The Engine Room of a Modern Private Markets Firm

March 11, 2024
News Release

Arcesium’s Private Markets Segment Head, Cesar Estrada, speaks to Private Equity Wire’s Aftab Bose about the complexity of today’s private markets strategies and how data unification can unlock value.

Last year taught us that private markets firms – despite operating in the medium to long term – need to be more agile. Not much more is  certain in 2024 than it was in 2023 – recession fears still loom, interest rates remain elevated, and inflation persists, all with the ever-evolving backdrop of intensifying geopolitical tensions and impending elections in key global economies. “Extrapolating from client  conversations, we can expect private markets to respond in a number of ways,” says Cesar Estrada, the Private Markets Segment Head at the  leading global financial technology firm, Arcesium.

“Firstly, private credit will likely stay on pace as the industry’s fastest-growing segment as it continues to gain share from the syndicated  space and expand into non-sponsored deals and other asset types beyond corporates and real estate. Then we have secondaries – within credit and as a whole – that will continue to expand as managers and allocators seek liquidity. The third trend is the continued push for private markets firms to pursue more forms of permanent capital via evergreen funds, funding from GP stakes funds and keeping tabs on the IPO market.

“And lastly, traditional asset managers, as well as large, diversified private markets firms will look to strategically acquire private market specialists. BlackRock’s acquisition of GIP and General Atlantic’s Actis deal, being two recent examples, also highlight the push on infrastructure investing.”

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Data explosions

These trends reflect significant pivots for the industry and might be subject to further change as macro factors play out. For Estrada, this translates into explosive growth in the size and complexity of data sets.

The number of new products entering the market means that data volumes and complexity are set to significantly exceed AUM. To illustrate the disparity, Estrada highlights how data volumes have risen exponentially compared to AUM. Looking at research from Preqin and Statista, respectively, estimates forecast that AUM will increase an average of ~12% per year while global data will expand 60% year-over-year. Estrada adds: “Managers are moving to offer a number of fund products – all actively investing and harvesting simultaneously.

Furthermore, the next frontier for private markets is to move down to the individual investor – the ultra-high net worth and upper end of the affluent markets. All of this will attract more regulatory attention, reporting demands, higher transparency expectations and greater scrutiny from LPs. “Firms need to scale up their reporting and analytical capabilities to meet these needs,” he says. In the process, they will likely experience a host of other benefits.

“For one, the efficiency of gathering insights will increase while reducing the resource required, giving people the flexibility to provide analysis and insight, rather than gathering and quality-checking data.” Relieving employees of tedious  responsibilities allows them to devote their energy and expertise to higher-level thinking, problem-solving, and strategic decision-making, says Estrada. The newfound flexibility and freedom to concentrate on analysis and insight generation will, no doubt, make for a more fulfilling employee experience as a whole and promote talent retention.

“Secondly, firms will gain more control – with full visibility into who has transformed or enriched data and when, reducing key-person dependencies in the process. And finally, from a CTO perspective, unified data platforms enable a quicker transformation journey –  accelerating the move from legacy, on-prem, spreadsheet environments to a modern, cloud-based environment.”

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The full picture

As it stands, Estrada says many firms have a way to go on this journey – the data infrastructure in private markets is still maturing when compared to counterparts in traditional asset management or even hedge funds. “Most private market firms have outgrown using Excel as the solution to every problem. We’ve witnessed the adoption of functional applications to respectively support fundraising, finance or portfolio monitoring, for instance. But by and large, data across these systems remains siloed and underutilized for the bottom line,” says Estrada.

The next logical phase, as firms grow in size and complexity, is to unify this data into a single, cloud-based platform. The benefits are that it facilitates the application of a transparent data management and governance framework for the firm; helps integrate all the information from a firm’s upstream and downstream systems; and quality checks the data ingress from external systems and third-party administrators.

“That’s the ideal end state for firms, giving them a fully transparent audit trail – created in the background and feeding into myriad use cases. If we take the example of an investor relations professional, they would be able to access performance data at their fingertips and provide quick, informed answers to clients. Immediately, the client services function improves.”

