Building a technology infrastructure for alternative investment management

An article by Thomas Nokin    No Comments

Part 1: Technology and deployment choices

This is the first of two articles that will explore the process of choosing and implementing technology solutions for alternative investment firms. Here, I introduce the drivers of technology, and what to consider when choosing a solution.

The alternative investments sector is under pressure from regulators and investors to improve reporting and communication throughout the investment value chain. The good news is that tailored technology solutions for General Partners (GPs), Limited Partners (LPs) and Fund Administrators are available to meet these new requirements. So, since evaluating technology is a complex endeavor, how can you ensure you are making the right decisions for 2012 and beyond?

Future-Proofing

This term expresses one of the primary goals in acquiring technology: making sure that the solution won’t become obsolete as soon as the industry changes. For example, amendments are being made to regulatory initiatives on what seems like an all-too-frequent basis. This is driving firms toward technology solutions that offer sufficient future-proofing against change from both a compliance and operational perspective. The first and most critical question is that of longevity.

Point vs. integrated solutions

This in turn raises the question of the comparative merits of best-of-breed solutions versus a more integrated approach. Because a private investment firm’s regulatory and operational needs span many disciplines, firms need the means to manage a wide range of functions across multiple parties.

A single solution will probably not meet all needs. Indeed, it is increasingly rare that a solution would exist in isolation from other applications.

Furthermore, a technological infrastructure that consists of multiple independent solutions will demand constant updates. This adds time, cost and effort that may limit the ability to adapt to future needs.

Integrated solutions are more efficient at managing the upgrade process while requiring less effort to introduce customizations and new features. This approach, the future-proofing approach, can enable firms to develop competitive advantages.

Deployment options

The next consideration is whether to outsource, license a Software-as-a-Service (SaaS) solution, purchase a hosted solution or deploy in-house. A number of issues must be considered, such as the ability to customize and maintain the solution.

With an in-house technology deployment, the firm retains maximum flexibility. They are not dependent on the provider for obtaining new reports and are free to adopt their own processes.

However, technology choice is often a function of budget. The SaaS licensing model offers reductions in capital expenditure in the near term and will require less in-house resources as maintenance and upgrades remain the responsibility of the provider.

Perhaps the biggest advantage the SaaS model offers is that the responsibility for keeping up with technological advances falls to the vendor. For firms with limited headcount, this extra “service” can be a great asset.

Conclusion

Financial services remains a fast-changing environment. Alternative investment firms and investor organizations must have one eye to the future when selecting technology, regardless of whether that technology is deployed in-house, licensed, or outsourced. Next time we’ll explore some best practices for working with technology providers.