5 Questions for the Institutional Investment Community
In a shrinking economy, it’s natural to look more closely at technology spending to make sure that your dollars are buying the best results. During the good times, you may have added to your tech stack with the philosophy of, “Let’s just buy best-in-class solutions and then integrate them all.” If so, you’re not alone: it’s common for organizations today to have more than 200 applications in place.1 That is a lot of software.
But here is the irony: the average percentage of engaged users for these applications is just 45%.2 Adding to the waste are situations where the solutions you have in your tech stack aren’t the optimal fit for your organization or aren't well-integrated with one another. It doesn’t matter if you have “best-in-class” point solutions if there are so many moving parts that they don’t join together in the tech stack, resulting in more manual work. Now, with economic headwinds blowing all around us, it’s a good time to look at the consolidation and rationalization of your tech stack to pursue more “bang for your buck.”
If you’re going this route, we want to share 5 questions specific to the institutional investment community to help you make the right technology optimization decisions for your organization.
For Allocators: How does your tech stack support your investment team model?
If you are an asset allocator, you may employ a specialist, generalist, or hybrid investment team model. For a generalist model, members of the investment team look across all or many asset classes. In a specialist model, members of the investment team focus on only one asset class. With a hybrid model, investment team members cover two to three asset classes, effectively “specializing” in a few asset classes as opposed to a single one.
Generalist Investment Teams
Based on our 2020 Institutional Investor Productivity Study, 69% of survey respondents reported that they work in a generalist investment team model. Because they cover multiple asset classes and managers, generalist teams must be incredibly thorough in scouring the investable universe. It is, therefore, vital to have the proper tools, systems, and external resources in place. If this is your model, assess your tech stack in terms of how well it:
- Is easily configurable to the specific needs of each asset class and to the different roles on the investment team
- Keeps different sources and kinds of information centrally organized and easily accessible to support better decision-making across different teams
- Enables team members to spend their time on core tasks, e.g., forming strategies, evaluating ideas, and analyzing data
- Facilitates searching for documents to put immediate, comprehensive, and complete information at team members’ fingertips
Our research has highlighted that improving areas such as data collection and distribution, information systems, and internal communications will make teams more efficient and their members more productive. Improving all of them via an integrated solution produces synergies far beyond any benefits that can be obtained by simply focusing on one or two problem areas.
Specialist Investment Teams
Specialist teams run the risk of creating tech silos that result in data silos. For instance, a hedge fund investment officer might use different software than a private equity investment officer, and a real estate specialist might employ still another set of apps. In their own specialized worlds, the technologies might appear to be working splendidly. The reality, however, is that you have multiple tech stacks sitting next to each other, and when it comes time to report to the CIO or stakeholder, you’ll need to make all of the point solutions talk to each other so you can connect the dots and see the bigger picture.
In addition, if you have a separate portfolio management system that doesn't connect to research management, then you don't have a way to look at all your exposures in a single place (rolled up at the manager level), along with your original investment thesis. You will know what you own but not why you own it. You would have to string together multiple systems to look at this.
Data integration and consolidation are necessary to give you the holistic view and visibility required to address broader asset allocation issues that impact your organization, such as how to guard against overexposure and protect against inflation or deflation. The more that the same platform can be used to support multiple asset classes, the better and the more scale it will have.
For Managers: How does your tech stack support your investment team AND your investor relations/business development team?
If you are a private fund manager, you likely have multiple teams within your organization: the business development team, investor relations team, deal team, etc. These teams may very well have developed siloed tech stacks over the past several years by purchasing point solutions designed purely for each team’s needs. Such silos keep data scattered, limiting visibility, and hampering accessibility. This impacts both your employees and your investors – and, by extension, your success.
The next generation of reporting requires the IR team to collaborate with the Portfolio Managers (PMs) as well as their investors in order to rethink what information an LP Analyst requires to best serve their various stakeholders. For instance, it is helpful to provide a portfolio summary across a variety of relevant parameters to enable the LP to consolidate exposures across their entire portfolio of GPs. Special attention should be given to the information that best reflects how portfolio managers are measuring value creation.
Fortunately, today’s advanced PE operating platforms can help. The new generation of PE-specific offerings unites portfolio monitoring, performance reporting, and investor relations. Though these solutions were designed to unify multiple systems for a GP office, the same data flow benefits are easily extended to the LPs. If the GP’s IR team can directly access the raw portfolio data from within their preferred IR platform, they should be able to modify their quarterly reporting process to include raw, yet structured, data in a format appropriate for importing into the LP’s platform. The final delivery of this data can be via Excel spreadsheet or integrated investor portal. Alternatively, many of today’s more advanced portals enable investors to view data on-screen with download options available.
Right-sizing your tech stack to centralize data:
- Improves communication with prospects, investors, and vendors
- Supports capital raising efforts in a competitive environment
- Enhances investor servicing capabilities
- Creates opportunities for effective collaboration
- Makes holistic data instantly accessible to every team member
- Provides an end-to-end investor lifecycle view
For both: How can you consolidate your technology to be more cost-effective?
It is easy to purchase point solutions – too easy. Purchasing an array of point solutions can result in unnecessary duplication, unused or under-utilized applications, and connection issues. In fact, a plethora of tools can lead to inefficiencies since every person or team is “doing their own thing” without a strategic approach to “doing the best thing.” The opportunity cost in terms of effectiveness and efficiency can be significant. Consolidating your technology by employing an integrated platform is invariably a more cost-effective approach than filling your tech stack with disconnected point solutions.
For both: Does your tech stack offer you a single source of truth?
From a data stance, point solutions often do not “play well” together. They can create visibility gaps or make holistic reporting difficult or impossible. Siloed data results in inefficiencies as your employees must search for information or, worse yet, may not even know that certain data exists.
An integrated solution, on the other hand, centralizes data to create a single source of truth. All data, therefore, becomes instantly accessible by every person for use, collaboration, reporting, and insights. The big picture, as well as every microscopic detail within it, is always available. Institutional knowledge is preserved, and innovation thrives, helping you remain competitive.
For both: What are your long-term objectives?
The final question is a prompt to review your long-term objectives. You want to future-proof your tech stack so that you can be agile no matter what curve balls the coming years throw at you. Therefore, evaluate your current tech stack in view of your organization’s overall mission and vision, strategy, and goals. Make the tough decisions today to set yourself up for success tomorrow.
If you’re interested in talking to Backstop about consolidating your own tech stack, we’d be happy to assist. You can request a meeting here.
1 Productivity, “The State of SaaS Sprawl,” 2021.