The benefits of a modern data platform

A modern data platform is more than a tool for managing and governing data. “When a platform is purpose-built for a firm’s specific  requirements, it has the opportunity to become the backbone of an organization’s data ecosystem, and seamlessly connect to all the different systems and stakeholders involved,” says Estrada. He points to the firm’s recent survey of investment data management professionals, which explored the priority initiatives, perceived barriers, and decision criteria of private markets firms, as evidence of the industry’s demand for such solutions.

Estrada highlights respondents concerns about a consolidated and reliable view of data, the accuracy and integrity of data, and need for data analytics to make better predictions and decisions. “Sophisticated systems allow firms to think beyond a framework for transparent data management and governance. In addition to integration capabilities with upstream and downstream systems, a modern data platform must be able to seamlessly run quality checks with lineage that allows a firm to track and audit their data.”

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Making it happen

Arriving at the end state with unified data on one platform is far from a smooth transition, especially if firms manage the journey in-house. Estrada reveals most of his firm’s clients are in one of three situations. In the first, they’re deciding whether to build or buy a data platform and need help understanding the trade-off.

“The most desirable state tends to be somewhere in between,” Estrada says, “and is often a delicate balance. The client desires to have someone to take care of the infrastructure and connectivity to all data source systems but flexible for them to self-service their analytical and reporting needs.” He goes on to explain that while building a data platform from scratch offers customization and control, it requires significant investments in time, resources, and expertise. “Buying can provide a quick solution but may raise concerns about meeting the firm’s specific requirements and workflows,” Estrada explains.

The second and most common scenario is where firms have made choices about certain generic tools and need support to integrate with  existing and new data sources, extend data models as their needs change, and keep up with the reporting and analysis demands from both internal and external stakeholders. And lastly, usually the case with larger more mature clients, is a scenario where large internal infrastructures have been constructed, but firms are struggling to maintain or modernize them.

Regardless of where firms are, implementation can become a significant pain point, and it’s important to plan things out carefully. “At the end of the day, the main driver should be business value,” says Estrada.

Lessons learned

According to Estrada, there are several important lessons and strategies to keep in mind as firms consider how to best manage their data.

“It doesn’t have to be daunting, as creating a unified data platform is not about disrupting the current infrastructure or going through costly, lengthy replacement projects. The technology available today can simplify this journey. Adoption is also crucial – people won’t use a tool unless it improves their life in some way, so it’s important to focus on changes that can quickly demonstrate value.” His recommendation to prioritize the most impactful business use cases and take an incremental approach allows firms to assess the high-return, low-risk items that will immediately deliver benefits and then thoughtfully build on their successes over time.

Estrada also highlights how tools that require vendor or internal IT support can limit user adoption. He suggests making sure tools are easy to use and offer features that allow a non-technical user to swiftly establish new data connections, run queries, or create dashboards and visuals on their own. This concept of accessible tools and data is what data democratization is all about, a topic Estrada speaks about often.

The last takeaway Estrada shared is his aim to meet clients where they are on their modernization journey, whether they’re at the early stages of evaluating their data and tools or have more advanced data needs. “Firms like ours have built specialized expertise in this space, and can help curate simple and effective implementation journeys at speed.”

Interested in learning how modern, cloud-based technologies can streamline middle- and back-office operations and optimize alternative investment processes? Read our case study: Creating a Single Source of Truth Across Alternative Investment Portfolios. 

This article originally appeared in Private Equity Wire’s Daily Intel newsletter.

Cesar Estrada
Cesar Estrada oversees Arcesium’s application of its core competencies in data integration and harmonization to the investment lifecycle of managers in private capital markets, including private equity, private debt, real estate, and infrastructure. Previously, he was Senior Managing Director and Alternatives Segment Head for North America at State Street, driving growth for a business with approximately $1tn in AUA. Prior to that, as a Managing Director at JP Morgan, Cesar led the private equity & real estate funds services business from launch to $350bn AUA. He holds an MBA from Kellogg School of Management at Northwestern University and BS in Chemical Engineering, ITESM.