Alternative Investments Working Group
Purpose
Alternative investments are becoming a mainstream component of institutional portfolios and encompass a broad range of asset classes, including private equity, private credit, real estate, infrastructure, natural resources, commodities, collectibles, hedge funds and other structurally complex investment instruments.
Unlike publicly listed equities and bonds, these investments frequently operate outside standardised market infrastructures and are characterised by:
- Bespoke Legal Arrangements
- Limited Liquidity (e.g. harder to buy and sell quickly, with no continuous active market)
- Complex Ownership Structures (e.g. less public information is available compared with listed securities)
- Non-Standardized Valuation Methodologies (e.g. no secondary market prices; NAV must be modelled)
- Fragmented Servicing Models (e.g. assets may be available only in large lots, with high barriers to entry, while management and performance fees can be complex and high)
- Diverse Regulatory Requirements (e.g. many instruments require specialist expertise and understanding)
As institutional allocations continue to grow globally, securities services providers face increasing challenges in delivering consistent:
- Safekeeping and Record-Keeping (e.g. complex ownership structures, limited regulation and potential safekeeping-only arrangements, without full custody liability, create significant risks for providers)
- Valuation (e.g. NAV must be calculated using models in the absence of transparent secondary market pricing or independent benchmarks)
- Reporting and Compliance (e.g. fragmented and complex regulatory frameworks generate a significant compliance burden and inconsistent treatment across jurisdictions)
- Lifecycle Event Processing (e.g. subscriptions, transfers, redemptions and capital calls are largely manual and reliant on bespoke legal documentation, with complex fee structures and no standardised workflow)
- Settlement Infrastructure (e.g. very few alternative asset markets provide settlement through a central securities depository (CSD), and there is no equivalent finality mechanism comparable with conventional markets)
The purpose of the WG is to develop standards through thought leadership, industry guidance and best-practice frameworks that enable market participants to service alternative investments with the same level of transparency, governance, control and operational resilience expected in traditional securities markets.
The WG will:
- Assess challenges and risks by alternative asset class and investment structure
- Evaluate their implications for safekeeping, record-keeping, valuation, oversight and regulatory compliance
- Identify gaps in current frameworks, market infrastructure and practices
- Propose practical mitigants, best practices and recommendations to enhance consistency, transparency and operational efficiency
Out of scope are traditional asset classes and activities where established industry frameworks already adequately address these considerations.
Scope
The Working Group will focus on alternative investment assets and servicing models that fall partially or wholly outside conventional CSD-based market infrastructures.
Asset Classes: Divided into Horizontal and Vertical Categories:
1. Horizontal
Category | Definition | Examples |
Private Credit | Private credit is debt financing provided by non-bank lenders through privately negotiated, non-publicly traded loans to businesses or projects, typically funded by institutional investors and structured outside the traditional banking and public bond markets | Direct lending, senior secured loans, unitranche facilities, mezzanine financing, asset-based lending, venture debt, distressed debt, infrastructure debt, real estate debt, project finance and fund finance |
Private Equity | Private equity refers to equity investments made by institutional or professional investors in privately held companies, or in public companies that are taken private, with the objective of creating long-term value through active ownership, operational improvement and strategic growth before exiting the investment through a sale, recapitalisation or initial public offering (IPO) | Leveraged buyouts (LBOs), management buyouts (MBOs), management buy-ins (MBIs), growth capital, venture capital, buy-and-build strategies, distressed equity, turnaround capital, PIPE investments, take-private transactions, secondary buyouts and recapitalisations |
Real Assets | Real assets are tangible, non-financial assets over which ownership rights can be legally enforced and which derive their value from their physical characteristics, generating long-term economic benefits through income, capital appreciation or both | Real estate, infrastructure, renewable energy assets, utilities, transportation assets, farmland, timberland, natural resources, water assets, energy assets, data centres and telecommunications infrastructure |
