Dark Money: Alternatives OversightPreqin
The next instalment of our blog series taken from our Don’t Believe the Hype Whitepaper explores the historically secretive nature of the alternatives industry and why the need for reliable and accurate data is higher than ever.
An Opaque Industry
Even in the complex world of finance, the alternative assets industry is recognized as particularly opaque. Although alternatives are now an integral part of most investors’ portfolios, most participants are subjected to relatively few reporting requirements. Private institutions must report only to their boards or trustees, while private fund managers below a certain size do not have to report their activities other than to their investors.
There are a few exceptions to this: public pension funds are generally required to regularly disclose their portfolios, and large fund managers must file with regulators in markets like the US and UK. But compared to mutual funds, REITs and other investment vehicles, the alternative assets market faces little in the way of required reporting.
This is a holdover from a time when investing in private equity or hedge funds was a niche activity, in the ‘corporate raider’ days of the 1980s. The reasoning was that among the handful of managers at that time, the illiquid nature of their holdings, their relatively small size and the individualistic approach they pursued made it unnecessarily burdensome to require them to report in the same way as traditional fund managers.
“Four out of five investors globally have some allocation to alternatives, and the market as a whole is approaching $9tn in assets under management.”
However, in 2018, four out of five investors globally have some allocation to alternatives,1 and the market as a whole is approaching $9tn in assets under management. There is, therefore, an obvious need for investors to access accurate, timely and comprehensive information regarding both their own investments and the market as a whole. Activities such as looking for potential new investments, evaluating fund marketing documents and properly benchmarking the performance of portfolios all require that investors can compile figures on an industry that has historically been difficult to assess.
Fund managers themselves also have a need for reliable and actionable intelligence. Whether they are benchmarking themselves against their peers, looking for potential deal opportunities or seeking new investors, they also benefit from being able to know more about the industries and sectors in which they are operating, and about other industry participants.
A Worthwhile Task
There is, then, a mutual need for data provision that encompasses the entire alternatives industry and offers participants a clear and accurate view of what is happening in the space. The stakes are high: public pension funds, for instance, now control an estimated $14tn in retirement savings, of which an average of 6% is invested in private equity and over 7% in hedge funds. Enabling them to make better decisions is a vital and impactful task.
At the same time, many start-ups and new companies are choosing to remain as private entities longer into their lifecycle, in many cases relying on private sources of capital like alternatives funds. Especially in booming emerging markets like China and India, private investment vehicles are a cornerstone of the private sector and are helping to stimulate some of the fastest-growing economies in the world.
With this in mind, the task of providing accurate and insightful data on the industry is as much one of principle as it is business. At Preqin, we believe that having access to data of the best possible quality will allow investors and fund managers to make better-informed decisions. This will make capital markets more efficient, investors will see better returns and more capital will flow to pension pots, government budgets and charitable foundations around the world.
1According to the H2 2018 Preqin Investor Outlook: Alternative Assets, 80% of institutional investors have an active allocation to at least one alternative asset class, and 50% allocate to three or more alternative asset classes .
Article by Preqin