As the Australian custody market continues to evolve, several themes and challenges will emerge to take centre stage in 2023. Three interrelated trends stand out: private capital, better connectivity, and regulation.
As we emerge from the sustained low-yield environment of the last decade, institutional investors have been gradually increasing the proportion of private capital in their portfolios. In tandem, the industry has developed more ways to value these assets using digital solutions, while portfolios will benefit from the stronger connections between investors, asset owners and market service providers that technology can now enable.
Going into 2023, progress in these areas will be led by regulation. Along with overseeing and directing key market stakeholder movements, regulators are steering the industry towards ESG measurement and transparency.
More private capital, better reporting
Private capital is seeing unprecedented growth, with global private capital assets under management (AUM) surpassing USD8 trillion in 2021[1] and predicted to reach USD17 trillion by 2027, according to Morgan Stanley.[2] Private assets now make up over 10% of most institutional investors’ portfolio investment allocations, a remarkable boost from 2-3% of their allocation a few years ago[3]. We have also seen sovereign wealth fund, foundation and endowment allocations into private equity exceeding 10%[4].
With such growth comes the need to understand and predict private asset performance and optimise management strategies, especially as many processes are still manual.[5] Asset managers and owners, therefore, are increasingly turning to digital solutions for reporting and monitoring. In a 2022 survey of private equity and venture capital firms, the majority cited new technology deployment and increased outsourcing as their top strategies to reduce costs.[6]
In addition, digital solutions improve risk management and forecasting, and help investors compare their private capital investments with traditional asset classes using tracking tools and custom dashboards.
To ensure our clients have access to these tools, BNP Paribas has partnered with a leading European private capital fintech to enhance its private capital offerings and build CapLink Private, a new platform which enables clients to gain access to fully digital reporting and analytics capabilities as part of a comprehensive and integrated service offering . In conjunction with this, Securities Services facilitates cash flow management, capital calls, fund distributions, investment portfolio tracking and performance measurement for private assets.
Strengthening networks between service providers
As the need for better insights into private assets accelerates, so does the need for visibility and connectivity along the capital markets value chain, as networks become more complicated.
Consider sub-custody. In Australia, larger superfunds now take on multiple service partners, to capitalise on their distinct strengths and specialisms. Where asset owners once relied on a single partner, they are now using or considering multiple strategic partners, supplemented by interactions with other market participants such as registry systems and stock market trading platforms.
Coordinating between partners can bring challenges to communication and data accessibility. Digitally enabled custodians such as Securities Services support clients with a single, real‐time view into their inventory and positions across multiple markets. This data can then be shared seamlessly and securely with third-party service providers.
Along with visibility and connectivity, automation is another benefit of digitalisation. Robotic process automation (RPA) can save costs on manual tasks such as data entry. Once they are market-ready, Distributed Ledger Technologies (DLT) and Artificial Intelligence (AI) can add to efficiency gains. While DLT and central bank digital currencies (CBDCs) are the subject of much industry discussion and media coverage, it is still too early to deploy them at an industry‐wide or even enterprise‐wide scale. As lessons are learned and best practices are established, the sector will truly transform by embedding these technologies into broader systems.
For its part, Securities Services is also providing more flexibility by unbundling service packages and committing substantial investment into fulfilling market needs. Our approach is centred on our clients’ needs, supporting their transformational change and growth plans. This partnership-based approach has seen us win over 15 new client mandates in the past two years. Securities Services also won Best Sub-Custodian Bank in Australia from Global Finance[7] and Best Custodian Overall at The Asset Triple A Sustainable Investing Awards.[8]
Regulation and increased transparency
As Australia’s custody market integrates new processes and solutions, regulation continues to underpin the changes and drive increased transparency. The Australian Prudential Regulation Authority established 10 new reporting standards in late 2021 and is working on increasing the level of detail in its data collection,[9] while the EU’s Sustainable Finance Disclosure Regulation (SFDR) was introduced in March 2021 to simplify and standardise ESG reporting.
Indeed, transparency and disclosure is a growing concern among investors and other stakeholders. Managers in Australia acknowledge that custodians with European and North American backgrounds bring different approaches and skills to the role. For example, ESG is well-established in asset management in Europe, while it is still evolving in other parts of the world.
With our European footprint, BNP Paribas provides direct exposure to the EU’s regulatory leadership, particularly on the ESG front. Our new Manaos solution applies ESG ratings to portfolios by screening them against different ESG principles and data providers. With the tool’s additional filters and overlays, clients can also quantify and measure the ESG assets in their portfolios and disseminate ESG-enriched portfolio data to their ecosystem seamlessly.
The future of asset servicing
Despite a challenging macroeconomic environment, the future of asset servicing in Australia remains promising. Securities Services is committed to helping our clients navigate these challenges. Our mandate as a custodian now transcends the two main pillars of ensuring asset safety and efficient settlement. We believe that responsible asset servicing encompasses effective stewardship and facilitating communication between issuers and final investors.
This responsibility also covers the growing realm of data assets that custodians must oversee. For data custodians, transparency and trust is vital – not only in regulatory reporting but across the full asset servicing lifecycle. Indeed, global custodians can act as a single repository of information for clients about a firm’s activities in each market.
As we anticipate more macroeconomic uncertainty in 2023, the custodian’s role is ever more critical. Through seamlessly integrated support, deep local and global expertise and a digital‐first mentality, custodians can ensure our clients can weather these challenging times with peace of mind.
About BNP Paribas (https://securities.cib.bnpparibas)
We are a multi-asset servicing specialist committed to helping our clients achieve their ambitions both in terms of investments and cross-border distribution. As a pillar of BNP Paribas’s diversified banking model, we provide our clients with securities servicing solutions closely integrated with the best-in-class capabilities of the Group’s other business lines. These include treasury financing and advisory, and global markets solutions. Our values drive us forward and are a cornerstone of our business. We rely on our strengths that include: stability, responsibility, expertise and being a good place to work.
About Manaos (manaos.com)
Developed for the asset management industry by AELX SAS, a technology subsidiary of BNP Paribas, Manaos provides a swift and easy connection between investors, asset managers, and a panel of carefully-selected fintechs and regtechs. This facilitates fund inventory collection and data standardisation and allows users to look through their portfolios for full transparency on their investments. Manaos operates according to bank-level, industry security standards.
[1] Includes private equity, infrastructure, real estate and private credit. https://www.ft.com/content/356882f5-ca49-46a4-8602-c1e732f6198e
[2] https://www.reuters.com/markets/europe/morgan-stanley-sees-12-cagr-private-capital-market-over-next-five-years-2022-10-07/
[3] PE Investor Report PEI, FY 2021
[4] https://www.ifswf.org/general-news/2021-was-record-year-sovereign-wealth-fund-investment
[5] https://www.funds-europe.com/the-global-automation-survey/introduction-key-improvement
[6] https://www.ey.com/en_gl/private-equity/will-seeing-what-lies-beyond-bring-new-opportunities-into-focus; page 9 of full report
[7] https://au.linkedin.com/posts/bnpparibassecuritiesservices_global-finance-worlds-best-sub-custodian-activity-6938092957317124096-saxI
[8] https://apac.bnpparibas/en/about-us/awards-and-rankings/securities-services/
[9] https://www.apra.gov.au/consultation-on-apras-superannuation-data-transformation