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The upsurge in the unlisted sector requires the digitalisation of processes

12/05/2021

Investments in private equity, private debt, infrastructures or real estate are a response to investors’ search for performance, as well as meaning. These increasingly sought-after real assets are facing unprecedented momentum and volumes.

The growing demand for alternative investments is undergoing a transformation. Following an increase of almost 50% in such assets between 2015 and 2020, a further jump of 60% is expected by 20251. These investments in unlisted assets are popular among investors, who are seeking performance, diversification of their portfolios and meaning by investing in the real economy. They offer a spectrum of very heterogeneous assets and differ from liquid assets through the absence of market infrastructures. However, within this context of an upsurge in illiquid real assets in portfolios, investors’ requirements in terms of data, risk management and reporting are strong incentives for greater organisation and efficiency.

Opening up to individual clients

One of the striking phenomena of this movement is the opening up of these markets to individual clients. Hence, in France, among AIF (Alternative Investment Funds governed by the AIFM directive2), according to the French stock market authority (AMF), 40% are open to non-professional investors3. The portion of unlisted assets in life insurance contract vehicles offered by insurers has substantially increased. In France, the government has sought to encourage savers to consider investing in unlisted assets by launching, in October 2020, with Bpifrance (public investment bank), a venture capital fund-of-funds distributed by banking and insurance networks4. Within the context of many companies’ crucial need for equity, this approach is, for individuals, an opportunity to invest in SMEs, in other words in the real economy.

Players who are stakeholders in responsible financing

On the unlisted markets, many fund managers are capable of responding to savers’ societal and environmental concerns; indeed, incorporating such concerns will soon become an obligation, in the wake of the reform of the MIF directive5. These players are major stakeholders in responsible investment, and often the concrete search for impact is an integral part of the investment process.

This approach is encouraged by a regulatory arsenal deployed by the European Commission within the framework of its sustainable finance action plan launched in March 2018. Its latest initiative, the SFDR6, which came into effect on 10 March, 2021, categorises funds and formalises Reporting obligations regarding the inclusion of ESG issues7. This improved transparency will allow a move towards greater homogenisation in terms of practices as well as greater clarity for investors.

Unlisted markets are becoming an asset class in their own right

By definition, the unlisted market includes very heterogeneous investment universes and does not have the market infrastructure of listed assets. However, the valuation, accounting, position-keeping and control requirements remain very similar. Numerous banking and non-banking players are participating in a highly active competitive environment.

For banks, and the Securities Services business in particular, these markets are a natural growth driver, with custody, valuation and depositary services being an integral part of the offer.

Historically, Societe Generale has always accompanied asset managers and institutional investors’ developments in new asset classes, new geographical regions and new investment strategies. In this respect, we were pioneers in this domain by becoming the depositary bank for the first FCPR8 on the Paris market back in 1983 on behalf of a private equity company, Apax Partners.

But the unlisted sector is no longer a niche market reserved for specialised players. Europe’s largest asset managers have now structured solid expertise in private debt, private equity, infrastructures and real estate, with tens of billions of euros in each of them. The implementation of the AIFM directive in 2013 was a trigger, by providing a European framework for all alternative funds and by providing them with access to all European Union markets.

A necessary digital acceleration

The popularity of unlisted assets and the substantial increase in volumes requires greater industrialisation and the digitalisation of operational processes. Today, the nature of their funds’ underlying assets is still liable to create operational difficulties, in back-office, registry-keeping or transfer agent functions... The fragmentation of European markets, which are in large part governed by local regulations, increases the number of various documents that need to be provided to the authorities. The management of these operations, such as the production of certain statements of ownership of the assets in a portfolio, required by the AIFM directive, is still highly manual.

Our clients are looking for increased efficiency, and we need to support them in achieving their objectives and enable them to focus on managing their portfolios. We are thus continuing to invest heavily in digitalising our processes, but also in providing new integrated solutions such as the “advanced middle office”. This outsourcing service enables us to become our client’s sole entry point for all their operations, as we look after the analysis, control, monitoring and document-sharing administrative tasks, thus leaving the asset manager free to focus on their core business.

The unlisted market is a major growth driver for asset management industry players, not just because of the diversity of investment possibilities but also because of its ability to transform, industrialise and digitalise itself. Real-asset tokenisation initiatives will no doubt lead to additional opportunities.

 


1 Preqin special report: The future of alternatives 2025 – November 2020

2 Alternative Investment Fund Manager

5 Markets in Financial Instruments

6 Sustainable Finance Disclosure Reporting

7 ESG incorporates three notions (environment, social, governance)

8 Fonds Commun de Placement à Risques (venture capital funds)

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