Family Offices Should Leverage Technology To Tag And Track Data, Resulting In Saved Time And Enhanced Decision-Making And Reporting
Inflation, a looming recession, global conflicts and political upheaval are causing financial markets to fluctuate, sending ripples across the investing world. To protect their ultra-high net worth clients, family offices increasingly turn to alternative investments.
Specifically, instead of purchasing stock or having a wealth advisor invest funds, they’re directly investing client funds into businesses. If done right, family offices can better manage risks and target opportunities in ways that overcome market volatility and increase control. The results can be impressive.
According to the recently released Dentons Family Office Direct Investing Survey Report, 63% of family offices utilize direct investments, with another 22% interested. However, from finding suitable opportunities and ironing out terms to managing exits, direct investing can be very complex. As a result, family offices are concerned about assuming too much risk, the inability to realize healthy deal flow, lack of control over exit options, and time management – especially regarding effective due diligence.
Fortunately, technological advancements such as platforms for managing complex portfolios, including private investment tracking and the ability to customize the types of data tracked, can help family offices transcend these issues and effectively participate in direct investing.
Tracking With Purpose
With traditional investment vehicles, someone outside of the family office, such as a portfolio manager, does the due diligence on the individual holdings, which is used to decide where to place funds. With direct investing, the family office does the due diligence and needs to follow many financial metrics in order to make investing decisions.
A family office must know the target company’s EBITDA, size, market capitalization, industry, competitors, dynamics within its sector, geography and more. There are many data points to track and update, which is exponentially more daunting than just evaluating a portfolio or fund manager’s record of past returns.
General-purpose legacy technology has its limits, including the inability to customize data tags to yield the right data and quality reporting. Some solutions offer little more than a grouping and sorting mechanism for reporting on existing data.
Newer, purpose-built platforms provide data tagging that can be nested and changed over time, allowing family offices to track due diligence and follow virtually any financial metric to assess potential exposure and risk, how a target company is trending and whether it’s a good investment.
The Uses Of Custom Tags
Data tags often include descriptions for exposure to things like geography, sector, company and investment type. For instance, you could use geography as a data tag and New York as a description in order to follow developments in a region where a company’s sales are focused. You could also use EBIDTA as a data tag, and if your platform is date sensitive, follow performance over months or years.
You can also track trends, so if a client is interested in ESG, for example, you can avoid conflicting investments or seize emerging opportunities. And in instances where a family office has to compile data manually, it could be too late to make needed decisions about sudden new risks like banking instability.
Profit And Prospects
With private investment tracking, a family office can take advantage of timeliness and data quality to track aspects vital to direct investing while freeing staff from time-consuming data gathering processes.
This lowers overhead and enables the firm to do more with less. The result is not just safer and more profitable investing for clients – It can dramatically raise profitability and prospects for family offices.
Nicole Eberhardt is CEO of wealthtech firm Ledgex, creator of a platform designed to solve multi-asset data quality and usability challenges for portfolios.
