This summer, Vidrio Financial has engaged in discussions with various investors throughout the Gulf Cooperation Council (GCC) region to gain insights into their challenges and perspectives on the future of institutional investments, locally and globally.
By: Hattan Jabban, Business Development Executive, Vidrio Financial
The GCC's primary objective is to enhance economic and political collaborations among the six member countries, namely Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates, and Oman.
With nearly $4.4 trillion in projected foreign assets by 2024, the influx of institutional players setting their sights on this region is no surprise.
Our latest blog post starts a dynamic three-part series delving into the GCC region. We hope that you find this information valuable. Vidrio Financial is committed to protecting the security and privacy of investors, so we have anonymized the names of organizations in this post. The insight and intelligence through our discussions are sourced from leading family offices, endowments, SWFs, asset managers, and more across the region. If you would like to learn more about how Vidrio helps these allocators reach out to our team today.
Priorities of a GCC Asset Manager:
Our first meeting of the summer GCC road trip was with a leading asset manager who is keenly aware of the investment and reporting gaps in local practices compared to recognized global standards. This asset manager initially began with a full portfolio concentration on equities but quickly diversified to public and private markets locally, with plans to follow that approach on a larger global scale. During their early growth, they faced significant challenges with their data collection and management processes. As their portfolio grew, it became clear that the data scattered across Excel sheets, internally built systems, and external platforms couldn’t be relied upon with a high degree of confidence. This led the investment team on a path to centralize their data, allowing them to clean and reconcile while filtering out the noise and removing errors. If you’re unsure of the benefits and drawbacks of internally built systems or multiple reporting platforms, I would encourage you to check out Vidrio’s eBook on the top alternative approaches that allocators use for portfolio diversification.
Addressing reporting challenges was a specific focus for this asset manager, who discovered that their clients demand detailed monthly reports with in-depth metrics and attribution at the security level. Alongside these crucial reporting needs, other key pain points quickly surfaced through our discussions, which include:
- Providing clients with a universal view and reports of their holdings for managed accounts that cover different strategies and showcase various metrics.
- Getting a total portfolio view allowing clients to see both private and public market investments side by side.
- Dealing with unstructured custodial data that lacks a uniform template.
Vidrio Financial has been built to address these concerns by handling data in the most efficient and agnostic way possible. This has allowed our platform to quickly onboard past, present, and future data pipelines, while investment teams refocus their attention on portfolio strategies, manager selection, and rebalancing efforts.
Vidrio’s approach for private market investments is very similar when onboarding data to our platform. Vidrio works for you to gather the data and perform a reconciliation and enrichment process. We also don't depend on the attributes that custodians provide, since each manager or custodian might have their own categories for sectors or geographies.
GCC Family Office Portfolio Futures:
Knowing where you want to go, and then figuring out how to get there is a long road for many institutional investors across the GCC. Our second stop was a family office that summarized the future of their portfolio as:
1. What are the core investments of the portfolio today?
2. What investments will become part of a future 'book-sweep'?
3. What investments are in cruise control?
A main 2024 theme for this family office is diversification, which leads them to seek the help of a few chosen discretionary portfolio managers (DPMs) to improve and fine-tune their portfolios. For example, the firm knows that 50% of its portfolio should be illiquid, but now it is over 75%. The family office leaders think this should balance out or go down. The firm has begun to look at managers who will assess the current portfolio, sell the irrelevant parts, and use the money for more diversification.
One of the key challenges in this process lies in conducting thorough due diligence on the companies they choose to invest in, along with reviewing past evaluations. The investment team has observed that the data from investment managers is not always accurate, which results in more time spent by the team verifying their investment distributions.
At Vidrio, we evaluate managers through a dual lens consisting of quantitative and qualitative measures. For quantitative analysis, allocator clients can delve into the manager's funds, examining cashflows, IRRs, and investment multiples conveniently displayed on a unified platform. On the qualitative front, clients leverage Vidrio's robust due diligence workflows, empowering investment teams to follow a structured process tailored to their needs, ensuring alignment with their investment objectives.
