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Alternative investing process review: 5 areas to consider

April 29, 2022
clock 5 MIN READ

Use our process review to answer these questions:

  • Are your internal processes bringing unnecessary risk?
  • Are there ways your team could better support investment decisions?
  • How are teams following best practices to be more efficient?

As alternative investments continue to grow within institutional portfolios, so does the amount of work, complexity and risk. To keep pace with these demands, successful in-house investment and operations teams are adopting more efficient processes and technologies. 

Consider adding these five key considerations to your process. 

1. Operational due diligence: A time consuming, yet critical function

Operational due diligence (ODD) is certainly not sexy or exciting, but it is one area that is intended to be performed at 100%. As the number and variety of alternative investments in your portfolio grows, so does the ODD workload. Without proper ODD, you can face fraud, weak internal processes, systems incapable of certain external events or misuse of funds.

ODD includes thorough manager background checks, monitoring policies and reviewing internal processes. You need a detailed understanding of the manager’s operations, valuation policy, lifecycle of trade, IT infrastructure and compliance functions. Typically, a questionnaire is combined with meetings with key operations and compliance personnel to determine if adequate internal controls are followed and segregation of duties exist for the manager.

When looking at the firm, you should obtain information about assets under management and investor composition, ownership structure, personnel hires and departures, compensation structures, future plans and other material issues. Review offering memorandums looking for key terms that are outside of industry standards.  In addition, you may want to contact key vendors to verify critical details.

  • Self-assessment:  If you are not confident in your ODD efforts, you may need to consider adding resources, expertise or software in an effort to ensure adequate ODD is being performed. Another option some organizations take is to partner with a firm to assist. You can augment your efforts with significant expertise without adding staff. This approach can give your investment office the same scale as much larger team while helping to reduce risk.

2. The manager data challenge

You may receive manager communications via email, password protected web portals or password protected PDFs and in different formats like tables, Excel, Word, PDF or PowerPoint. It’s challenging when each manager has their own preferred method of delivery, leaving you with inconsistent data formats to comb through. Not only does this waste time but it can add a layer of unnecessary risk.

Aggregating data and reconciling from multiple sources with many asset types is difficult. Those performing this function are being relied upon to provide clean, timely, normalized and enriched data. We believe this is the standard and as such should be achieved. Teams using multiple spreadsheets and spending hours and hours trying to compile and organize manager data are opening themselves up to inefficiency and potential inaccuracy of the data.

  • Self-assessment:  It is worth taking a look into your processes. Understand how much time is going into consolidating manager data on a monthly basis. How many people are touching the data and how many different spreadsheets are involved? Have there been errors affecting your reporting? 

    There are systems available that can do this heavy lifting for you. They can simplify data collection, normalization and enrichment across all asset classes to power timely, accurate exposure reporting, risk modeling and analytics. Adopting one of these systems can help to reduce human error for a more efficient and less time-consuming process.  

3. Recordkeeping for documents and agreements: Avoiding the paper chase

Investment staff are strained with frequent investor updates and maintaining multiple documents, which are often stored in a scattered way and unencrypted storage containers. It might seem manageable now, but like gremlins, the number of alternative investments can start small and can grow rapidly! 

Each strategy is unique and more involved than traditional or passive investments, and that comes with more documents and agreements to manage. While every team has their own system, maintaining document management can be risky if not properly executed. Private market investments can linger on the books for a long time due to the long-term nature of the asset class.*

  • Self-assessment:  Leveraging time-tested systems and technologies to simplify what seems like countless documents is much more effective and helps to reduce risk and error. That way your documents and agreements are well organized and updated. A good, encrypted system should store Sub Docs, LP agreements and legal documents. Eliminate the paper chase, so you can spend more time on critical tasks.

4. Is the information at your fingertips when needed most?

Very busy investment teams do not want to receive a call from an auditor. But we all know it happens. Auditors love to ask about holdings that have been on the books forever – especially those pesky zombie companies.* Failure to quickly respond to an auditor’s request (especially an IRS auditor) can mean a much more thorough examination.

  • Self-assessment:  Having the proper processes and systems in place to organize, simplify and bring all your data into one platform can help you confidently respond to requests.

5. Alternative investments bring challenges and risk to portfolio management

Do your part to mitigate a break in process or reporting.

The most successful investment teams know the value of staying ahead of the ever-changing times. It can be tricky to stay on top of technology, especially if you’re not leveraging those systems that have been successful, and continue to reinvest over time. Partnering with an organization that is rooted in technology and committed to advanced learning each and every year can bring your portfolio to a whole new level.

Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. There can be no guarantee objectives will be achieved.
Alternative investments are subject to a complete loss of capital and are only appropriate for parties who can bear that risk and the illiquid nature of such investments.
Alternative investments:
•    often engage in leveraging and other speculative investment practices that may increase the risk of investment loss
•    can be highly illiquid
•    are not required to provide periodic pricing or valuation information to investors.
•    involve complex tax structures and delays in distributing important tax information
•    are not subject to the same regulatory requirements as mutual funds; and 
•    often charge high fees.

*Zombie companies are companies that earn just enough money to continue operating and service debt but are unable to pay off their debt.

Resources for your investment office

Next-generation OCIO

An OCIO should deliver what you expect, and more.

Patrick Carlevato, CFA

Managing Director, Unbundled OCIO