Generative AI and Risk Modeling Silos Emerge This Year as Key Areas of Opportunity in ‘Dynamo Frontline Insight Report’ Takeaways
Alternative investments FinTech Dynamo Software, in partnership with Northfield Information Services, released the findings from its second annual survey of more than 100 global Limited Partners (LPs) and asset allocators.
“Over the past 10+ years, the secondaries market has been on an upward trajectory thanks to a range of trends from overall exposure to market perception”
Analyzing Trends, Identifying Challenges, and Harnessing Insights from Leading LPs & Asset Allocators reveals insights on investor plans for the next 12 months. Polled during July and August 2023, global participants predicted their strategic moves related to allocations, business processes and technology.
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The survey findings are contextualized in the latest Dynamo Frontline Insight Report, as well as during a 30-minute Sept. 27 webinar. Among the takeaways:
Fund Manager Reign Expands
Moving into 2024, alternative investments are expected to remain a key strategy for LPs and asset allocators. Ninety-three percent of decision-makers participating in the survey said they will either increase (56%) or maintain (37%) their allocation to alternatives.
Notably, the number of LPs planning to increase their alternative investments is slightly higher than the 55% of participants who said the same in Dynamo’s 2022 survey. Twelve-month user metrics from the Dynamo platform further validate the sentiment, showing significant upticks in data reporting services for distressed debit (+31%), private equity (+23%) and real estate (+17%) holdings.
The survey data also supports the assertion of some private equity industry observers who believe the availability of PE funds has been underestimated. As PitchBook’s Senior Strategist Hilary Wiek observed in the Q2 2023 Global Private Market Fundraising Report, “… most people would agree that $1.1 trillion in annual commitments to private market fund strategies does not remotely indicate a closing of the taps from LPs.”
When asked how they plan to invest in alternatives, an even greater number of respondents than last year chose fund managers. Eighty-six percent selected that option as compared to 77% in last year’s survey. In what is likely an indication LPs are steering clear of more volatile investment strategies, survey respondents indicated a significant pullback from investment in cryptocurrencies; just 3% as compared to 13% the previous year.
“The pullback in crypto is understandable given the rapidly changing regulatory environment, the failing of notable players and remaining questions about the market’s medium-term development,” observed Dynamo CEO Hank Boughner.
The second-largest change year-over-year was in the number of LPs and asset allocators considering secondaries. Thirty-six percent selected that option this year, as compared to just 28% in last year’s survey.
“Over the past 10+ years, the secondaries market has been on an upward trajectory thanks to a range of trends from overall exposure to market perception,” said Boughner. “LPs are choosing to alter their exposures by selling positions to other investors. The secondaries market has become more transparent and ‘liquid’ in the sense that active investors are looking to come into an existing GP fund, for example. The ‘new’ LP can then take over the position, gaining the benefit of time along the investment curve. Additionally, sellers in the secondaries market often face time or allocation pressures that force a move in portfolio assets.”
Among those LPs and asset allocators working with tech-focused fund managers, three areas of innovation appear to be top-of-mind. In order of popularity, survey participants selected the following as the key solutions in which they want to see fund managers invest:
- Generative AI
- Edge computing and native clouds
- Automation and hyperautomation
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Technology to Empower People
Looking at their own investments in technology to improve business processes, LPs and asset allocators seem to be leaning in on plans to build more advanced tech stacks. A resounding 93% of respondents plan to either increase (49%) or maintain (44%) their technology budgets for the upcoming year.
Survey respondents were particularly enthused about reducing the amount of manpower currently dedicated to repetitive tasks. Doing so has not been easy to date; LPs ranked automating manual processes as their second biggest challenge behind economic uncertainty. Recruiting and retaining talented employees rounded out the list of LPs’ top-three business challenges.
“Predictions of sentient AI and out-of-control quantum computers get all the headlines, but the real story of technology is its impact on the everyday experience of people, including those doing work they love,” said Boughner. “The decisions LPs and asset allocators make are very meaningful. From impact investing to job creation, their strategic moves will only become more relevant and purposeful when they mitigate the risk of errors and improve accuracy through tech automation. Greater relevance and greater purpose breeds happier employees who are committed for the long-term.”
The desire to spare employees from manual tasks showed up again when survey participants ranked their priorities for the next 12 months. In order of popularity, LPs and asset allocators reported the following as their top three:
- Remove manual data tasks and introduce automated workflows.
- Better enable our team to manage new investment structures.
- Create strategies to optimize team productivity and build workflow efficiencies.
Processes related to research, portfolio analysis, and document/data management appear to be the biggest sticking points for LPs and asset allocators. Very few gave their ability to perform these processes a rank of “excellent.” In fact, as high as 15% (for document and data management) ranked themselves as “poor.”
Risk Assessment Silos Persist
Siloed risk assessments were a stand-out portfolio-analysis challenge uncovered in Dynamo’s 2023 survey. A sizable group (31%) of LPs and asset allocators do not use the same risk model framework for public assets as they do for private assets. This prevents investors from seeing a complete picture of risk, as well as diversification, across their complete portfolios.
The most likely cause of risk assessment silos is the inadequacy of most vendor risk models on the market today. As the survey results indicate, LPs and asset allocators have been forced to develop workarounds to get themselves the fullest possible views of total portfolio risk.
The most popular approach to including private assets into a public assets risk model is estimation:
- Thirty-five percent of respondents said they categorize Mark to Market valuation returns based on a model and then relate those returns to a factor within the model.
- Twenty percent continue to use GP-supplied valuation returns to incorporate private assets into their assessments, despite industry concerns with the practice.
- An emerging group of investment professionals (10%) predicate their risk model approach on cash flows rather than valuations to increase the objectivity of the risk estimates.
“Regardless of the approach, such workarounds contribute to the number of repetitive, manual tasks taking up valuable employee time,” said Emilian Belev, Head, Enterprise Risk Analytics at Northfield Information Services. “This further explains LPs’ prioritization of FinTech to create workflow efficiency.”
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