Globalisation, impact investing and more


Globalisation, impact investing and more

It featured actor Natalie Portman and magician David Blaine as speakers, but at the 2019 Cayman Alternative Investment Summit the themes of innovation, digitisation and so-called impact investing dominated the content, with delegates urged also to embrace millennials and globalisation. Cayman Funds reports.

Globalisation, digitisation and ‘millennialisation’ are three important challenges facing the alternative investment industry. So said Tony Cowell, partner KPMG and chairman of CAIS 19, when he opened the annual Cayman Alternative Investment Summit (CAIS) in February, the theme of which was “Tech-Tonic Shift: Innovation in Alternative Investments”.

On globalisation he suggested that, despite the rise of populism and increased geopolitical tensions, in many ways the rise of technology will accelerate globalisation and will create more opportunities.

“Companies such as Netflix increasingly understand that it is not where you are but who you are that will determine the products you use and the investment products you might buy,” Cowell said.
Digitisation, he added, especially artificial intelligence and machine learning, would increasingly be the lifeblood of the industry in the future.

“Companies that do not embrace data will face huge strategic risks. Digitisation will become the North Star of the industry and will ultimately make it unrecognisable,” he explained.

The term millennialisation refers to the challenges of catering for a generation that is the most connected ever, who expect a friction-free client experience embedded in the digital world—and the 
next generation will be even more connected. He noted that the millennial population of China is already bigger than the entire population of the US.

“Millennials also care about doing good—they are driven by purpose as well as profit and there is not a boardroom in the world where that is not a consideration,” Cowell said.

“Companies that succeed need to consider not only what they do but also why they do it—they need that purpose.”

These sentiments were echoed by Chris Duggan, vice president, Dart Enterprises, who said that innovation and change have already changed the world but will continue to do so at an unprecedented rate.

Duggan noted the challenge that while innovation is changing at a remarkable pace, human nature is not and that presents a key challenge going forward. He explained that there have been fundamental shifts in innovation and transformational shifts in how society operates and how the way business is done.

Alden McLaughlin, premier of the Cayman Islands, in a speech welcoming delegates, noted that technology is crucial to the future and will be both an enabler and a disrupter to the financial services industry in the future. He said that Cayman intends to play a key role in developing the required regulatory framework to allow it to keep pace with these events and help develop new markets.

Innovation a priority

A survey conducted by CAIS during the conference confirmed the growing importance of innovation to the industry. Some two-thirds of alternative investment professionals in attendance said they believe that investing in innovation should be the top priority for chief executive officers and other C-suite executives. This response was far ahead of building trust with employees (19 percent), evaluating workplace policies (9 percent), and growing jobs and wages (6 percent).

“More than ever before, the alternative investment industry is experiencing a dramatic technological shift, and financial services firms realise they will need to incorporate innovation into their investment processes and business operations or otherwise risk falling behind their peers,” said Duggan.

“This year’s survey results demonstrate that the alternatives industry has finally reached a tipping point, recognising the undeniable impact of technology on the future of global markets.”

Looking specifically at the tech-related shifts most expected to influence markets, survey respondents believe automation and machine learning (45 percent) and blockchain technologies (38 percent) are likely to have the biggest near-term impact globally.

When asked about the global markets more broadly, key survey highlights included government instability causing volatility, with 38 percent of respondents believing signs of government instability, such as Brexit and the US government shutdown, will be most to blame for a market correction.

Other factors driving volatility include a private credit bubble (26 percent), trade tensions with China (21 percent), and tightening monetary policy (15 percent).

Nearly 40 percent of respondents identified pressure from the general public or government officials as the primary driver behind investors’ growing interest in responsible investing. This pressure outweighed a commitment to helping solve the world’s challenges (28 percent), recognition of environmental, social and governance (ESG) factors as material to performance (22 percent), and a herd mentality to keep up with other investors (10 percent).

Finally, investors believe cryptocurrency is the asset class that most represents a bubble right now (45 percent), as compared to US equities (20 percent), the leveraged loan market (19 percent), and private credit (16 percent).

Technology-led dislocations

These themes were reflected by some of the speakers at the event. Ian Bremmer, president and founder, Eurasia Group, told delegates that an increasing dislocation will emerge between the fundamental technology platforms being developed and used by China and the US as a ‘cold war’ as technology develops around the world.

In a presentation titled “Entering the digital vortex in an uncertain world” Bremmer said that the current geopolitical tensions and uncertainty will not disappear. He said they are driven by “misassumptions” about China and globalisation, and are being fuelled by digitisation.

He said that many assume that as China becomes wealthier, it will also become more like the west—more democratic, more open and more integrated into global systems. In fact, he argued, while the US and China will soon resolve tensions over trade, a different dynamic will play out in terms of technology and they will compete to develop rival technology platforms.

“Neither government wants a trade war and that will lead to something that feels like a deal. That is how globalisation is supposed to work,” Bremmer said.

“But in terms of technology, the opposite is true. They will continue to develop competing systems that are not mutually dependent on each other and that will lead to a fragmentation of technology.”
Bremmer argued that countries will need to choose which system to base their own process of digitisation around: countries in Asia and Africa will increasingly align with China while Europe will tend towards the US.

“Multinational companies will need to have two sets of standards if they are to continue to operate globally,” he said. “They will need to position themselves for that.”

The theme of technology as a disrupter was also addressed by Bettina Warburg, co-founder, Animal Ventures, who said that blockchain will play a central role in the way economies work in the future by enabling increasing decentralisation and lowering uncertainty in how we trade.

In a presentation called “The decentralised economy” Warburg said that while blockchain is now a familiar concept to most in the business and investment world, few truly understand its potential for changing the way the global economy operates.

