How private markets technology is helping firms stand up to increased regulatory scrutiny

How private markets technology is helping firms stand up to increased regulatory scrutiny

24th October 2022

Investing in private markets has historically been reserved for ultra wealthy, highly sophisticated, or institutional investors. With such a niche and closely defined audience, financial institutions have successfully relied on highly personalised operating models to connect the right types of client with the right types of investment opportunity. In more recent times however, the democratisation of access to private markets means that there is now a much more diverse range of investors operating in this space and this approach needs to be reevaluated. 

With more investors turning to alternative assets as a way of re-balancing their portfolios, financial institutions are having to adapt their propositions in order to meet increasing client demand. As a result, firms are faced with a challenge that is straightforward to articulate, but difficult to solve; how do they scale their private markets proposition while mitigating against the regulatory complexities associated with private markets? More specifically, how can they deliver more unlisted investment opportunities to more clients, while streamlining their processes and ensuring that their governance processes are robust? 

This blog will explore the role that technology can play in enabling financial institutions to scale their private markets offering while maintaining robust and efficient regulatory controls.

Streamlining processes without cutting regulatory corners

Private market investments are a fundamentally complex financial product. They are highly illiquid and are therefore considered by many to be high risk, despite the fact that they have outperformed public markets for much of the last 20 years. Assessing investor suitability, undertaking due diligence, and transacting a deal is typically a slow and resource-intensive process. This creates significant operational challenges for financial institutions. 

Traditionally, the investment lifecycle has relied on the cooperation of multiple employees from different departments across an institution. When managed manually or through poorly connected processes, the risk of information being shared incorrectly, regulatory checks falling through the gaps, or human errors being made is particularly high. 

This approach is also out-dated, highly inefficient, and potentially damaging from a regulatory perspective. The extra time that highly paid employees must devote to completing repetitive and administrative tasks at the expense of other fee earning activity, must also be factored in.

The need for highly visible regulatory controls

An over-reliance on manual processes associated with an unlisted investment not only consumes a firm’s resources, it also leaves them vulnerable in the face of external regulatory scrutiny. Recent announcements from global regulators, such as the ‘Dear CEO’ letter published by the FCA earlier this year, have made it clear to firms that their governance framework must be sufficiently robust in order to meet the demands of increased regulatory scrutiny. 

Firms that rely on human-led processes involving copious amounts of documents, emails and phone calls are highly fallible to errors or shortcuts being taken. Another factor to consider is how this information is being communicated and stored; is each step of the process being recorded and is this audit trail visible, both from an internal and external perspective?

If the answer is ‘no’, then financial institutions are creating regulatory black holes that not only leave them exposed to the regulator, but also exposes clients to unnecessary risks that can damage relationships and reduce trust.

How can private markets technology help?

The use of technology is central to how financial institutions are mitigating the regulatory challenges associated with transacting unlisted investments.

Delio’s private markets platform digitises and automates every aspect of the investment lifecycle. This means that each stage of the process must follow an institution’s pre-approved workflows and be approved by the relevant decision makers or senior managers before proceeding any further. This digitised ‘gatekeeping’ means that regulatory processes cannot be inadvertently overlooked or sidestepped without formal recognition by a suitably qualified member of the team.

Private markets technology - NDA

Workflow automation is also particularly valuable in the context of multiple people from different departments collaborating on a deal. Real-time notifications mean that relevant team members are involved as and when they are required, removing the need for chaser emails or time being wasted as they try to identify at what stage the transaction their expertise will be required. This not only helps to increase productivity and efficiency across the business but also mitigates the risk of human error or miscommunication that comes with cross-functional projects.

Managing these operational processes digitally also ensures that every step of the investment cycle is recorded, stored and available for scrutiny at the touch of a button. Important documentation and client correspondence is detailed in one central location, meaning that they are trackable and transparent in regulatory terms but also offer staff ‘one true view’ of the progress being made on a deal. Crucially, this also demonstrates that institutions are taking their regulatory governance seriously and provides robust evidence that necessary compliance steps have been taken should they be subject to auditing from a regulator. 

Private markets technology - Audit trail

Ultimately, the use of private markets technology to manage regulatory processes means that firms are positioning themselves strongly to answer any questions posed by external audits. It also plays a significant role in maximising the efficiency of their operations and ensuring that resources are deployed as effectively as possible. Firms that fail to modernise their manual, paper-based processes are not only operating inefficiently but leave themselves vulnerable to the consequences of regulatory non-compliance.

Find out how Delio’s technology can mitigate regulatory risk in private markets