To build or to buy? This is the central question many private market executives have when confronted with the need for an investment data management solution.
Private market asset classes are experiencing fast growth – Preqin predicts that global private capital AUM will grow from $8.9 trillion at the end of 2021 to $17.8 trillion in 2026. This is creating a strain on operations for many asset managers – more investors, more investments, more funds all combine to create evermore data that needs to be centralized from the beginning to the end of the investment lifecycle.
Whether you build a system or buy a technology platform, data management is a significant cost center for fund managers. McKinsey estimates that private market managers with more than $10 billion in assets under management typically spend between $1 million and $5 million per year on third-party solutions and software per asset class. Factoring in related spend on internal capabilities and talent, leading managers are investing $10M+ annually.
The immediate gut reaction is often to build a solution in-house. After all, data strategy is tricky, and keeping such sensitive information within the company appears to be more straightforward. Managers assume they can hire some consultants to build out the architecture and connect some pipes and they’ll end up with a system that can grow with them. But what often ends up happening is that expenses and maintenance required to meet ongoing business requirements, compliance, and cybersecurity standards significantly diminish returns and resources.
Here are 5 questions private market leaders should ask before building an in-house investment data management platform:
1. How much will it really cost?
When you look at the effect building your own investment data management platform has on the bottom line, it’s easy to see how this approach is no longer viable. Creating a data platform from scratch is incredibly expensive to build and maintain.
One large asset manager client of ours shared their own build vs buy analysis and the cost difference was vast. The four-year total cost of ownership of an in-house system was more than six times the cost of Mercatus.
For example, you will need to consider the following costs:
- Initial setup consultations
- Data pipeline design
- Platform development
- Testing with and without your existing system
- Employee training
- A dedicated team
- Ongoing fees
- Infrastructure maintenance
- Compliance costs
To build and maintain an in-house platform, even a small fund manager might need to hire at least four full-time resources, such as a data engineer, integration specialist, reporting designer, and business analyst. That easily reaches $1+ million annually excluding consulting and licenses.
In addition to immediate costs, an in-house platform reduces funds available for other key areas of your organization. Private market fund managers are investment professionals, not IT professionals.
2. How much time will it take my team to maintain the platform?
Like sinking funds into a non-core project, the time and resources lost on building your investment data platform could be used for other mission-critical tasks. Not only do you need to factor in the lost time when building your in-house data infrastructure solution, but you’ll also have to consider the amount of time it takes to manage data quality. Furthermore, you risk bad data coming in and influencing your analytics. You will also need more time for data validation exercises.
3. What are the risks of creating an in-house system?
When you build a data management solution in-house, there are significant risks, such as:
- Poor quality data coming in
- Data lags due to manual entry
- Investing and managing multiple technology vendors
- Increased key man risk
- Worries about maintaining constant availability and making data recovery procedures
4. Will non-technical staff be able to use it?
The biggest complaint we hear from private market fund managers who built their own solution is that it was created with the IT user in mind and not the business user. The result is that the investment professionals who hoped to gain insights from their data management platform did not trust the data. In many cases, they ended up building an Excel-based shadow so that they have more control and trust in their data, which defeats the entire purpose of the costly exercise.
5. Will our in-house solution scale with the business?
With in-house solutions, business users are often beholden to the IT team to make changes, such as adding a fund or investment to the platform. This not only takes time, but it can be challenging to plan your other overarching projects and budget appropriately.
If your data needs to change or expand significantly a few years down the road, and with the rapid pace of digital transformation, that is likely, you will need to shell out more to rebuild your data platform. This makes in-house solutions incredibly difficult to scale.
Get Started with Mercatus
While building your own investment data management platform is unsustainable, point solutions are often ineffective. Poor data quality, decoupled solutions, and a lack of usability are all issues when using a data warehouse as a data lake.
At Mercatus, we provide an end-to-end investment data platform that is easy-to-use, compliant, and compatible with different data types from your existing systems. We’re the intelligent data orchestration that makes your architecture work for the business user.