Mercatus on why data is infrastructure’s most valuable resource

Leveraging big data and advanced analytics will transform infrastructure investment in the years to come, says Mercatus co-founder and chief operating officer Tim Buchner

This article is sponsored by Mercatus

What are the key technology trends that you see shaping the infrastructure sector today?

There is tremendous emphasis on data and the current situation with covid-19 is only exacerbating that trend. Lockdown has produced severe stresses on cashflows. There are pronounced risks around revenues, margins and returns. Will investors see the same level of performance that they have in the past? Those pressures are causing organisations to look deeper at the data available to them in order to support rapid decision-making. In the past, too many managers have been complacent with their data, but now they are having to prioritise leveraging technology.

How widespread is this issue of complacency?

Tim Buchner

I think most organisations fit broadly into two camps. The first comprises those managers that recognise that this is a new normal. They understand that they will have to be able to deal with these black swan events and have real-time knowledge of how their investments are doing, what they are worth and how that is likely to change. The over-reliance on Excel is a risk. Those managers are taking proactive steps to protect themselves in the current crisis and to get ready for the next one.

But, at the same time, there are managers sitting on the sidelines believing that their legacy ways of working will satisfy the demands of tomorrow. Those companies are being complacent about their data and I think they are missing out on significant opportunities.

To what extent are LPs embracing technology?

I would separate LPs into two groups as well. You have the active LPs, investing directly, and they are following many of the same trends that we are starting to see among GPs. Technology, and in particular data, is becoming one of their top issues, if not the top issue.

But, for the more passive LP, I see a great deal of risk. Most of those LPs are still receiving PDF reports from their managers and, either working with managed service providers or internal staff, they are manually inputting that data into their systems on a quarterly basis.

That is fraught with the potential for error. It isn’t real-time. And it is not giving them the kind of confidence they should have, especially given the covid situation.

In this era, you must have ways to ingest and analyse data at scale so that you can form your own views on what lies around the corner.

How do managers approach resourcing when it comes to technology?

The first place managers typically start is by hiring a chief information officer or chief technology officer. Today, only around 5 percent of firms with more than $1 billion under management have some form of CIO or CTO in place. We expect that to grow to between 30 or 40 percent over the next two years. Meanwhile, we estimate around 15 percent of firms with over $10 billion currently have CIOs or CTOs and we expect that to rise to more than half. Managers are realising the importance of having an organisational data strategy that is well aligned with their individual team business requirements.

Not only do we see the percentage of CTO/CIOs going up, we also see a major change of the old guard with the new. Getting the job spec right is going to be essential where it’s no longer just about getting in someone who understands IT, but people who understand well the complexities of the business balanced against data.

For those organisations that are leading the way, in terms of their approach to data, what sorts of outcomes are being achieved?

The very best managers are learning that there is a critical dependency on ingesting and normalising data and embedding that data across workflows in singular management systems in order to enable advanced analytics. That is driving significant gains in terms of automation.

“There are management teams that are massively resistant to adopting infratech because they are living on past successes. They have a legacy mindset that prevents them embracing innovation and change”

First, we have seen real progress with the automation of operating reports. Some organisations that have been able to tie data management with workflow in single systems have been able to eliminate around 50 percent of the non-value-added work involved in that. In addition, these systems have allowed firms to make a lot of movement on running stress testing analytics, as a result of the covid environment, but also looking more broadly at future cashflow forecasts or risk mitigations.

Furthermore, this is not just happening at an asset level, it is happening at a portfolio level as well. The only way to do that is by truly embracing Excel. Half of all our industry’s data lives in Excel, right from investment thesis to operations. The only way organisations can do portfolio analysis at scale, therefore, is by interfacing directly with Excel.

Therefore, if a fund manager wanted to determine how a change in interest rates and/or terminal values would impact its entire portfolio valuation, they are able to get the answer in minutes, not weeks.

Does that not create significant risk in terms of cybersecurity?

