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For our next Operational Leaders interview, we sat down and spoke with Sahem Gulati, Head of Strategy & Consulting for Private Assets at M&G. Sahem, who focuses on shaping the strategy, vision and scalability of the business, speaks to us about private markets within the broader strategy for a multi-asset manager and current macrotrends in the industry, including ESG data, the democratisation of private markets, and tokenization.
Disclaimer: This interview is based on the individual’s personal views or opinions and does not represent those of people, institutions or organisations that the individual may or may not be associated with, unless explicitly stated.
How much of a strategic focus should private markets be for a multi-asset manager? Who do you see as the main driver of this increased focus on private markets: investors or managers?
A lot of firms are currently debating how much they should allocate towards private capital, particularly in the current economic environment, where you see outperforming returns and a more resilient performance in private assets compared to public assets. Historically, in times of increased market volatility, private assets have shown uncorrelated return profiles which is seen as an attraction to investors in diversifying their portfolios. It should therefore be an area of focus for multi-asset managers to be able to offer that to their investor base.
How much focus a firm should devote to building this capability will differ between organisations. It will also depend on their historical capability in this space: whether it’s been a bigger part of their organisation or an offering they are growing out. Different asset managers allocate to private markets to varying degrees, but it’s generally on everyone’s mind in some shape or form. What I find particularly interesting are the different approaches managers are taking. Some are looking at purely organic growth by building on an existing fixed income business for example, and expanding to private credit, or by recognising that their real estate business that they’ve had for years is the natural starting point. Others are taking a more aggressive growth approach, leveraging M&A activities to grow their capability in this space. There’s a real spectrum of approaches in this space, with pros and cons for each of them. The starting point should always be having a clear strategy.
As for the driving force behind this focus on private markets, I believe it’s a combination of four main reasons. First is the increased demand from investors that managers need to respond to. Second, is that private assets offer portfolio diversification and uncorrelated returns in comparison to public assets. Third, private assets offer managers the ability to “lock in” revenue for a longer period and generally a higher margin. Finally, with regards to sustainability, private markets allow managers to get closer to their assets and have a greater say when it comes to sustainability priorities. There is a lot of attraction in private assets, not only from the perspective of an investor or an LP, but also from a GP.
How have you seen private markets operating models be developed? How comparable are they to public markets operating models? How scalable are they?
Private assets have historically played a smaller role in multi-asset managers, and have generally been an underinvested area in terms of operations & technology. There has recently been great scope for transformation as a result.
On the public side, there has been a lot of investment to develop mature multi-million pound operating models that are scalable and far more automated. It is a completely different story on the private side, where the operating model is immature, still relatively manual, and struggles to scale. That’s what I have typically seen in those firms which are just starting their journey with regards to growing their private assets capability.
You first must acknowledge that the two sides of the businesses are very different. You can’t generally apply the same approach to public as you would to private, and even within private assets, there are nuances within each asset class.
Scalability depends largely on how much of a strategic focus this new offering is for the firm. Asset managers need to be looking at the full operating model; people, process, technology, data and governance. They need to look at how they can build a private assets platform from a part of the firm that has traditionally been a series of siloed businesses. That’s not easy. From a technology and data perspective, it’s really important that you can provide the right tooling with quality assured data, and from a culture perspective, it’s vital your culture is aligned between the various investment capabilities in order to have a well-functioning platform.
In fact, when building out a scalable operating model, one of the most important factors is your firm’s culture and people. In organisations where I’ve seen it work well, there is a culture that embraces change and pushes for success. In those firms, the conversation becomes a lot easier because they see the benefits of changing existing processes, even if they have been a part of the old operating model for years. Transformation is always hard, and even if you force it through, the adoption might not be there. In my opinion, if you want to run a successful transformation programme to build a scalable operating model, it has to start with the people and having the buy-in.
Having worked at multi-asset managers and working across different strategies, how have you seen technology implemented and how do you manage technology across these different strategies when there are different requirements?
Ideally, if I were to build out a private assets platform from scratch, I would want one system that could do it all without the need for multiple integrations. That unfortunately isn’t the case. The market is highly fragmented when it comes to private asset technology. Although we’ve seen a lot of M&A activity over the years, managers are generally having to embrace a best-of-breed model.
So it’s about how you make that jigsaw work for you as an organisation, considering where you draw the line between capability, scaling, and simplifying the operating model. I believe having a concrete strategy is vital, but also ensuring some flexibility to allow for changes in the market. Over time, I expect more M&A to consolidate the market further but also that new and innovative fintechs will disrupt this space.
I’d now like to discuss three macrotrends we are currently seeing in the industry: the increased demand for data; the democratisation of private assets; and finally the use of tokenisation and blockchain technology within private markets.
To begin, let us discuss data. Over the past few years, demands for data have been increasing both from regulators but also investors, especially when it comes to ESG. How are you working to meet these ESG reporting requirements and what operational challenges have you come across? How have you overcome them?
Data is generally a challenge for private asset managers as a whole. If you then combine that with ESG, you have a perfect storm. On the public side, you have readily available data, compared to the private side, where even sourcing this data is a fundamental challenge, even before you consider how you ensure quality and then reporting.
