Investor onboarding and the democratization of private markets
Dan Kaytes | Vice President, Product Management, Digital Solutions, FIS & Rory Blazeby | Commercial Lead, IDR
September 13, 2022
A seismic shift is taking place in the private markets. Ten years ago, private markets were only accessible to large-scale institutional investors committing big tickets to a relatively obscure marketplace. All this is now changing with retail-like investors – particularly high net worth individuals (HNWI) and family offices increasingly setting their sights on the private markets. UBS’ recent Global Family Office Report 2022 found that eight out of 10 family offices now invest in private equity.
What does this shift mean for fund managers wishing to attract a portion of this new capital into the private markets space? And, in particular, what are the implications for investor onboarding?
Private investors are often unaccustomed to the time-consuming and manual onboarding process associated with private markets. Many of the HNWI, family offices and private investors entering the market through feeder vehicles will have experienced a streamlined onboarding process for their public markets portfolio or personal banking.
While the world of private assets is different, this group of investors represents significant investment potential for the private markets. In response, a growing number of fund managers are exploring how they can streamline the onboarding process to meet these investors’ expectations while ensuring it remains in line with the regulatory environment.
Raising the bar
Private investors tend to prefer the faster, simpler and more efficient onboarding they typically experience in public investment portfolios. This is helping to drive change in the private markets with more fund managers turning to technology and technology enabled service providers for a solution. While several providers can digitize the onboarding process, the benefits of this are limited if investors still need to repeat the process multiple times with different fund managers.
IDR, in contrast, offers a one-and-done approach, standardizing and simplifying the onboarding process to create a better investor onboarding experience. With an ever-growing client base and number of investors utilizing their own digital “KYC passport,” IDR is driving transformation and change throughout the industry with a seamless investor onboarding process that’s acceptable across all major investment jurisdictions.
The influx of private investors into funds brings cost and scalability implications. With smaller commitment sizes, fund managers inevitably need to onboard more investors, adding to the cost and time involved in the onboarding process. By providing a more efficient and scalable process, fund managers can onboard larger number of investors efficiently and quickly while minimizing costs.
However, it’s important to remember that fund managers will need to factor in a degree of handholding and process education for those investors entering the space for the first time. IDR’s managed service addresses this by combing people with technology. KYC analysts and AML experts work with clients, helping them onboard and completing their profiles, enabling them to get familiar with digitizing the existing process.
Addressing regulatory, reputational and relationship risk
As the pool of investors continues to grow, fund managers are looking more closely at the risks associated with the onboarding process. By outsourcing onboarding and KYC, they can transfer some of the risk to a third party. They also gain 24/7 visibility over their KYC information, which is held in a single, centralized location – removing regulatory concern regarding the accessibility and reliability of data.
Reputational risk is another consideration. If a fund manager is known for having an inefficient onboarding process, this can be a hindrance. Those fund managers offering slick and efficient onboarding will have the benefit of allocating more time to strategic relationship building with less time spent on KYC. This in itself improves the overall relationship and gives the investor a hassle-free onboarding experience.
Private markets fund managers have historically relied on manual processes for onboarding. Now, however, it’s not uncommon for some of the largest fund managers to be managing 5,000-10,000 investors across multiple jurisdictions. We’re seeing a general move away from purely manual processes as it becomes ever more challenging to operate without some degree of automation at this scale.
Fund managers are contending with larger fund sizes and an increasing number and variety of investors. As they look at how to meet growing investor expectations, understanding and rising to operational complexity at scale is key.
Analyzing large data sets and handling thousands of documents – all while applying appropriate regulatory standards and providing a good investor onboarding experience – requires a focused and targeted approach. Going forward, fund managers are increasingly prioritizing major technology and process overhaul to meet the increasing demand from investors, regulators and competitors alike.
Prioritizing the investor experience
Scalability, standards, regulatory pressure, risk and reputation are all important considerations for investor onboarding processes. These priorities may differ by manager, but we’re seeing that the overall investor experience is the driving force behind change.
The democratization of private markets is underway, and fund managers are adapting their onboarding processes to ensure private investors have a positive investment experience. Additionally, the demand for a more streamlined and technology-based approach is growing. By opening the doors to new investor capital and adapting processes, the private markets will be able to grow rapidly at scale, provide a positive investor experience and satisfy increasing regulatory obligations across all key investment jurisdictions.