Large university endowments wrote the book on alternatives investing for institutions. With long-term investment horizons and a need for self-sustaining portfolios, endowments for more than 30 years have made sizable allocations to private equity and hedge funds, real estate holdings and other alternative investments. The leading university endowments were investing in alternatives when many institutions kept to the tried and true equity and fixed-income formulas. Large plans continue to significantly overweight alternative strategies, according to the 2017 NACUBO-Commonfund Study of Endowments.
Now endowments, like other sophisticated asset owners, face increased demands for transparency into their investments. Trustees want more detailed performance and risk information. Student groups are vocally opposed to investment in certain industries or companies. Alumni need assurance that their donations are being handled responsibly — in some cases urging a shift away from active strategies and toward less costly investment products.
The problem for large endowments is that asset-servicing platforms were created to support portfolios largely comprising marketable securities, where one can rely on an ability to enrich these positions with widely available referential and market data in order to support their asset allocation and investment processes. Because of the nature of alternatives, which can include investments as diverse as private credit and natural resources as well as hedge or private equity funds, endowment offices are bogged down in manually intensive documents and spreadsheets. Investment professionals who should be dedicating their time to seeking alpha are instead chasing information and filling holes, spending a disproportionate amount of time instead on investment data management.
Over the past year, my colleagues and I have spoken with more than 100 investment and operations leaders, including many at large university endowments. We sought information about their investment processes and their pain points, seeking to answer the bigger question: "Are you able to efficiently make data-driven decisions about your portfolio?" Every person we spoke to was reliant on a patchwork system of software, manual inputs and sometimes incomplete data.
In today's technology-enabled world this is unacceptable, and leads to unnecessary and uncompensated operational risk. It holds particular peril for endowments and other institutions with generational or perpetual missions, which need to generate investment returns that support steady distributions over the long term.
Along with risk, the inefficiencies impose added costs on limited partners, who typically pay management fees and fund expenses for fund accounting, administration, software, data and reporting services, and also pay their in-house teams to procure, ingest and act upon this disparate and often incomplete data.
Thankfully this is a problem with a solution on the horizon. Endowments have been working with asset managers and asset-servicing firms to push for new and innovative services. The industry is beginning to form consensus on the requirements for data sets that are timely, complete and accurate. Endowments still struggle to find formats and service providers that allow for customization across a multitude of risk factors, including an institution's appetite for risk, exposure and liquidity. Asset-servicing providers that straddle both general partners and limited partners are perhaps best positioned to create, and nurture, a community of limited partners that can make progress solving this tremendous challenge. Blockchain technology, recently launched in the private equity market by Northern Trust to seamlessly allow a GP to administer a fund's LP activities, demonstrates how such collaboration can be delivered by an asset-servicing firm.
Also, forward-thinking asset owners already are working to create more integrated solutions. In addition to providing true transparency, these industry forerunners have the opportunity to gain operational alpha through reducing unnecessary cost and professional time while ensuring data security. They also will have the advantage of setting a standard the industry can use as a baseline.
Large endowments have a history of innovation, partly enabled by the illiquidity premium available to long-term investors. But as they face appropriate demands for transparency by investors and other important stakeholders, the only way endowment leaders can continue to succeed with such complex strategies is to get the data they need, when and how they need it. Investment teams deserve more control over their complex portfolios. I am confident that together, we will find a solution.
Melanie Pickett, head of front office solutions at Northern Trust Corp., is based in Chicago and formerly was chief operating officer of Emory Investment Management. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.