This article is sponsored by State Street
The role of the fund administrator is changing as technology continues to impact the world of real estate investment management. Increased data flows are useful tools for managers; however, big data brings with it big demands. To compete effectively, managers need to focus on their core business of sourcing, managing and transforming assets, while delivering greater transparency, better reporting and tighter accounting controls.
How is the role of the fund administrator changing and how is technology involved in this evolution?
Outsourcing, although not new, is still emerging in the real estate fund space. Some of the real estate mangers that we engage come to us with varying types of insourced operating models; some have siloed data sources, including spreadsheets, systems and third-party suppliers, and some do not have formal processes for the collection and normalization of data. Depending on where they are in their growth stage, some are often lacking a core data source across assets, funds and business units, while at the same time face increased reporting obligations, including valuations, cashflow requirements, distributions and ESG.
All of this drives a greater emphasis on data collection, quality, accuracy, integration and timeliness. Traditionally, the fund administrator’s role is primarily keeping the general ledger, accounting or books of record for a real estate fund. However, in that role, we are the recipients of vast amounts of data, not just financial data, but non-financial information from third-party property managers, such as leasing data.
A manager might be getting 30 data packages from 30 different property managers and it is up to them to try to make sense of all of it internally. Data, right down to the individual property level, is becoming an increasingly important part of real estate investment management and there is more data available. However, the natural consequence of this is that it becomes more complicated and requires a technological solution to ensure managers benefit from data and do not drown in it.
In August and September 2020, we commissioned PollRight to conduct a survey to help us better understand the outlook of alternative investment professionals when it comes to how they manage the data within their investment activity. We found that 83 percent of alternatives managers say their data management practices and technology systems that underpin them are only ‘average’ or ‘good.’
We see firms like ours providing an ecosystem where real estate fund and investment level data is consumed, managed, normalized and delivered on a single platform underpinned by end-to-end data management. We are focused on increasing our ability to support managers across the end-to-end investment management lifecycle for consistent workflows and holistic views of the investment process; becoming an enterprise outsourcing provider to our clients, helping to solve their most complex data challenges.
Outsourcing provides managers access to scale and efficiencies through a service provider’s platform and reduces the costs associated with building technology in house. Working across a group of investment manager clients means a fund administrator can aggregate the costs of building and maintaining that technology platform for handling data.
Investors require managers have technology in place to provide detailed reporting on their investments and a mechanism for transparency. In fact, 58 percent of the respondents in our survey said they expect investor pressure on transparency and reporting for commercial and residential real estate will increase over the next three years. Identifying and mastering the best technology applications that can support the reporting needs of investors is not necessarily a core competence of most managers but is certainly expected of the fund administration industry.
A fund administrator can streamline data, but how else can technology and data boost operations?
Once the collected data is driving more efficient fund administration, it can be used for enhanced purposes, such as layering on scenario models for risk management purposes or applying machine-learning techniques to other sources of unstructured data for insights. While forecasting and running multiple exit scenarios on assets has always existed, we want to use the data to connect the dots between investment-level activity and the fund level, to understand the impact at the portfolio level and how it works out for managers and investors.
Acquisition teams, portfolio managers and fund managers in real estate have multiple deal models, valuations and asset-level data files predominately housed in Excel and many have no centralized data repository for these files. This impedes the timeliness of information being extracted and provided to other users and increases the risks of non-current data being used. Coupled with this, asset-level non-financial and underlying operational data will reside within the systems of property and asset managers, portfolio companies and JV partners and need to be collected and normalized.
Fund-level data can then be layered across this from accounting teams or third-party administrators. Without a platform that combines these collections in a systematic way, asset-level data and fund-level data will not be dynamic and provide insights that use both levels of datasets to their full advantage.
How could fund administrators help managers which have built their own internal processes and workflows?
The real estate fund industry operating models are very fragmented in this regard; a lot of people have built up their internal processes over time and a lot of these processes tend to be bespoke. While that might work at a certain point in time, it also makes them hard to adapt if the business moves into different fund strategies or expands to different jurisdictional geographies as it becomes larger and more complex.
This is something we see quite often; clients come to us, because they have maxed out their bespoke processes and workflows, and in many cases, they are growing too fast for their current operating models. So, moving some of that infrastructure to us, and then viewing it from a data perspective allows them to focus on managing their assets, rather than trying to create a new process for new products.
The big benefit to working with an administrator is to really allow the managers to focus on their core investment management activity and build operational efficiency around that, while reducing the need to deal with data technology and accounting information.
As the landscape of capabilities continues to grow, a fund administrator’s platform will consume and normalize data and then provide a relevant dashboard for the manager to access that information and utilize it. For example, asset management of real estate assets can be enhanced with a fund administrator’s ability to collect historical operational performance data which can drive benchmarking for future development of asset operating plans.
How can fund administration technology be used to benefit investors?
Investors are more demanding these days! They want more detailed information. To aggregate some of the reporting that investors want to see is a huge undertaking for a manager, because again they need to pull information from different places.
There is a lot of data out there and a lot of operation information across the marketplace: property data, fund data and market data. Anything we as the fund administrator can do to streamline day-to-day workflows and operations and to provide a “golden source” data management would be the key here.
Growth in data demand is something that we see playing out across the industry as well. In our survey, 70 percent of respondents acknowledged that they need to increase spending on data storage, management and analysis due to increasing investor pressures on reporting and returns. One in five say they need to increase spending significantly.
Usually the investor relations team is faced with a number of queries, many of which may be very specific: “Can you tell me what’s happening on this investment?” or “What is my NAV position?” or “Can you tell about my historical distributions?” The investor relations team then has to go to the fund accounting team or someone else to get that information.
The alternative is to go into the dashboard provided by the fund administrator and quickly pull up the majority of the data to answer the questions which will be asked of them. The financial data and non-financial data will be aggregated and thus will provide managers with a dashboard where they can access the information, and they can run their own analytics and see their own historical data.
You can have different views of that data, so if you are the investor relations person, you can customize the view to get the information that you readily need. If you’re the asset management team, then you can customize that dashboard for the data you specifically want to see like detailed lease or asset budget to actual data.
There can also be an evolution of this process. Historically the manager was the gatekeeper of information to investors, communicating on a periodic basis in the form of a letter or bulletin, which was obviously selective. There is also a considerable amount of effort required to do this every quarter, alongside meeting ongoing investor requests for information. Rather than spending a tremendous amount of time communicating their strategy, communicating performance, etc, you could have an investor dashboard that the manager can access in real time and see the data for themselves.
How else might the technology used in fund administration transcend to the broader marketplace?
More data, used wisely, leads to greater market transparency and that means more efficient pricing of real estate assets and greater insights, which is always what the market is looking for. Using blockchain technology – where details of transactions across the lifecycle of an asset is embedded in an immutable digital record – could bring more transparency to the secondary market for fund LP investment interests for example.
Introduction to AI or machine learning through a lifecycle of investments view – from deal pipeline, acquisition and investment accounting through portfolio, fund management, administration and investor relations to disposition – can help make smarter decisions, optimize returns and better manage your business.
Having more data and more accessible data is going to enhance real estate businesses but you need a technology strategy to manage and maintain it where various user groups at a manager can augment the one combined data set across roles. Data is going to become a far more important part of real estate investment management. A fund administrator who has evolved into a data administrator can provide that platform for managers to build on.