How Shifts in Investor Preferences and the Rise of Asset-Based Financing Change Reporting Needs

Investment models that focused on the traditional 60/40 split are being supplemented — and in some cases upended — by emerging asset classes. As investors seek to gain that proverbial edge in a market shadowed by volatile interest rates, geopolitical uncertainty, and changing economic conditions, many are turning to alternative investments such as real assets, private equity, commodities, cryptocurrencies, and other innovative financial instruments like asset-based finance. 

Asset-based financing — a broad term encompassing financing structures secured by physical or financial assets — has gained traction in recent years. While these investments offer unique advantages, they also present distinct challenges for LPs tasked with providing accurate and timely reporting to both investors and regulators.

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The new investor landscape

Investor behavior has undergone a significant shift in the last decade. While traditional equities and bonds still play a vital role in portfolios, many investors are seeking exposure to private markets because it offers access to innovative, high-potential companies. Asset-based financing, which involves using assets as collateral for loans, is gaining traction as a result of:

• Improved access to capital: Asset-based financing removes credit history barriers, making it easier for startups and high-growth companies to secure funding.
• Investment diversification: New sources of uncorrelated returns, downside protection, and an income stream help to reduce overall portfolio risk.
• Protection from economic headwinds: Asset-based finance is less correlated with market swings, providing stable returns during economic uncertainty.
• Shifting market demands: The growing need for flexible and accessible financing options has fueled the popularity of asset-based lending.

This growing appetite for alternative assets brings with it increased complexity. Traditional reporting frameworks are often inadequate for the nuanced needs of asset-based financing structures.

As transparency and trust grow more crucial, LPs must be ready to respond to investors accustomed to near-instant data access. Regulators, too, are pushing for greater transparency to protect investors and maintain market integrity. This shift in investor preferences, coupled with the rise of asset-based financing, is fundamentally changing the reporting needs of financial firms.

The impact on reporting needs

No longer content with the traditional quarterly or annual reporting cycles, investors want to know their exposure in specific sectors, regions, and investments, and they want this information regularly. Requests for more frequent and detailed reporting is driven by several factors, including demands for real-time data to respond to increased market volatility, increasing requests from regulators and investors for more transparency, and technological advancements that make it more feasible to meet these demands.

• Increased reporting frequency: Investors looking for monthly or even ad-hoc reporting expect managers to turn around information quickly and accurately. Without the right technology, analysts can find themselves scrambling to compile data from error-prone Excel documents or disparate platforms, often without knowing if the data is the latest available.
• Comprehensive data access: A clear and detailed view of positions across all investments helps investors understand their exposure, performance, and track record. This requires robust data management systems that can integrate and synchronize data from various sources.
• Demand for what-if scenario analysis: Tools that simulate portfolio performance under various interest rate scenarios can help identify vulnerabilities early, allowing managers to adjust positions and prepare for potential shifts. This is particularly important in a volatile market where even a micro change in interest rates can change an investment thesis.
• New reporting demands: Reporting demands such as environmental, social, and governance (ESG) factors ebb and flow driven by changing political landscapes, market conditions, public opinion, and the challenge of consistently measuring and verifying performance across different companies. Managers able to provide detailed ESG reports to meet demands for sustainable and responsible investing will stand out.

Strategies to overcome reporting obstacles

To effectively engage with this new investor base and meet their evolving needs, LPs must adopt practical strategies that enhance transparency and ensure the accuracy of information they report.

Establish consistent standards

Clear and accessible reports have always been essential as a way to establish trust with managers and enable investors to make informed decisions. That will never change. What has changed is the sheer volume of data flowing across an organization.

A 2023 Deloitte survey found the number of alternative datasets applicable to financial services increased 36% in just two years.¹ As firms face up to a growing volume of internal and external information, consistent standards in how they collect, curate, and report on that information only expands. By adhering to consistent standards firms can ensure their reporting is accurate, informative, and accessible.

Integrate modern technology

Automated reporting tools are a game-changer, streamlining error-prone processes and enhancing the overall efficiency of reporting mechanisms. As the complexity of analytics and reporting grows, a synchronized source of data will help you deliver timely and accurate reports. For example, an automated reporting tool will enable you to pull data from a variety of sources, such as financial statements, market data, and ESG metrics, and then marry that information to generate comprehensive reports.

Leverage self-service tools

Providing information to stakeholders in a format that is both usable and meets reporting deadlines is a significant challenge. Self-service reporting tools can help managers create reusable templates that capture the exact information stakeholders need and present it in a visually compelling, easy-to-digest format.

A fund manager who wants to create a template for monthly performance reports can pre-populate the template with the necessary data and re-use the template the next month, allowing them to focus on analyzing the data rather than formatting slides or curating relevant information. This saves time and ensures reports are consistent and accurate.

Collaborate with external providers

External partners can help smooth out the complexities of investing in a new asset class and reporting performance to a diverse investor base, ensuring necessary information is accurately and comprehensively presented. For instance, a REIT might partner with a data analytics firm to provide daily NAV calculations for its open-end funds. This partnership can help the REIT meet the growing demand for liquidity and provide investors with the transparency they need to make informed decisions.

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The importance of data-driven digital transformation

We’ve all heard the saying: Data is king. And it’s true. Sophisticated tools can pull information from synchronized data sources to rapidly ingest and present details. Streamlined report generation and distribution, combined with self-service tools, can save time, reduce errors, and optimize operations, making the investment process more efficient and user-friendly for both private market investors and managers.

By having data at their fingertips, analysts can focus on their core responsibilities, such as strategic planning and risk management, rather than spending time formatting slides or pulling together relevant data.

When analysts can quickly and accurately provide the information investors need, it demonstrates a commitment to transparency and trust, an element particularly important for managers who require detailed and accurate information. For instance, during investor conferences, the ability to present well-formatted, up-to-date reports can make a significant difference — whether it’s self-service tools that help an analyst quickly pull together information for an upcoming investor conference or detailed information that enables managers to secure further investment from existing or new investors.

However, this shift in reporting expectations also presents challenges. Firms must ensure their data management systems are robust enough to handle the increased frequency of reporting. They must also have the necessary tools and processes in place to accurately calculate and report a daily NAV.

As the financial landscape changes, LPs must be proactive in adapting their processes and practices. By integrating modern technology, leveraging self-service tools, establishing consistent reporting standards, and collaborating with external providers, firms can meet the growing demands of investors and regulators.

By providing timely, accurate, and comprehensive reports, firms can build strong relationships with their investors and position themselves for long-term success. The key is to stay ahead of the curve and be prepared to adapt to the changing needs of the market.

To learn more about solving the operational challenges of asset-based finance, download our comprehensive toolkit for practical insights and strategies to help optimize your processes and build stronger relationships with your investors.

Sources:

1. Fueled by better information: Why investment management should embrace alternative data, Deloitte, July 27, 2023.