FOUR QUESTIONS – JTC Group’s Michael Halloran on why most impact investing may fail, and how a Lamborghini figures into that

This is third in a series of Q&A’s with leaders in the fund and fund services industry. Michael Halloran originated the category of Specialty Financial Administration, and pioneered the Silicon Valley approach to data operations for funds. That was primarily through his founding of San Joe’s NES Financial, which was recently acquired by JTC Group. He’s developed a track record and reputation for expertise at the intersection of private funds and technology.

Today Michael is currently Group Holdings Board member for JTC Group, Group Head of Technology & Strategy, and CEO of ICS USA for the global fund administrator.

Harmonate – You have been at the heart of some of the most impactful investment programs in the U.S., but at the same time these programs have also invited controversy. I’m thinking of EB-5 and Opportunity Zones for instance. What does that tell you about the rise of impact investing?

Michael – Nobody believes a capitalist will ever invest money in any other way than in a self-serving way. And when I say “nobody,” I mean the capitalists too. In addition, whenever a program is set up to harness capitalist self interest and vector it toward a social good, a healthy dose of skepticism is often heaped on top.

The question inevitably comes up, on whether the social good is just a cover for some dubious get rich mechanism for the already rich. That’s especially true right now in an era of hyper skepticism and conspiracy theories run amuck.

The extreme distrust we see in society is leading to investment decisions that are guided by more concern that folks are going to come after pockets of wealth with a pitchfork, if they don’t see that wealth being turned to an acknowledged good. And it’s moments like these that the scammers and fraudsters come out of the works.

There will inevitably be a clash between proponents of impact investing, many of which are themselves quietly skeptical of it, and a public that will cry that it’s too little too late.

Harmonate – Good lord that’s dark. But NES Financial has been an extraordinary success, so you must see something maybe others don’t?

Michael – Well, if investors are going to invest in something that’s supposed to provide a social good, and make a better than average return, they don’t want to be suckers. And that goes for the public as well.

And there is an answer, and we know it works. That’s where Specialty Financial Administration comes in. Frankly distrust comes from people not being able to look at the same numbers and agree on what they’re all trying to accomplish. That’s partly fed by vague policymaking, and partly fed by the culture of competition and secrecy in the financial world. But there’s one component that is an entirely unnecessary obstacle to people getting on the same page, and that’s how expensive and time consuming financial accounting and reporting is.

Nobody wants to do the accounting for things like EB-5, Opportunity Zones, and other programs because there doesn’t appear to be enough money in it, and it’s just a lot harder with lots of volume and eccentric variables. But then if the fund administration infrastructure is not there, scammers and fraudsters can take root. And you get into a chicken and the egg situation where it doesn’t pay to do fund administration in impact areas. And impact areas don’t make sense because the accounting burdens and politics are just too hard for an uncertain return.

That’s where technology can step in through purpose built automation to reduce the accounting and reporting burden, and create a third party system so different stakeholders can see what’s going on at a more rapid and detailed pace. That’s where trust can be built. And trust leads to investment and stability. And impact can actually happen.

Harmonate – Theoretically that makes sense. But is the technology there to bring about this magical world of which you speak?

Michael – Most of it is. Yes. If you look at how EB-5 in the U.S. went from being scandal-ridden to becoming a huge success when you look at the numbers, especially during the Great Recession, that was facilitated by good old fashioned fund accounting and automation.

And there’s something else happening in the fund world. Automation generally is driving down fees, through ETFs in particular. That means that mainstream fund administration is starting to look increasingly like relatively more niche things like EB-5 and Opportunity Zones that nobody wanted to get into. Fees go down for asset managers. That means fees go down for fund administrators, and before long mainstream fund administration needs to start having the automation tools of Specialty Financial Administration.

So the curious thing is technology that can enable more transparency and trust, plus handle eccentric variables at high volume is coming into being, being driven by the macro trends in software eating professional services one industry at a time.

That being said, not everyone realizes or accepts that. Just like folks waiting for COVID-19 to go away and things to go back to normal. There are asset managers and fund administrators who are waiting for automation to go away. Or they think automation is something happening in retail sales and they can close the borders of our private fund territory and live a professional services and Excel lifestyle for ever more.

But then there are hungry fund administrators and asset managers who have realized change is coming, and they’ve decided to beat the competition. Someone in charge has gotten the vision and they are empowering folks to make changes.

So I said most of the technology is there. But not all of it is. And it’s a partnership of these leading asset managers, integrators, fund administrators and technology companies that are building the dominant fund administration infrastructure of the next few decades. That’s happening right now.

Harmonate – Lamborghinis, you have one. Is it as cool as it looks?

Michael – For me it is, yes. But I’m going to ruin the fun of that question and give you a serious answer.

If you look up “Lamborghini” in the news you’ll see reports on the latest models and apparently there are now Lamborghini go-karts and mopeds. But you will also see reports of individuals who took government COVID-19 relief money intended to protect workers and used it to buy a Lamborghini for themselves.

Those stories get in the headlines because the Lamborghini is a symbol of frivolous luxury, and using desperately needed public money for it is a slap in all of our faces. Impact investing constantly harbors the same potential for stabs at the public trust. The government infusions of cash into the economy did not have enough controls in place. That’s largely because there’s just not enough people available to monitor all those funds. It calls out for better financial technology to monitor, to more effectively catch and prevent nonsense like this that jeopardizes the public trust.

And I’ll offer up the Lamborghini as a metaphor in a different way here. Whenever people drool over the looks and engine of the Lamborghini, what you’re missing is the immense effort and engineering that’s necessary to keep it from flying off the road. The engine is impressive, the design is nice for some, but it’s the controls that make it work.

I realize comparing impact investing to a Lamborghini on face value is contradictory at a symbolic level. But bear with me. If we put aside the fact that one is a symbol of indulgent luxury, and the other is emblematic of public consciousness, they both represent an aspiration that often seems out of reach, alien in some respects, and at a certain level a challenge to practicality.

But, if you really want impact investing to work, and I certainly do.

If we want this to work, and to work for everyone, we had better get the controls in place so that it’s not just looks and a lot of money, or else it’s going to end very badly with casualties all over the place.

Fortunately, if we acknowledge that Specialty Fund Administration is really becoming New Fund Administration… that we’re seeing the birth of funds tech in the hands of some smart leaders, I think we are seeing that publicly conscious and socially conscious investing can work, can be trusted, and can work very well. If we have the engineering and controls in place, we can start to trust it.