Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
00:17:16 · Michael Sidgmore, Yann Magnan
[00:17:16] S1: process of monitoring and valuing assets in evergreen structures be done without the technology that is available to firms today? [00:17:26] S0: Could it be done? Yes. The answer is yes. It's been done for like forty years with Excel, Google search and email, or maybe not Google search, but it's been done for a long time. The key question is, is that an efficient way to do things? Then there the answer is no. As the industry is growing, as a frequency is increasing, you want to have a very robust process. You want to have a very consistent process. And it does not make sense if there is a strong set of technology solutions that can enable that work to continue to do that work manually because just it's a massive and massively costly effort that has to be done. [00:18:00] S1: Where does technology give firms the most leverage? [00:18:04] S0: Collecting data, structuring data, creating consistency, and doing that in a governed, auditable, traceable type of environment. That's what matters most for this industry, for this part of a process. And again, because at the end of the day, you're dealing with a process that is not regulated in the sense that we are thinking about regulation with public markets, but that has a lot of consequences and you need to make sure that you're right. So everything that's around how you structure data consistently and create that governed environment is the most critical part of things.
00:18:04 · Yann Magnan, Michael Sidgmore
[00:18:04] S0: Collecting data, structuring data, creating consistency, and doing that in a governed, auditable, traceable type of environment. That's what matters most for this industry, for this part of a process. And again, because at the end of the day, you're dealing with a process that is not regulated in the sense that we are thinking about regulation with public markets, but that has a lot of consequences and you need to make sure that you're right. So everything that's around how you structure data consistently and create that governed environment is the most critical part of things. [00:18:36] S1: What's required for firms to be able to do that well? Do they need to have enough resources internally? Do they need to spend enough for a certain amount of money? How and what will be the ingredients to success for these firms that have to manage particularly evergreen vehicles? [00:18:53] S0: We have to have the expertise, generally speaking, and the expertise, either have that with people or you can have a combination of people and technology. A lot of these processes are codable. They can be thought through and developed in a way that most of what a human would know can be embedded into a technology. And then you leave to human whatever is the most significant part of the process, which is human judgment, asserting when there are choices to be done, how to do these choices. [00:19:20] S1: What still needs to be improved upon as it relates to leveraging technology or automation to make processes be smoother, better, or faster?
00:19:20 · Michael Sidgmore, Yann Magnan
[00:19:20] S1: What still needs to be improved upon as it relates to leveraging technology or automation to make processes be smoother, better, or faster? [00:19:32] S0: Integrating further various pieces of technology. The alternative investment fund industry comes from a world where technology teams were looking at point solutions. But at the end of the day, when you take a step back and you look into how these firms operate, everything boils down to portfolio company data. That's the material from where everything is basically derived, whether it's thinking about value creation, whether it's about thinking about an exit, whether it's about the evaluation process, the reporting process to VLP, all of that sits on this stream of data. We are talking about, of course, financial data, also operational data, cap table type of data, all of that is our dataset that are basically the DNA and the materials that these GPs operate on. What's missing is a set of technology that basically covers everything. [00:20:27] S1: So my mind goes to two places when I hear you talk about that. One is, how does technology harmonize these processes? But two, and I think related, is the portfolio company level data is the single source of truth. Different investment firms, whether it's equity or credit, may have different valuation methodologies. Does the industry eventually move to a standardized methodology for valuing where you don't get two assets that two firms may value at slightly different prices or values for some reason?
00:21:02 · Yann Magnan
[00:21:02] S0: I don't think that will ever happen. If you look at the public markets, take 10 different brokers, financial analysts, they will come up with 10 different valuations anyway. A lot in valuation is about human judgment. It's not just about methodologies. It's about human judgment. And you would have a different perspective on the certain asset than I would have. It's as simple as that. The key question is how do you inform this human judgment as fast as possible? How do you document justify this human judgment as best as you can? But at the end of the day, there will always be nuances. Valuation of methodologies are not that different. What differs is the way they are applied from one GP to the other one. And again, that boils down to human judgment and the way they are thinking about things. Can there be some convergence at some point in time? I think yes, definitely. I think another thing that is happening already and has to happen anyway is consistency over time, especially when it comes to post investment reporting and valuation. You're valuing the same asset over and over again, quarterly, monthly, weekly, daily. You can't operate in a world that from one quarter to the next one or to the next to next one, you change methodology unless you can explain and justify that. So creating that level of consistency from one period to the other one is also going to be very important, especially from a regulator standpoint.
00:22:20 · Michael Sidgmore
[00:22:20] S1: Where do you think the human in the loop will still matter? You mentioned, and I asked this question in the context of human judgment will still be a big part of the valuation process. Where will the human in the loop still matter? And where will things like AI either eat into or augment that human in the loop process?
00:22:42 · Yann Magnan
[00:22:42] S0: Think of valuation as basically a combination of art and science. And if you think at it like this, so science basically being everything that's calculation and workflows. How do you get from point A, I'm receiving portfolio company data to point Z, I'm reporting to my LPs. So these are the processes. All that is the science piece and the art is what I call the human general. Basically, I'm valuing a company. I have a set of pure sample. The average ABDM multiple from that pure sample is anywhere from 12 to 14? Am I going to pick 13 because it's the average? Or do I think that for any reason the company I'm valuing is closer to the top of the range or to the low of the range? All of that is your management. It sounds like very simple, but at the end of the day is how do you position a company vis a vis another? There's so many factors that you could look at to do that, but at the end of the day, it requires a bit of judgment. It requires a lot of judgment and feeling. So that's what the art piece is about. Technology will take care of everything that's the science piece and human will be in charge of the art piece. And I'm saying in charge of the art piece, which means that that's where AI, general in particular, can also inform the user, the human that is supposed to make the human judgment on certain elements and factors that will help him or her form his judgment faster.