Collateral management in alternative investments
The time has come for the role of treasurer in alternative investment (AI) firms to be elevated to one that is considerably more strategic in order for treasury to advance operational, financial, and technological goals to meet the ever-changing financing landscape.
Forward-thinking management teams at AI firms will need to strengthen that role, and we offer a five-step action process to help empower the position for the benefit of the entire organization.
These five steps deal with a treasurer’s central strategic role in:
In our recently published whitepaper, Speed. Control. Growth. Alternative Investment Keep Their Luster, a major risk we identified in this industry is its broad reliance on manual processes. Use of spreadsheets and faxes, for example, remain common—perhaps even preferred. As a result the possibility for errors is high, and there is cause for concern due to heightened expectations for transparency and accuracy by regulators, investors, and credit providers…among other stakeholders.
While manual inputs through cut-and-paste processes and the use of e-mails and faxes are part of a firm’s technology challenge, they may pose even more of a fundamental collateral management risk than a technological one.
Generating alpha in the midst of an increasingly regulated and uncertain marketplace has placed an enormous premium on enhanced sophistication of collateral management abilities in AI firms.
With collateral management an undeniable enabler of risk mitigation, as well as a fundamental financial tool, AI firms will increasingly need to prove to a fragmented collateral marketplace that they are deserving of sometimes cautious suppliers. Creating alpha will hinge on the firm and its leaders recognizing that now is the time for demonstration in the marketplace that their firm possesses sophisticated collateral management capabilities.
Though each alternative investment firm will confront individualized issues and conditions, we offer a collateral management governance structure as an example approach led by a strategically empowered treasurer.
Even though collateral management led by a treasurer may differ somewhat from enterprise to enterprise, we believe there are fundamental issues to be confronted.
Having the right people managing the proper processes with the most appropriate technology is never easy. With it often being said that people are the most valuable assets in any business, collateral management reorganization with a newly empowered treasurers will test that adage.
In addition to the people needed to help upgrade the overall business, a major issue standing in the way of improving collateral management programs through the digitization of processes is the costs involved in installing a technology backbone to replace the manual processes, and the array of service providers who promise technology solutions. But it is not the only one.
“We see an opportunity for alternative investment firms to differentiate themselves among the pack and move well beyond collateral management as an operational function, to a more strategic one. Significant value could be realized in areas such as improved balance sheet usage, reduction in certain friction costs, better regulatory compliance, a more complete understanding of counterparty credit risk, and even enhancing returns.”
National Practice Leader – Principal, Advisory