Over the past years, Alternative Investment Fund Managers (AIFM) have put their focus on compliance matters, shaping their operating models to match the regulatory framework of the AIFM Directive (AIFMD).
From process re-engineering to digitalisation
Beyond their core activities of fund raising and investment management, managers have applied for licences with national authorities, implemented risk management and compliance procedures and built tools and enablers to support the performance and documentation of their regulated day-to-day activities.
Most European and international managers have by now completed their efforts and embraced AIFMD requirements as standard practice. They are therefore tackling the next wave of organisational reforms in a drive to invest money more efficiently and in a more standardised and harmonised way in a truly global way, i.e., throughout several jurisdictions. The need for efficiency mainly stems from ever- increasing amounts of capital being allocated to alternative investments as well as high competition and hence tough margins on the investment side. Overall, driving performance is becoming more difficult because higher asset values make it harder to achieve a good rate of return.
Align their operating platforms
Many large players with offices in several jurisdictions are increasingly looking into aligning their operating platforms on a pan-European level. Even though AIFMD aims at providing a level playing field among the different European Union countries, certain local differences pertain and are mostly due to pre-existing local laws, tax rules and customs. Aligning processes on a European level generally means performing tasks the exact same way, no matter whether execution is done in Luxembourg, Madrid or Krakow. However, where there are regulatory differences between countries, managers might have to add an extra loop into the process to capture those.
Another trend in the alternatives industry that calls for a certain alignment while taking good care of the subtle differences is that many managers are increasingly operating funds across a number of different sub-asset classes (private equity, real estate, debt, hedge funds). This requires them to take a view of operational efficiency that includes each of the sub- asset classes and the way that processes play out across the different aspects of the business, for example in investment structuring or valuation, so that people in different parts of the company have access to the same level of information.
In order to build an efficient operating model, managers need to look into the way they are organised on a global or pan-European level, but equally importantly into their processes. This is especially true when they span over several functions or even jurisdictions. To really understand and ultimately build out how tasks should be performed, managers can apply the RACI matrix by defining for each process step who is responsible, accountable, consulted and informed. This helps diminishing pain points and providing a clear vision to the people and functions involved in the process as to their role and responsibility. It might also lead to crystallising the need for organisational changes such as centralising a certain function in a centre of excellence.
Once all processes and organisational elements are properly designed, IT changes can be carried out and implemented. There are two types of major IT enablers managers are looking at. The first is the classic enterprise resource planning (ERP) system, which covers front-, middle- and back-office operations and allows managers to gradually move away from extensively using Excel. Those packages also often allow for proper process and workflow management which helps an organisation improve the way in which its people are complying with the initially designed processes. The second is smart technology solutions like robotic process automation and artificial intelligence which help navigate in an environment of high dependency on manual execution. Identifying key data points within hundreds of pages of contracts or automating payments for cascading cash-flows are good examples for the use of such technologies.
In times where the alternative investment industry is facing such tremendous growth rates in terms of capital deployment, managers need to make sure they can cope with the increased processing volumes that come with it. Having the right organisation, processes and IT systems is therefore not only a nice-to-have but a prerequisite for survival and success.