Cybersecurity is a big smoking gun for this industry. Most managers we talk with identify it as a high operational risk to their business. We have found that unless you are talking to multi-segment managers far exceeding $10 billion AUM, few have plans to put in place a fully operational and compliant cybersecurity program or even know where to start. Instead of being centralised, most often managers’ data lives in Excel on desktops. As a result, it’s very difficult to have secure and compliant data.

For that to happen, organisations really have to be thinking about how their entire ecosystem connects. They need to think how data is managed across the front, middle and back office, and ensure everyone is working from a single source of truth. Too often, managers fail to approach data holistically and, as a result, they spend years and millions in capital on something they later realise has major holes. The fall-out of a cyberattack can have devastating consequences to a firm: it could lead to the downfalls of deals, performance, misreporting, and the firm may be hit by reputational damage and vast potential fines.

Which emerging technologies do you think are going to be most influential in the years to come?

Advanced analytics is the thing that I get most excited about in this space, particularly given the vast proliferation of data sources available. Of the data that exists today, 90 percent was generated in the past two years. That is incredible.

If you are able to manage data coming from all those different sources and be very specific about the outcomes you are trying to drive with that data, I think advanced analytics – and ultimately big data, when there is sufficient volume – will be one of the biggest enablers for infrastructure investors. It will allow for real-time decision making, based on accurate, timely information, as well as the ability to think forwards rather than only in reverse.

What do you see as the biggest inhibitors for the adoption of infratech?

I think the talent these organisations bring in and the culture they are able establish will be either one of the biggest enablers – or biggest inhibitors – to the adoption of infratech. There are management teams that are massively resistant to adopting infratech because they are living on past successes. They have a legacy mindset that prevents them embracing innovation and change. But there is also an underswell of management teams that are real believers – a new breed that are open to change to building a culture based on data.

What recommendations would you then make for managers considering their tech position?

My advice would be, do not use the recent pandemic as a reason to postpone innovation or investment in technology. We are finding organisations are using the current situation as a way to delay discussions. They say, “let’s talk again when this is all over”. But we are expecting this to last for at least nine months to a year. Managers have to prepare for this being the new normal. As a result, pressures are only going to increase. Take action now and do not be complacent.

I would also advise organisations not to approach technology problem by problem. Think across the whole business from front office to middle office to back office. Everything should be interconnected. Focusing on business outcomes will also help managers prioritise. Ultimately though, I strongly believe data will be one of the big value drivers over the next 12 to 24 months and I would highly recommend managers start thinking with a data mindset.

Bearing that in mind, together with the covid-19 outbreak, what are your predictions for how infratech will evolve in the years to come?

Over the next two years, we expect somewhere between 50 and 75 percent of managers will move away from legacy on-premise environments and into the cloud.

We also think more than 50 percent of infrastructure managers will modernise and re-engineer what they currently have in place, with a focus on end-to-end solutions rather than the siloed approach of the past.

In particular, we believe a growing number of those firms with $10 billion or more under management will have some kind of advanced analytics in place that will help them generate the insights and intelligence required to run their businesses in real time. Around 80 percent of managers today rely on spreadsheets and quarterly cycles but are really flying blind in between. That has to change and we believe it will.

How does infrastructure stack up against other private markets asset classes in terms of its adoption of technology?

“Truthfully, I think infrastructure is at least two to three years behind when you think about hedge funds, private equity, or real estate. And here’s why. Most of the innovation in those other markets has involved single asset classes with relatively simple structures and relative homogeneity. The challenge that most infrastructure teams have today is that every investment is unique. Every investment strategy is unique. Lastly, financial models are very bespoke and complex. Revenue and expense assumptions are very nuanced. There is a heavy reliance on Excel to accurately forecast an asset’s net asset value.

As a result, managers struggle with the idea that technology can provide a ready solution. Companies like ours, therefore, have had to embrace that complexity, diversity and the flexibility required to work across multiple asset classes and complex structures that evolve over time. With that support, significant strides are starting to be made by the top players, while a lot of other players are striving hard to catch up.”