Alternative investments refer to a diverse category of financial assets that deviate from the traditional forms of investment, such as stocks, bonds, and cash. These investments encompass a wide range of assets, including but not limited to, private equity, hedge funds, real estate, commodities, venture capital, and infrastructure projects. Unlike conventional investments that are well-defined and widely recognized, alternative investments lack a standardized market identifier. The absence of a consistent identification system poses challenges in terms of operational efficiency, as it makes it difficult to accurately identify, categorize, and match these assets within the complex landscape of the $13 trillion alternative investment market. Presently, organizations employ their own internal identifiers, leading to inconsistencies and inefficiencies in the management of these assets. Addressing this industry-wide concern necessitates a collaborative effort involving a diverse set of stakeholders.
To assess the magnitude of this issue, Sia Partners conducted comprehensive surveys and interviews involving a spectrum of industry participants, including large asset and wealth management firms, fund administrators, data vendors, pricing vendors, broker-dealers, and other relevant stakeholders. The findings unequivocally underscored that the absence of standardized identifiers for alternative investments underpins a cascade of challenges, leading to processes that lack scalability, and ultimately resulting in resource-intensive and time-consuming operations. Given the industry’s projections of continued expansion within the realm of alternative assets, the looming scalability problem assumes even greater significance.
The pain points related to the absence of a common identifier in the alternative asset market include:
-
Inefficient communication and information exchange among third parties due to the inability to match assets (market data providers, fund administrators, custodians, distributors).
-
Impediments to asset transfers, client reporting, redemption processing, capital calls, and distributions.
-
Difficulty aggregating multiple data sources and challenges with data warehousing. Challenges stemming from inconsistent data coverage: pricing data, risk analytics, asset attribute data, and issuer data, among others.
Asset transfers between broker-dealers provide a clear example of the difficulties brought on by the lack of a common identification. The technique entails linking assets based on their IDs in traditional investments with well-established identifiers, permitting quick and easy transfers. For alternative investments, however, the lack of a standard common identifier results in a complex and time-consuming document review procedure to correctly identify the asset in consideration. This illustrates the operational inefficiencies brought about by the absence of a standard identifier in the alternative investment sector.