The rise of the private sector requires the digitization of processes
Investments in private equity, private debt, infrastructure or real estate are a response to investors’ search for performance but also for meaning. These increasingly sought-after real assets are facing unprecedented dynamics and volumes.
The growing demand for alternative investments is changing. Following an increase of nearly 50% of these assets between 2015 and 2020, a further jump of 60% is expected by 2025[i]. These investments in unlisted assets are appreciated by investors, who seek 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 by the absence of market infrastructure. However, in this context of an upsurge in illiquid real assets in portfolios, the demands of investors in terms of data, risk management and reporting are strong incentives for more organization and efficiency.
Open to individual customers
One of the striking phenomena of this movement is the opening of these markets to individual customers. Thus, in France, among the AIF (Alternative Investment Funds governed by the AIFM directive[ii]), according to the Stock Exchange Authority (AMF), 40% are open to non-professional investors. The share of unlisted assets in vehicle life insurance contracts offered by insurers has increased significantly. 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 the networks. banking and insurance.[iii]. In the context of the crucial need for equity capital of many companies, this approach is, for individuals, an opportunity to invest in SMEs, that is to say in the real economy.
Actors involved in responsible financing
In unlisted markets, many fund managers are able to respond to the societal and environmental concerns of savers; Indeed, integrating these concerns will soon become an obligation, following the reform of the MiFID directive.[iv]. These players are major players in responsible investment, and the concrete search for impact is often an integral part of the investment process.
This approach is encouraged by a regulatory arsenal deployed by the European Commission as part of its sustainable finance action plan launched in March 2018. Its latest initiative, the SFDR[v], entered into force on March 10, 2021, categorizes the funds and formalizes the reporting obligations concerning the inclusion of ESG issues[vi]. This improved transparency will allow an evolution towards a greater homogenization of practices as well as greater clarity for investors.
Unlisted markets become an asset class in their own right
By definition, the unlisted market includes very heterogeneous investment universes and does not have the market infrastructure for listed assets. However, the requirements for valuation, accounting, position maintenance and control remain very similar. Many banking and non-banking players participate in a very active competitive environment.
For banks, and the Securities Services business in particular, these markets are a natural engine of growth, with custody, valuation and depositary services being an integral part of the offering.
Historically, Societe Generale has always supported the development of asset managers and institutional investors in new asset classes, new geographic areas and new investment strategies. In this regard, we were pioneers in this field by becoming the custodian bank of the first FCPR[vii] on the Parisian market in 1983 on behalf of a private equity firm, Apax Partners.
But the unlisted sector is no longer a niche market reserved for specialized players. The largest European asset managers have now built up solid expertise in private debt, private equity, infrastructure and real estate, with tens of billions of euros in each of them. The implementation of the AIFM directive in 2013 was a trigger, providing a European framework for all alternative funds and giving them access to all markets in the European Union.
A necessary digital acceleration
The popularity of unlisted assets and the substantial increase in volumes require greater industrialization and the digitalization of operational processes. Today, the nature of the underlying assets of their funds is still likely to create operational difficulties, in the functions of back office, record keeping or transfer agent … The fragmentation of European markets, largely governed by local regulations, increases the number of miscellaneous documents to be provided to authorities. The management of these operations, such as the production of certain statements of ownership of the assets of a portfolio, required by the AIFM directive, is still very manual.
Our clients are looking for increased efficiency and we must support them in achieving their objectives and allow them to focus on managing their portfolios. We are thus continuing to invest massively in the digitization of our processes, but also in the supply of new integrated solutions such as “advanced middle office”. This outsourcing service allows us to become the sole point of entry for our clients for all their operations, as we take care of the administrative tasks of analyzing, controlling, monitoring and sharing documents, leaving the manager with the freedom to focus on your core business.
The unlisted market is a major growth engine for players in the asset management sector, not only because of the diversity of investment possibilities but also because of its ability to transform, industrialize and expand. digitize. Real asset tokenization initiatives will undoubtedly lead to additional opportunities.
By Gildas le Treut, Global Head of Sales & Relationship Management at Société Générale Securities Services
For more information, do not hesitate to visit SGSS website.
[ii] Alternative investment fund manager
[iv] Financial instruments markets
[v] Sustainable finance disclosure reports
[vi] ESG integrates three concepts (environment, social, governance)
[vii] Risky Mutual Fund (venture capital fund)
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