Hedge Funds | A hedge fund is a privately managed pooled investment vehicle that employs flexible investment strategies, including leverage, derivatives, short selling and other sophisticated techniques, to generate absolute or risk-adjusted returns for professional or sophisticated investors, typically operating outside the investment restrictions applicable to traditional retail investment funds | Long/short equity, global macro, event-driven, merger arbitrage, convertible arbitrage, fixed-income arbitrage, relative value, statistical arbitrage, managed futures (CTA), multi-strategy, credit hedge funds, distressed securities, market-neutral and activist hedge funds |
2. Vertical
Category | Definition | Examples |
Fund Assets | Investments made through a pooled investment vehicle, where investors own interests in a fund rather than directly owning the underlying assets. The fund is managed by a GP or investment manager who makes investment decisions on behalf of investors | Private equity funds, real estate funds, infrastructure funds, private debt funds, hedge funds and funds of funds |
Direct Investments | Investments where the investor directly owns or holds an interest in a company, project, loan or asset without investing through a pooled fund structure or special purpose vehicle (SPV). The investor typically has greater control and visibility over the underlying investment | Direct private equity stakes, co-investments, direct loans, mezzanine financing, venture capital investments and direct infrastructure projects |
Real Assets | Physical or tangible assets whose value is linked to real economic use and which often provide inflation protection and long-term income generation. Real assets may be held directly or through funds | Real estate, infrastructure, timberland, farmland, energy assets, renewable energy projects and commodities |
Key Deliverables
Subgroup 1: Standardization
Subgroup 2: Manual Processes
Out of Scope
- Publicly listed equities and bonds
- Existing CSD settlement models already covered by established market standards
- Product-specific investment recommendations
- Jurisdiction-specific legal opinions
Key Outcomes
Key outcomes will be:
- To promote greater consistency in market practices, terminology and governance frameworks applicable to alternative asset classes
- To enhance awareness and management of risks related to servicing, oversight and lifecycle management of Alternative Investments
- To facilitate knowledge sharing and dialogue among key market participants
Working Group Strategic Objectives
The Working Group will seek to:
Structured Best‑Practice Frameworks
- Development and publication of a series of clearly articulated best‑practice standards across the identified alternative asset classes and investment structures
Manual Processes – Gap Identification and Practical Recommendations:
- The manual nature and operational inefficiency creates significant fragmentation. Very few alternative asset markets provide settlement via a central securities depository (CSD); there is no equivalent finality mechanism to conventional markets. At the symposium the feedback was that automation is currently limited due to the diversity and complexity which resulted in high cost / low return for traditional automation. The working group will explore the big ticket and common asset classes that don’t have solutions and will aim to highlight and recognise these challenges by providing clarity to them
Publications
- Watch Chris Rowland, State Street – and Executive Sponsor of ISSA’s Alternative Investments WG – explain how ISSA will look to update the current challenges in providing safekeeping and supervisory services for out-of-network assets and revise its previously published legal and practice framework -> link
- Final Report on Hidden Risks in the Securities Services Industry – A Sampling of Consequences to Custodians, Clearers and (I)CSDs (06/2012) -> PDF 577 kB
- AGC / ISSA Joint Report on Addressing Challenges in Safekeeping and Supervisory Services for Out-of-Network Assets (04/2014) -> PDF 704 kB
Working Group Co-Chairs
- Ashweeni Basenoo, U.S. Bank
- Stuart Warner, HSBC
Executive Sponsor
- Chris Rowland, State Street Bank and Trust
Institutions Represented by Experts in the Working Group
- Bloomberg LP
- BNY
- Central Securities Clearing System Plc
- Citi
- Deutsche Bank AG
- GIC Private Limited
- GlobeTax Services, Inc.
- HSBC Holdings Plc
- Montran
- MYRIAD Group Technologies Ltd
- NSDL Group
- SEB Group
- SIX Group AG
- Standard Chartered Bank
- State Street Corporation
- U.S. Bank, N.A.