We recently sat down with Ian Lynch, Founder and Chief Commercial Officer at Alchelyst, to discuss the evolving landscape of private markets and the critical role of technology in driving future growth.
As a tech-driven fund administrator, Alchelyst is at the forefront of innovation, offering cutting-edge solutions that streamline operations for alternative asset managers. In this conversation, Ian shares his insights on the democratisation of private markets, the challenge of scaling, and the role of advanced technology platforms in reshaping the industry to meet growing demand.
Private markets have seen huge growth in recent years, and this industry is constantly seeking new avenues of expansion. How do you see the next phase of growth unfolding, and what role does technology play in this landscape?
Private markets have grown considerably across all sectors, with private debt leading the way over the last two or three years, and I expect this trend to continue.
The most talked-about avenue for expansion is the democratisation of private markets. Two main factors are driving this: managers want to expand their investor base, and investors are seeking more diverse opportunities. Private equity, for instance, has outperformed public markets over the last five to ten years - people want access to this growth.
As larger endowments fill up their allocations to private capital, managers are turning to the mass affluent for the next phase of growth. This shift will likely lead to more retail-friendly structures, like open-ended funds that only partially invest in private capital. Managers will no longer be dealing with traditional LP and GP interests as investors enter and exit these structures in a share-based format. There will be a greater need for features like equalisation and other hedge-fund-style mechanisms to manage these investments effectively.
Liquidity is another key factor in this conversation. Investors will either access liquidity through more liquid vehicles or through the secondaries market. In my view, this will become a major growth area as investors seek assets with more frequent liquidity events than the typical 7- to 10-year investment period in traditional private capital vehicles.
Technology will be a critical enabler to these trends. Manually processing hundreds if not thousands of investor movements is not possible. Retail like investors will have to self-serve directly with the administrator or the RIA/IFA will need to be able to set up and manage investors in an automated way. Everything from onboarding to investor transactions to reporting will have to be fully digitised.
New fund structures such as ELTIFs will be unitised, thus needing share-based accounting treatments such as equalisation that are not commonly used in the closed-ended fund space. General ledger capabilities will also need to be more sophisticated to deal with the more liquid instruments in an ELTIF structure. This means using multiple technology platforms that will need to be consolidated so that all assets can be accounted for in the NAV production. While many general ledger systems can handle low volume private capital type instruments and others can handle high volumes complex instruments, very few can do both which will narrow choices for managers looking to utilise ELTIF-type structures.
With democratisation in mind, what challenges and opportunities come with scaling up private market funds?
The key challenge is managing the growing number of investors and the complexity that comes with it. If you’re dealing with 50 LPs, you can manage them manually. As you increase to 250 or more investors, automation becomes essential to avoid errors and delays.
Automation is crucial from the very start of the investment journey, beginning with LP onboarding. In a more retail-focused model, automation is critical and self-service becomes necessary as manually processing hundreds of investors becomes unworkable.
From the outset, you need clean data. You’ll need to categorise investors by risk level and meet regulatory requirements, like conducting annual AML checks for high-risk investors. Historically, this was done with paper and pen, with folders saved on different computer drives and wet ink documents. Today, a fully digital process is essential. This may sound simple, but my 25 years in this industry have shown me that getting this right is critical or you face many downstream issues.
After investing significant time and effort in onboarding clients, GPs want to ensure they are treated well. Whether there are 50 investors or 500 the level and quality of service needs to be consistent. Scaling this effectively can only be done with the right technology, and GPs will look to their administrators to provide this platform.
In a market that can sometimes feel sluggish with difficulties launching new vintages, how can technological innovation help administrators navigate challenges and deliver operational efficiency?
The democratisation of private assets brings an influx of investors, which increases the need for technological innovation. ELTIFs and other open-ended funds require advanced solutions to handle complex tasks like managing share classes, equalisation, and dealing with increasing investor numbers.
To stay efficient and scalable, your investor servicing toolbox needs to be far more sophisticated and digitised than it has been in the past. Automation can remove the risk associated with manual processes and ensure you are meeting ever-increasing regulatory requirements. The ability to digitally track investor refresh dates and AML documentation can streamline compliance while providing investors with an improved experience.