Sourcing data still relies on the relationships analysts have with their portfolio companies. That is typically the starting point to getting that data. Beyond that, there are some innovative ways companies have considered to collect ESG data: some suppliers are starting to offer technology solutions that can help the company send out questionnaires to collect the ESG data, with others going to the next level by offering a managed service to prepare the footprint of companies for you. It all starts with how you source this data and then how you carry out quality assurance.
The next step is to adopt a common framework to align across the company, and then consider reporting. Reporting considerations include regulatory requirements, considering SFDR, as well as investor demands and expectations. In particular, I have seen growing demand from investors for increased granularity and timeliness of data. Finally, you can consider how this reporting fits with your public side reporting. The process is complex, and data is a real challenge with a lot of investment being made.
Moving on to consider the second macro trend, the democratisation of private markets. What steps have you seen in the private markets space to achieve this? Do you think that this is an achievable goal?
It’s interesting – in the truest sense, the democratisation of private assets means providing access to retail investors or the mass affluent to invest in private assets. In my view, that’s been happening for a number of years through investment trust vehicles that invest in private assets. There’s also been an increasing trend recently, where a number of private asset managers list on the stock exchange. That is another route retail capital can gain access to private assets in a very democratised way. Though ‘democratisation’ as a buzzword has recently grown in popularity, it’s been happening in different capacities for years.
The question is how we can tap into more retail-style capital in more closed ended vehicles, traditional private equity or private debt structures. To do so, embracing technology will be key. The worry that a lot of managers have is around reputational risk, particularly with recent scandals. The potential upside is great, with managers being able to tap into new pools of capital, but the potential downside of severe damage to reputational risk is something managers are being cautious about.
The technology will continue to improve as technology always does. One area I believe needs more focus is the education of the retail investor. By working in the industry, you gain this information over time, but it’s not always readily available and easily digestible. We should be thinking about how we can educate more people in this space, as to the potential rewards and opportunities but also understanding the risk. There is a lot more we can do as a society in this regard.
As for the final macrotrend: tokenization. How do you see tokenization working in private markets? Do you see it as a point solution for any specific challenges that you may have come across recently?
My first caveat is that I am by no means an expert in blockchain technology or tokenisation, but from a conceptual basis, I really do see the value of this technology in private assets. The way I look at it is that you can apply this technology at a fund level to help tokenize or digitise your share class/units. This will make it far more efficient for investors to buy in, and you can create a nearly liquid fund in a far more cost effective way, which typically hasn’t existed for private capital.
The challenge is the valuation concern: investors would be buying in and out at unrealised values, so whether they are buying in at overpriced or underpriced value is something regulators and managers need to grapple with.
The other consideration is whether you can apply this tokenisation or blockchain technology at an asset level. That’s where I think managers are going to try to do something especially interesting. A number are running proof of concepts around how you can digitise assets and make them far more tradeable and exchangeable between funds they manage themselves, or equally when it comes to selling them to another fund and realising the assets. Currently, this is still highly manual, particularly in the real estate space. You can save a lot of money, time and effort in some of these transactions.
It is however a new area for a lot of managers and the new technology is something the regulator will be looking at closely. One potential starting point for many organisations could be real estate given its predominantly manual nature, requiring physical signatures of documents in a lot of cases. It ultimately comes down to how your business is shaped. Before any new blockchain technology is rolled out and is accessible to investors – whether institutional or retail – there will be a lot of work and internal focus. Organisations need to ensure they are comfortable, from both the risk and the security perspective. Regulators will also get closer to this going forward, so that’s something organisations need to be aware of. Over time however, I believe it will go from a buzzword to becoming something more tangible.
Beyond these three macrotrends, what do you predict for the next two to three years for the private markets industry?
I believe we will see more allocation to private assets and an increased focus on private assets from multi-asset managers. ESG will absolutely continue. I think there will also be some level of standardisation, especially on the reporting side, which will make it a lot easier for managers. When firms become comfortable with ESG reporting, the focus may shift to how to measure your impact as an organisation, particularly those who are very focused on impact strategies.
I also believe technology will continue to evolve. It’s important not to be too narrow minded when you look at technology in the financial services space. There is a lot of innovative technology outside of financial services that can be highly applicable to asset managers. It’s really important to keep an eye out on what technology innovations are available more broadly across other sectors and see where it can be applicable.
Another trend that will continue is diversity and inclusion in private assets. It’s a huge issue, particularly in our sub-sector, and I know a lot of managers and organisations are very focused on it. Ensuring you have a diverse and inclusive organisation is incredibly important. Particularly as we enter a period of change and economic uncertainty, embracing diversity of thought and skillset will be essential to survive and grow as an organisation. This applies at all levels, from the pool of talent entering your organisation, to mid-management and the top level. It’s not about ticking a box; it’s the ability to embrace the oncoming changes within the industry with a talented, diverse team.
ESG regulation is helping drive this forward too, as many organisations are under the spotlight to improve and realise their D&I strategies. Investors focus on this when it comes to their assessments of different asset managers, and managers focus on this when considering their investments. There is of course more to be done, but I am optimistic for the coming years.