Benchmarking is also an important aspect of family office portfolio growth for both public and private allocations. Much in the same way that workflows, custom benchmarks, and simulations can be set up to track performance over time. With this ability enabled, investment teams can quickly push simulations into a live portfolio and begin tracking the simulation using live data, again provided under a unified dashboard. On the private side, Vidrio also can be used to leverage J-curves to highlight the growth trajectory of private investments under consideration.
At the end of the meeting with this GCC family office, they asked about artificial intelligence and how Vidrio used AI and LLMs to help investors in the region. Vidrio's work on generative AI, LLMs, and deeper neural networks has been very timely, and we have produced a lot of original content and insights about these areas. A case in point of this content coverage is where our Chairman & CEO, Mazen Jabban, talks more about investor innovation and the implementation of artificial intelligence in institutional investing. Click on the image below to be taken to the podcast recording to learn more.
We firmly believe that by merging decades of human expertise with advanced automation, Vidrio is positioned to deliver allocators across the GCC a top-tier solution that seamlessly grows with their portfolios. Indirectly, clients have commented that having a platform like Vidrio has benefited recruitment. In this industry where there is a war for attracting and retaining top talent, having the right technology-enabled solution in place to optimize data collection, monitor portfolio performance, and more can showcase your dedication to providing an environment that invests in talent to accelerate performance and search for alpha opportunities.
In many of our meetings, Mazen stressed that data education is the key to applying AI in institutional investing, as it allows the models to understand the data pipelines from different asset classes and produce impartial recommendations from them. To supplement the data education, Vidrio is proactively putting guardrails in place to prevent AI hallucinations from occurring.
AI hallucinations are defined as a response generated by these models resulting in errors that result from insufficient training data, poor assumptions, or biases in the development of the model. More on this research is documented by Dr. Sebastian Farquhar, University of Oxford’s Department of Computer Science.
Ultimately, Vidrio’s goal with AI is to have an objective framework that allows allocators to get quick answers about their portfolios, assist in due diligence activities, investment selection, and build the portfolio.
GCC Dual Model Investors:
Through our initial talks in the region, it quickly became clear that many allocators operate different allocation models under the same organizational umbrella. Our next stop on this road trip was a prime example of this setup, with one division set up as a family office, while the other was structured as an endowment model.
The portfolio is composed of real estate investments, but senior leadership wants to diversify the portfolio scope by adding private equity, fixed income, real assets, and more. This dual allocator also emphasized the importance of adopting a holistic portfolio view for future operations, thinking it would improve transparency in asset allocation and portfolio rebalancing. Currently, this investment team relies on simplified Excel spreadsheets and a custodian for time-weighted returns, performance analysis, and other metrics. Managing portfolio risk is a key focus with regular meetings with their chairman necessitating significant time spent on gathering and analyzing investments and key ratios. Their firm’s objective is to identify the main sources of risk as a dual allocator and achieve greater diversification, while also learning from historical scenarios that could either boost or harm portfolio performance in the future.
It is worth mentioning that Vidrio’s risk management solution supports both time-series and position-based risk models. These models use VaR/CvaR, historical scenarios and factor shocks, risk factor breakdown, Greeks, and fixed income measures (duration, convexity, and others). Overall, as these dual-structured model allocators embrace the total portfolio approach, best-in-class solutions will allow them to focus more time on strategic decisions and deploy internal resources more efficiently.
GCC Investors on Capturing the Private Market
As highlighted in the 2024 AW Research Investor Compendium powered by Vidrio Financial, private market investments are continuing to grow inside today’s multi-asset portfolio.
Portfolio digitization, normalization, and reconciliation are all important to allocators across the GCC, especially when dealing with the millions of unstructured data points from private market investments. Our last allocator for Part 1 of this GCC roadshow once again combined two allocation models, one division was built as an asset manager, while the second is a foundation.
