Infrastructure Q&A
Addressing investors' demands for better reporting with smarter data tools
Infrastructure Q&A
Addressing investors' demands for better reporting with smarter data tools
August 2018
By Alan Flanagan, Dermot Finnegan
New challenges have infrastructure fund managers seeking answers. BNY Mellon’s Alan Flanagan, Global Head of Private Markets and Dermot Finnegan, EMEA Head of Private Markets, discuss the current landscape, technologies being developed to address these challenges, and what the future may hold.
As investors seek portfolio diversification and return, new asset classes are attracting more attention. One such asset class is infrastructure, which provides returns similar to private equity funds and are expected to see new growth opportunities given projected government shortfalls in funding infrastructure projects and the need for private investment to meet the demand.
BNY Mellon’s Race for Assets survey confirms this interest. Over the last two years, infrastructure funds globally have attracted record levels of investor capital, with US$54.3B raised in 2017 and US$55.6B in 2016. This continuing growth brings to light new challenges, and for infrastructure funds in particular, there is an increasing need for better, more usable data to provide the analytics, transparency and reporting investors demand – yet made all the more difficult to satisfy due to the distinctiveness of infrastructure funds.
Q: What challenges are unique to managing infrastructure funds?
Alan Flanagan: There are two main challenges facing fund managers today. One is from the asset management side. It’s a "race for assets," and fund managers are tasked with finding infrastructure projects that meet their investment profile. Then there is the challenge from the operational side. Infrastructure investments are a constant work in progress, which presents more challenges to value over long periods of time. There is also a significant amount of upfront cost associated with projects, while the payoff could be quite far out. These factors present challenges for valuation and reporting.
Q: How do infrastructure fund managers meet investor demands given these challenges?
Dermot Finnegan: Top of mind for investors is transparency and liquidity. We’re seeing investor demand for these two things increase across all funds, but as Alan alluded to, infrastructure funds are inherently difficult to manage against these types of expectations. There’s little trading, and the underlying assets don’t lend well to liquidity. Due to the length of time that infrastructure projects typically take, it’s difficult to budget accurately for as well.
Q: How do these demands create pain points for the fund manager?
Alan Flanagan: Technology and talent play a huge part. Finding talent that understands the operational requirements of infrastructure funds can be a challenge. As an asset class, infrastructure has very specific operational requirements, and the right talent is required to deliver on execution. The talent pools are shallow and competition is high. The staff in turn needs technology to properly work on due diligence, regulatory requirements, investor relations and other functions. The number one complaint we hear from fund managers is that they can’t focus on front office activity because middle- to back-office setup is taking up a significant portion of their time.
Q: How can a fund administrator help?
Dermot Finnegan: We’re actually going very granular within our data technology. We’re using automation to take the heavy-lifting out of the day-to-day operational work like reconciliation, payment matching, invoicing – all necessary but extremely time consuming. A level above that, we’re working on data mining, aggregating and harmonizing data within an ever-shortening period of time.
Q: What services in particular have proven to be valuable for fund managers?
Alan Flanagan: Previously we focused on purely financial information, but now we pull non-financial data, things like environmental, social and governance (ESG) considerations or contextual details. And we track these non-financial elements within data sets that we can playback to client data lakes and feed directly into their own models. For infrastructure funds, financials are not enough and don’t exist in a vacuum - we need to support fund managers and their modeling requirements with additional non-financial information that assist them in their efforts to provide a holistic representation and evaluation.
Q: How does BNY Mellon approach these challenges in a different way?
Dermot Finnegan: BNY Mellon has a proprietary aggregation tool that has the ability to aggregate data, both financial and non-financial, from third parties. Deploying this tool allows us to run a quality review, both qualitative and quantitative checks, to clean and refine the data at a base level. This provides more control to infrastructure funds on the quality of the data input and output.
Q: What does the future hold?
Dermot Finnegan: Everyone’s talking about blockchain for a reason, and the technology has a lot of use cases. We see a practical application for infrastructure funds. One difficulty we encounter with these funds has been achieving one version of the truth regarding data - there could be a lot of competing numbers when describing the fund, and that makes data analysis extremely challenging. You could approach it on a case-by-case basis, but there’s no good way to scale. This is where blockchain can provide a single, agreed-upon version of data points allowing investment managers to enrich and to study their valuation models.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorised and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 240 Greenwich Street, NY, NY 10286 USA, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority.
The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, authorised and regulated as a significant credit institution by the European Central Bank (ECB), for conduct of business rules, a subsidiary of The Bank of New York Mellon, and operating in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request.
The Bank of New York Mellon SA/NV, operating in Ireland through its branch at Riverside Two, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, D02 KV60, Ireland, trading as The Bank of New York Mellon SA/NV, Dublin Branch, which is authorized by the ECB, regulated by the Central Bank of Ireland for conduct of business rules and registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. If this material is distributed in or from, the Dubai International Financial Centre (DIFC), it is communicated by The Bank of New York Mellon, DIFC Branch, (the “DIFC Branch”) on behalf of BNY Mellon (as defined above). This material is intended for Professional Clients and Market Counterparties only and no other person should act upon it. The DIFC Branch is regulated by the DFSA and is located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. Not all products and services are offered in all countries.
BNY Mellon also includes The Bank of New York Mellon which has various subsidiaries, affiliates, branches and representative offices in the Asia-Pacific Region and other regions which are subject to regulation by the relevant local regulator in that jurisdiction. The Bank of New York Mellon, Singapore Branch is subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch is subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distributed by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. Further details about the extent of our regulation and applicable regulators in the Asia-Pacific Region are available from us on request.
The material contained in this document, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. The contents may not be comprehensive or up-to-date, and BNY Mellon will not be responsible for updating any information contained within this document. If distributed in the UK or EMEA, this document is a financial promotion. This document and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. Similarly, this document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The information contained in this document is for use by wholesale clients only and is not to be relied upon by retail clients. Trademarks, service marks and logos belong to their respective owners.
BNY Mellon assumes no liability whatsoever for any action taken in reliance on the information contained in this material, or for direct or indirect damages or losses resulting from use of this material, its content, or services. Any unauthorised use of material contained herein is at the user’s own risk. Reproduction, distribution, republication and retransmission of material contained herein is prohibited without the prior consent of BNY Mellon.