Platforms like Goji offer enhanced transparency, giving investors real-time visibility into their onboarding process and a clear view of the individual portfolios, enhancing the overall investor experience and improving operational efficiency.
As more liquid hedge funds and more private capital come into play, platforms like FundSettle become the big trading venues for those entering and exiting funds. This is an infrastructure that is growing alongside this growth of demand.
This shift isn’t just about reaching more investors but also about targeting different kinds of investors. We’ve seen an aggressive push into the wealth management space, with both large and small managers focusing on smaller investors. What does this mean for the industry, and how are fund administrators adapting to this new focus?
Much of the growth in wealth management will come from the RIA and IFA markets. For example, large US RIAs will need direct integration with fund administrators, which must be entirely technology driven. If an RIA has automated its investment process, they will expect that same automated process for entering and exiting private capital funds.
Managers will turn to administrators to support these interactions. They will say, “This RIA wants to interact via an API - how can you support that?” That conversation is crucial for enabling funds to onboard more retail investors.
As the industry faces adaptation and growth, the role of a cutting-edge tech stack becomes crucial. In your view, how are technology providers like Goji contributing to a more advanced tech stack for fund administrators? How does this help in managing a larger and more diverse investor base efficiently?
Technology providers are certainly playing a key role in this conversation. Euroclear’s FundSettle platform is a great example of how tech is supporting growth. By plugging into existing infrastructure like Euroclear’s FundSettle, providers like Goji will allow the ecosystem to connect to distribution platforms. This means admins can interact with these distribution platforms as they do for UCITS funds.
Administrators want an infrastructure that encompasses all asset classes, and Goji is that bridge that connects private markets to this platform.
To drive efficiency, connectivity in private markets is key. Could you elaborate on the importance of straight-through processing (STP) connectivity? How does this enhance collaboration between fund administrators, distributors, and asset managers?
Connectivity is essential for staying competitive. Manual processes and large operational teams won’t cut it anymore, and distributors will increasingly demand seamless integration. Administrators will need to collaborate with distributors and GPs to find workable solutions.
Without STP, managing funds that cater to retail or semi-retail investors will be nearly impossible. The cost of onboarding and maintaining a high volume of smaller investors is likely to outweigh the revenue generated from those clients.
If you’re bringing in 100 clients with $1 million each, compared to a single $100 million investor, you’re spending significantly more to onboard them. For this to be viable for both managers and distributors, the process must be as frictionless as possible. The natural middleman here is the fund administrator, who will need to bridge these interactions effectively.
Do you see a role for financial market infrastructure in providing this connectivity?
Absolutely. Distributors or financial advisors, like RIAs in the US, using a platform like FundSettle won’t want to switch between platforms for different asset classes. They’ll prefer a single platform for all trades.
Market infrastructure has already made investing in long-term markets easier, and this efficiency remains crucial as we look to the future.
Looking ahead, where do you see the private markets industry heading in the next few years, and what role will Alchelyst and other fund administrators play in this rapidly evolving landscape?
I think the industry will continue to grow and become more mainstream, as it has over the last decade. I expect the global trend towards privatisation to continue, with more and more companies going from public to private.
For fund administrators, it’s essential to be future proofed. We need flexible operating models that support all areas of private capital, including more sophisticated general ledgers for areas like private debt.
We also need to support innovation. The alternatives market is evolving, and one size does not fit all. At Alchelyst, we are committed to providing a tech environment that not only keeps pace with our clients’ innovation, but also facilitates it and drives it forward.
Finally, as a tech-driven firm, how do you stay ahead of the curve in solving problems for your clients and seeking new market opportunities? What innovative solutions are you currently exploring?
At Alchelyst, we stay ahead by focusing on the latest, most innovative technology. Our cloud-native and API-native approach ensures seamless integration, helping clients tackle new challenges and automate processes.
Building a business on the newest technology coming out in 2023 and 2024 is completely different than building a business on legacy technology. This gives us a tremendous advantage in problem-solving for our clients, and that’s why we consistently try to stay ahead of the curve when it comes to tech.
By focusing on automation, we can push into democratisation and help our clients reduce costs in the long-term. By providing a single-unified technology platform, we offer real-time access and a streamlines experience, reducing the need for multiple systems, simplifying operations and removing the need for a shadow set of books and records.