Oil & Gas Q3 2023 Insights
From Inefficiency to Clarity: what are the challenges in alternative investments due to the lack of a standardized identifier?
Unique common identifiers are ubiquitous across the asset management space and are used to identify assets across multiple different asset classes. Prominent examples include CUSIPs, ISINs, and ticker symbols for stocks and bonds. These codes perform the crucial task of accurately and unambiguously identifying specific securities when market participants are taking different activities in capital markets. These identifiers help financial institutions and market participants around the world execute electronic trading, clearing, settlement, and record-keeping of security transactions. The codes are used by regulators to monitor trading activity and promote transparency. Global security identifiers that are standardized promote efficiency, liquidity, and monitoring throughout financial markets. They are a crucial component of contemporary financial systems because their commonality allows financial institutions to significantly automate their processing of all kinds of market activity leading to decreased processing timelines and increased efficiency.
Alternative investments refer to a diverse category of financial assets that deviate from the traditional forms of investment, such as stocks, bonds, and cash. These investments encompass a wide range of assets, including but not limited to, private equity, hedge funds, real estate, commodities, venture capital, and infrastructure projects. Unlike conventional investments that are well-defined and widely recognized, alternative investments lack a standardized market identifier. The absence of a consistent identification system poses challenges in terms of operational efficiency, as it makes it difficult to accurately identify, categorize, and match these assets within the complex landscape of the $13 trillion alternative investment market. Presently, organizations employ their own internal identifiers, leading to inconsistencies and inefficiencies in the management of these assets. Addressing this industry-wide concern necessitates a collaborative effort involving a diverse set of stakeholders.
To assess the magnitude of this issue, Sia Partners conducted comprehensive surveys and interviews involving a spectrum of industry participants, including large asset and wealth management firms, fund administrators, data vendors, pricing vendors, broker-dealers, and other relevant stakeholders. The findings unequivocally underscored that the absence of standardized identifiers for alternative investments underpins a cascade of challenges, leading to processes that lack scalability, and ultimately resulting in resource-intensive and time-consuming operations. Given the industry's projections of continued expansion within the realm of alternative assets, the looming scalability problem assumes even greater significance.
The pain points related to the absence of a common identifier in the alternative asset market include:
Inefficient communication and information exchange among third parties due to the inability to match assets (market data providers, fund administrators, custodians, distributors).
Impediments to asset transfers, client reporting, redemption processing, capital calls, and distributions.
Difficulty aggregating multiple data sources and challenges with data warehousing. Challenges stemming from inconsistent data coverage: pricing data, risk analytics, asset attribute data, and issuer data, among others.
Asset transfers between broker-dealers provide a clear example of the difficulties brought on by the lack of a common identification. The technique entails linking assets based on their IDs in traditional investments with well-established identifiers, permitting quick and easy transfers. For alternative investments, however, the lack of a standard common identifier results in a complex and time-consuming document review procedure to correctly identify the asset in consideration. This illustrates the operational inefficiencies brought about by the absence of a standard identifier in the alternative investment sector.
There are several headwinds that will need to be addressed prior to the establishment of a common identifier for alternatives. These include low incentives for issuers to participate, issuance costs, data privacy concerns for proprietary assets, potential operational issues during trading processes and reliance on third-party solutions currently employed as a workaround for the lack of standardization. Moreover, the volume of identifiers needed for certain investment types like hedge funds poses a challenge. Many institutions have partnered with third-party service providers who, while not directly addressing this issue, alleviate many of the problems caused by the lack of a common identifier. Many institutions are now deeply intertwined with their service providers with significant capital investment in automation and integration. While these providers do provide a valuable service, they typically only solve the problem within their closed ecosystems. This leaves firms with options to limit themselves to assets that are within their partner ecosystems or have a solution that only partially covers the assets they work with.
Given the inherently collective nature of this challenge, its resolution demands a concerted industry-wide effort, one that necessitates strategic collaborations with key stakeholders across the expansive alternative asset ecosystem. By fostering partnerships across a broad spectrum of industry participants, ranging from major asset and wealth management firms to fund administrators and beyond, the industry can embark on a journey to collectively address this issue. This collaborative approach is poised to yield multiple benefits, including the reduction of operational costs, streamlined prioritization of high-demand products, and effective communication of the merits associated with a standardized identifier through diverse channels such as training materials and media platforms. Furthermore, incentivizing the adoption of a common identifier can be achieved through initiatives like cost incentives and open enrollment plans, potentially encouraging industry leaders in the alternative asset space to embrace this vital industry-wide solution.
In a groundbreaking collaboration, Sia Partners has partnered with CUSIP Global Services to investigate the potential issuance of industry-standard CUSIPs for alternative assets. CUSIP Global Services has earned the industry’s trust with respect to identifiers. This makes CUSIP uniquely positioned to overcome the challenges associated with solving this collective problem. With the introduction and broad adoption of a CUSIP for alternative investments, there is an opportunity to redefine efficiency and transparency in alternative financial markets. With Sia Partners’ expertise in financial and digital transformation, and project/product management, we are equipped to help firms with data conversions of all kinds, including identifiers. Through the collaboration of Sia Partners and CUSIP, a common identifier for alternatives is closer to becoming a reality. The implications of having an industry-standard identifier for alternatives are far-reaching and Sia Partners can guide you through this transition, ensuring you are primed to leverage these changes to your utmost advantage. Because the potential benefits of change can only be realized and harnessed when you are fully prepared and working with Sia Partners ensures that you are not only prepared but poised to capitalize on this evolution.