By: Maryling Yu, CMO, Backstop Solutions Group
At our recent Backstop Beyond, I had the privilege of giving our audience – the institutional and alternative investment community - a recap of the research we’ve undertaken this year to study how they’re spending their time. As a leading software provider to the industry - and one who claims to optimize our clients’ valuable time - we wanted to understand how that time is truly being spent.
To this end, we published two groundbreaking studies this year: the “2022 Backstop-Mercer Institutional Investor Productivity Study” and “Raising and Retaining Capital: A Productivity Study of BD & IR Professionals in Alternative Investments.” The findings were truly eye-opening, and I thought it would be worthwhile to present a few of the many insights that did emerge from the studies.
First up, the allocators
in order to invest wisely, they need to invest their time wisely. It might be their best source of long-term sustainable alpha, actually. Here is what we learned about how allocators are spending their time today.
Allocators are working harder than they were 2 years ago.
Allocators are putting in an average of 50 hours per week, up 13.6% from 2020, when they were working 44 hours per week at the height of the pandemic. We believe this increase to be related to the sudden influx of existing managers looking for follow-on funding, which we’re seeing happen every 1.5 to 2 years (instead of every 3 to 4 years) now.
Allocators are spending proportionally more time with existing managers versus new ones
We gave the respondents a list of 12 common allocator tasks and asked them to break down the number of hours they spend on each one in a week. On average, allocators say they are clocking 9 hours a week meeting with their current managers, up from 5 hours a week in 2020. Conversely, they are spending 6 hours a week with new managers, up from 4 hours a week in 2020, reflecting that a larger proportion of their time is being spent with the managers of their existing portfolio.
This is not surprising given the prevailing market conditions, which require allocators to shore up current portfolio performance by getting a better grip on what is happening with their existing stable.
Allocators didn’t agree with how we categorized the importance of their tasks back in 2020. Also, they don’t agree with each other
Back in 2020, we sat down with Mercer and categorized each of the 12 tasks into 3 groups:
- “Core”: the central things that an allocator is meant to be doing.
- “Non-Core but Value-Adding”: not core to an allocator’s job, but does add value either up or down the chain to someone, somewhere.
- “Non-Core and Non-Value-Adding”: a euphemism for “waste of time.”
This year, we decided to ask the allocators themselves. And boy, were we wrong. It turns out that they consider “managing liquidity requirements” and “reporting to key stakeholders” to be core tasks. And “typing up handwritten notes” and “performing manual computations of performance” to be non-core, but value-adding tasks.
So if we could go back in time and rewrite 2020 headlines generated by the 2020 study, they would say, “Allocators are wasting 18% - not 30% - of their time.” And in 2022, that “waste of time” category would occupy just 13% of their weekly hours.
Although on the surface it seems that the industry got more productive, in practice, that may not be worth much.
18% of the 44 hours they worked in 2020 per week meant allocators were losing almost 8 full hours a week to “waste of time” tasks (7.92 hours). 13% of 50 hours means allocators are still losing 6.5 hours a week to these tasks. So, not a huge gain.
And finally, I would posit that “typing up handwritten notes from meetings” and “performing manual computations” are actually a “waste of time for allocators” – these are items that technology can and should solve today for these highly educated investors.
Allocators are still bogged down by manual tasks.
The number of internal systems that allocators are manually passing data back and forth between exceeds the number that they are automatically integrating. Also, they are automatically receiving custodial feeds from less than half of their custodians, signaling that many are still using their ten fingers to enter custodial data into their portfolio management systems.
Allocators spend half of their meetings with managers reviewing basic facts about the manager or going through templated questions. Less than one-third of the time is spent gleaning market insight and commentary from the manager. And yet, only one-third of allocators use an external investment manager research provider.
This surprised me. Considering the amount of time allocators spend on due diligence, I would think they would welcome having a proven research provider to augment their internal research. These days, Backstop is able to bring in manager ratings and research right into our RMS platform, taking the friction out of toggling back and forth between systems during investment due diligence. Perhaps if they had this information at their fingertips, institutional investors wouldn’t have to spend valuable time during manager meetings going through basic facts...instead, they could go right to gaining insight and forming their investment worldview by gathering market commentary from managers.
All of our research seems to point to this conclusion: that despite the passage of two years, the industry has not made meaningful progress in leveraging technology to improve their ability to focus on core tasks. Even if you use their generous definition of what constitutes core versus non-core but value-adding versus a waste of time, they’re still wasting a day a week. As one allocator survey respondent put it, “…we spend too much time documenting, as opposed to critical thought and decision-making.”
fund managers have many of the same issues
Earlier in the year, we released a similar study on the other side of the street, specifically on the business development (BD) and investor relations (IR) professionals in alternative investment firms. These are the people responsible for raising and retaining capital for their organizations. We saw some similar patterns, and I’m happy to also share a few highlights here.
BD/IR professionals at alternative investment managers work pretty hard too, clocking in 52 hours a week on average.
This might be driven by the fact that, according to our study, about 65% of them “wear two hats,” meaning they are responsible both for raising the capital and servicing investors. That potentially is what fuels the long hours.
They might even be working harder than they realize, around 58 hours a week.
52 was the average when we asked them, “How many hours do you work per week?” But similar to the allocator study, we also asked managers to tell us how many hours they spent each week on 13 different tasks, and when you add those up, you get 58.
BD and IR pros spend 12% of their time on non-core, non-value-adding tasks.
That is around seven hours in a 58-hour work week, the equivalent of a full day. Sound familiar? This side of the street is also losing about a day a week to “waste of time” tasks.
When asked, BD/IR pros told us that manually entering and reconciling fund admin data is among the most frustrating uses of their time.
Other things they considered a “waste of time” were “compliance-related filings,” which gave me a big surprise. I would have thought keeping their firms’ noses clean would be a core and value-adding task.
BD/IR professionals don’t really control their time, spending about 13 hours a week on unplanned interactions with their LPs.
For those who work in investor relations, 35% of their interactions with their LPs are unplanned. Whether it’s a phone call out of the blue, an email asking for a bespoke report, or a question the LP needs answered quickly, these unplanned interactions are often the medium in which the investor relations professional can differentiate themselves. Whether they rise to the occasion and provide fast, accurate, responsive client service, or whether they have to say, “I don’t know, I’ll have to get back to you” and spend another week chasing down the answer can make all the difference in how they are perceived by their investors. Here, technology can also be the hero.
Capital raising is challenging in the current environment.
We did the survey of managers earlier in 2022, but by then, they were already feeling the headwinds. 58% of them agreed or strongly agreed with the statement, “Capital raising is difficult because of the current market environment.” And when we asked them what they were doing when they last had the thought, “There must be a better way to do this,” the number 2 answer was, “Finding the investors who are actually allocating” (the number 1 answer was, “Manually entering fund admin data”). When we interviewed a few respondents, they told us that some allocators were telling them they were already fully allocated...in January!
There are a lot of nuances in these studies that I did not go into in this blog, and I highly recommend downloading the full reports for a deeper dive. With a recession threatening 2023, it’s more important than ever that both allocators and managers invest their time wisely. At Backstop, we’re here to help the industry do just that. We invite you to:Review the reports with your team: “2022 Backstop-Mercer Institutional Investor Productivity Study” and “Raising and Retaining Capital: A Productivity Study of BD & IR Professionals in Alternative Investments.”
Finally, talk to us about how we might be able to help – we've learned a thing or two from serving over 1,000 clients in this community, and we’d love to share them with you.