Preparing for Operational and Regulatory Change

“The most important driver of change in the investment industry is the increased demand for transparency by regulators and investors”
(The Future of Alternate Investments, World Economic Forum 2015).

This is a period of change, as managers aim to standardise their business operations. Alternative asset managers are striving to become more institutionalised by building operational platforms and revamping business and infrastructure in order to be more agile and scalable, and to achieve efficiency and operating leverage. Sophisticated investors now expect alternative asset managers to operate beyond required quality standards, more effectively, and also expect them to offer broader capabilities. To meet these demands, alternative asset managers need to revamp their operations in a cost-effective, non-disruptive way in order to attract asset flows. Increasing assets are commensurate with pressures on the asset management industry. These include increased regulatory requirements, rising costs and fee pressures. Alternative asset managers cannot escape these pressures and should instead seek to respond proactively to each of the key areas:


A big break for alternative assets in South Africa came in July 2011, with the implementation of Regulation 28 of the Pension Funds Act, governing pension fund asset allocation. Within specific limits, a retirement fund can now invest more of its total assets in alternative assets (limits include private equity, unlisted real estate and hedge funds).

The depth and breadth of regulation is expanding, with new requirements on alternative asset managers and more involvement by the regulator. Why is this? Simply put, it is to protect investors.

Positively, this greater transparency brought about by the new reporting requirements aims to drive the industry towards greater openness and building trust between investors and managers. Investors are no longer happy to sit back and let managers “get on with it” as long as returns are good. They now need to understand why returns are good, what did they get right and what did they get wrong.

Over the coming years, asset managers can expect more regulations. These regulations cost asset managers money and if they do not budget for them correctly then asset managers may ultimately pass these costs onto investors.


Few managers view regulation as a competitive advantage enhancer. However, if managers want to see change and effective procedures, compliance must evolve from being considered a support service to a value-add. Managers have to buy into a positive case for compliance. The effect of regulation leads to an increase in the cost of compliance. The overall cost of compliance is already substantial, and likely to increase due to necessary investments in compliance related technology and people. Spending on compliance can be justified by the potential consequences of failing to comply. New regulations aimed directly at the alternatives industry require managers to improve infrastructure, transparency and reporting, however, the cost and complexity of  new legislation creates barriers to entry for the industry, which may reduce innovation in ways that decrease long-term returns.

The investment industry is experiencing vast change as a result of regulatory reforms (including the Foreign Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS) and the Retail Distribution Review (RDR)), that require asset managers to provide greater transparency into operations, upgrade their risk and governance structures, and utilise third-parties to maintain client funds. The transformation from a lightly regulated niche to a well-regulated entity, will change the industry. These new requirements force managers to upgrade their institutional infrastructure and processes, in order to comply with new reporting requirements. Although many alternative asset managers recognise that reporting requirements are increasing exponentially, for many, regulatory reporting is not yet at the required level.

Managers can build more dynamic compliance functions by:

  • Building controls and processes around regulatory reporting, as for all other critical business activities.
  • Investing in compliance resources with multiple skills extending beyond compliance, into analytics, reporting and technology. Technology can support compliance by enhancing data-gathering techniques and using dashboards.
  • Developing centralised data capturing.
  • Pushing responsibility of routine compliance activities into business.
  • Rationalising reporting requirements.
  • Creating compliance programmes, checklists and summaries of information for review.
  • Shifting from a ‘rules-based’ approach to a ‘principles-based’ approach to compliance.

Benefits of this include: savings from eliminating duplicated efforts and over-spend on compliance, operational efficiencies arising from the implementation of unified administration systems and the potential for better investor reporting. Further, embedding compliance tasks into business procedures can reduce delays in client on-boarding.

By integrating controls into business so that compliance becomes second nature, business can accurately monitor and manage risks, and can practice risk management rather than risk avoidance, and the compliance function can move from being business support to a business enabler. Delivering such transformation requires commitment and significant changes to both business and compliance functions, with both parties viewing compliance as more than just a box to tick, but rather an integral part of business process.

Key considerations

Regulations such as FATCA have significant implications for managers and can vary widely based on jurisdiction. Implications around these regulations drive the need for increased reporting, better data and processes.

Anti-money laundering compliance programs must do more than just identify money laundering but must be designed to detect financial crime.

The cost of establishing and maintaining such a system could affect the industry in four critical ways:

  1. Increased costs may reduce returns
  2. It could serve as a barrier to entry for new managers
  3. It could drive consolidation in the industry, as larger managers find it easier to distribute the costs across a larger pool of assets
  4. It could reduce innovation in the industry, affecting returns in the long-term


Operations supporting alternative asset management need to be agile to accept new products and assess new service requirements. Operations also needs to be adaptable to changes in product mix, provide customised solutions to investors, support new asset classes and products, and keep up to date with regulatory requirements. All of this, in a cost effective way, that is not disruptive to day-to-day business, as investors and regulators have raised their expectations of the standard of quality. To meet these expectations and reach the next level, managers need to realise that incremental change is not the solution. Rather, transformational change is necessary. An agile, scalable, efficient operating model is what is expected. This operating model requires process improvements of streamlining operations aggressively, automating processes and removing inefficiencies.

In response to regulatory oversight, alternative asset managers need to enhance valuation processes through the use of independent valuation advisers and increasing disclosures surrounding valuation estimates.  Support for judgments, policies, third party validations to estimates and enhancing overall control processes, all demonstrate to investors that a rigorous process is in place and that the manager is delivering the most pragmatic fair value estimate possible, in a cost effective way.

As alternative assets are bespoke in nature, there is no scale to automation and operational processing. This leads to information or data challenges unique to the management of the specific asset type. A low number of transactions in many alternative asset classes make performance measurement and pricing difficult to measure. Data is difficult to get, difficult to use, and often those responsible for managing the data are the same people making the investment decisions. Further, data for some alternative assets may not be available at the same time frequency, or mismatched to the valuation frequency, causing pricing anomalies.

Key considerations

  • Investors, advisors, operations, and fund administrators all have different data requirements.
  • Identifying operational and technology risk poses challenges due to manual processes which lack formal governance processes and system generated data.
  • Due to a high level of manual efforts, account maintenance and client reporting issues are prevalent.
  • Difficulty in obtaining accurate and timely data from funds that lack transparency and trade in less liquid or more complex investments.
  • Manual reconciliations are performed and human approval is required.
  • Individual funds have complex processing requirements.Transactions such as capital calls, redemptions, transfers, valuations and distributions require significant knowledge of fund agreements to process accurately and timeously.

Culture fit

An alternative asset manager’s culture is the most important governance factor for avoiding regulatory problems, assuming of course that governance holds the highest place in business.

On the one hand, there is a need for rules, to ensure senior management perform effective governance and oversight, and improve professional standards and culture within the business. On the other hand, overly strict rules impose an unfair burden and liability to senior managers who take reasonable steps to prevent and detect problems, and ultimately may deter qualified individuals to take up senior roles. The skill set managers look for when hiring compliance and operations teams, needs to focus on technical knowledge of the regulations, practical experience in trading and operations, leadership as well as management skills. If business is to achieve cultural change, this cannot be achieved without such skills, especially without leadership to drive change efforts. 

Only by weighing out the benefits and costs of compliance, can alternative asset managers begin to implement incentives for a cultural transformation, a transformation that regulators are demanding, and that the industry is seeking.

By Sanusha Gokaran,

Operational Due Diligence Manager,
STANLIB Multi-Manager