She explained that the key function of blockchain will be its ability to lower uncertainty when third parties trade and do business, lowering barriers and enhancing trade in the process. “We no longer need a middle man or an institution in the middle of transactions—we can suddenly do one-to-one transactions but on scale,” she said.

She described the decentralised framework created by blockchain as creating a new “shared state of reality” managed by decentralised virtual machines. “But the key point is that this allows us certainty and extends our ability to trade,” she said.

Warburg explained that Animal Ventures works consulting, investing and building prototypes for the real application of blockchain technology to business and industry. It works with a number of Fortune 100 companies exploring how they might leverage blockchain to improve how they do things.

She noted that one of the fastest adopters and potential biggest beneficiaries of this technology is the supply chain and logistics sector where companies want to be faster and more efficient and narrow the gap between the originator and the consumer.

“It will also help augment the gap between human intelligence and machine,” she said. “The reality is that every asset has its own supply chain—everything is coming from somewhere and is moving somewhere whether it is a physical asset or a financial asset.

“It will change the interaction between humans and machines and change economic activity as we know it today.”

Impact investing

The other big theme of the event was so-called impact investing, seen in the industry as representing a natural evolution from ESG standards. This will play an increasingly central role in the alternative investment sector especially once a framework or set of standards is developed for how to measure it, said Cowell.

He said that almost all funds are now looking at the concept and grappling with how to apply it their own portfolios. He added that whereas ESG was a relatively passive or reactive approach to an investment strategy, impact investing was far more direct and proactive and done with a view to making a difference.

“The largest institutional investors are all looking to better understand their impact but a way of measuring this will be key. KPMG is working on developing a dashboard designed to help investors do this; once there is some sort of industry-wide framework we will see it really take off,” he said.

This would continue to be driven by what he described as the millennialisation of society—as a new generation matures and generates wealth, they have a very different perspective on how they wish to use their money. “They want purpose as well as profit,” he said.

Cowell suggested that as this concept matures and evolves it could conceivably transform the very nature of the charity sector. On the one hand, more money could be directed to good causes; on the other hand, these same investors will want a return. “It will create a class of investments that barely exists right now,” he said.

Alfred Fichera, global head of alternative investments at KPMG, added that the concept of impact investing was not only a natural evolution from ESG but also from what the industry was calling socially responsible investing 10 years ago.

He acknowledged that one of the biggest challenges was agreeing on common standards as to what this meant.

“It is a subjective concept. What is agreeable to one person is not to another,” he said. “There will be natural differences of opinion in terms of what is good and bad.”

He suggested that the concept of impact investing or ESG would become central to the industry from the bottom up and become part of the decision-making process alongside how much risk might be taken in a portfolio.
“It is possible to create platforms or benchmarks that allow investors to make these decisions,” he said. “Just in the same way as there are multiple indices for stocks, there might be multiple approaches to this where investors can choose their approach and tolerance using an ESG-based metric.”

He added that one part of such a metric could be the extent to which an investment portfolio seeks and promotes diversity in the companies it invests in.

A panel discussion on this topic overall agreed that investors increasingly want their investment managers to embrace ESG standards but exactly what this means and how it should be applied is still inconsistent.

A session called “The impact revolution”, chaired by Julia LaRoche, a reporter at Yahoo! Finance, examined how the focus is increasingly on investment managers taking into account wider factors such as doing good for society other than simply financial performance when selecting their investment strategies.

LaRoche also noted that millennials will drive this approach in the future. “They have a different approach, different priorities and they want to put their money to work in a different way,” she said.

Seth Blackman, partner at KPMG, said that impact investing for him meant attempting to quantify the wider impact a company or an investment has on society. But he also acknowledged that quantifying this was difficult; doing so, however, would eventually happen and would drive growth in this sector.

He added that he had a passion for helping clients achieve success as they define it as opposed to what he or others define it. “Understanding millennials can be difficult but we need to see the world as they see it and in terms of their aspirations,” he said.

Asha Mehta, director of responsible investing, Acadian Asset Management, said that ESG means thinking holistically about the companies you are investing in and their wider impact on society.

“We started to look at this around 10 years ago because investors started asking very different questions,” she said. They wanted a broader perspective of more than just the financials to consider anything that could impact investments.

“We are only midway through what will be revolution in terms of investors look at using capital and the impact it can have in the world,” she added, saying that the use of data would also be critical to this market in the future.

“We now have the tools to process unstructured data and this is a very exciting area,” she said.

Anna-Marie Wascher, founder CEO, Flat World Partners, agreed that the next generation wants transparency and innovation and an alignment in how their money will be deployed. “They also want high returns—their expectations are significantly different,” she said. “There is a lot of real money being put to work in that way now increasingly understanding how this can fit into an overall portfolio.”

Crypto continues to fascinate

The potential of cryptocurrencies was again a big talking point at the event. One panel discussion discussed that, while it is unrealistic to expect the world to grasp the enormity of the potential of cryptocurrencies, which explains their fluctuation in value, there is no doubting their long-term importance.

In a session called “Bits & Blocks: Mining for Alpha” chaired by Ran Neu-ner, CEO, Onchain Capital, the panel explored the evolution of cryptocurrencies including its challenges to date and the opportunities of the future.

Scott Kupor, managing partner, Andreessen Horowitz, said in his mind the analogy was the process of the internet developing, the importance of some of the original protocols that were developed and the impact they ended up having on the world as the likes of Google were developed using them.

He added that the fact these are based on open source computer technology is also important and will be an important factor in driving the development of this market, as nothing will depend on any type of central organisation. He also stressed that investors should not become fixated on the currency aspect of this new world but also pay close attention to the applications and infrastructure being built around this that will make these markets operate smoothly in the future.

Cayman Funds