This session focused on private market transparency and how Vidrio would look at local and international portfolios across these structures. The goal of this allocator (which isn’t isolated to the region, as Vidrio has observed this trend more globally) is to:
1. Preserve wealth.
2. Generate income.
3. Grow the portfolio.
One main takeaway from this trip was that Vidrio knew that GCC investors needed reliable and up-to-date private market data to grasp capital call structures, distribution notices, statements, and manager reporting. As a valued partner, Vidrio goes above and beyond by providing additional insights to offer investors a comprehensive view of their private market allocations. Within the Vidrio platform, interactive dashboards empower our partners to assess their holdings' value, instrument types, and customize filters based on regional or country exposure. With advanced cash flow analytics, partners can gain valuable intelligence on commitment levels, IRRs, MIRRs, realization terms, distributions, PIC multiples, and more.
In addition, during the trip, we answered questions about our industry rivals and the services that we offer.
Vidrio Financial is unique in that we don’t have any direct competitors offering a comprehensive range of services and functionalities for institutional investors. We consider ourselves a pioneering platform with a holistic portfolio approach that covers front, middle, and back-office operations. Through these first-round discussions in the region, we found that many investors use multiple platforms to handle data collection, portfolio monitoring, risk analytics, and reporting. These multiple systems can be costly over time, both in terms of renewals as well as internal training and knowledge sharing. Vidrio helps to reduce the reliance on multiple systems by understanding the challenges facing allocators today, as we were once practitioners allocating to the alternative markets. We believe that without these past experiences, we could not deliver a best-in-class solution to CIOs and investment teams today.
Investors in the GCC face a significant challenge in navigating the line between local and international portfolios and implementing effective data management controls across these areas. Vidrio envisions this dynamic as akin to a robust dam generating renewable energy for a given community. Like a reservoir with controlled channels for water flow, Vidrio sees data as the lifeblood of the portfolio, delivering specific performance data and analytics for both local and international markets. These data pipelines are designed to open and close based on data frequency, asset value, descriptions, and more. This approach is attractive for local portfolios that are heavily weighted towards something like real estate, where market data and benchmarking might be challenging to view across multiple platforms. Vidrio provides a high degree of integration between the underlying assets and how performance data and advanced analytics are viewed in our dashboards. Should a client still wish to view data on a preferred internal platform, Vidrio can integrate into any third-party system for further internal team review.
Another allocator said their portfolios are mostly for finance and reporting outputs, and they don't meet the investment reporting needs at all (ABOR vs. IBOR). This means they must manually handle the portfolio data in Excel, extracting, analyzing, and changing it, then entering it into another system. The main differentiator with Vidrio, in comparison to other systems, is that it can act as a shadow accounting system for your ABOR, reconciling the ABOR and saving the difference between IBOR and ABOR during the crystallization or close process.
Vidrio compares and reconciles the data received from the client’s accounting system with the data in the NAV pack of the portfolio from the custodian/administrator. Vidrio then crystalizes any differences and saves them for the next reporting period. This action is necessary in light of the growing regulations worldwide for institutional investors. The ICFR program is being promoted in the region to safeguard investors from accounting dishonesty or hiding warning signs in investments. With these frameworks in place, GCC investors can rely on more investment transparency and lower risk. In a late 2023 KPMG report on asset management trends in Saudi Arabia, contributors highlighted the past failures of private equity, healthcare, and constructions entities across the region. These failures helped propel allocators to better understand quality financial reporting and how to relate that back to risk and asset allocations. You can view more of that study from KPMG here.
There is a significant amount of groundwork yet to be done to assist GCC allocators in enhancing their front, middle, and back-office operations for the future. Through our initial series of meetings, we have identified genuine concerns among these investors regarding data collection, reporting discrepancies, portfolio diversification, artificial intelligence implementation, risk monitoring, and more. While these challenges are not without solutions, they will necessitate the support of the right partner to steer these family offices, endowments, and asset managers toward success. Keep an eye out for the next part of our GCC journey on the Vidrio blog, where we will explore the conversations with the following group of investors we interacted with and the challenges they encounter in investing in institutional markets.
