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The particulars of PE
fund admin
GLOBAL CUSTODIAN PUT SOME OF THE SURVEY FINDINGS TO SHASHIKALA SURYANARAYANAN,
EXECUTIVE VICE PRESIDENT FOR PE ACCOUNTING, VITEOS, FOR A PROVIDER PERSPECTIVE ON
THOSE RESULTS THAT APPEAR COUNTER-INTUITIVE.
Why do you think average scores are so much higher in this survey
than in GC’s other surveys, such as hedge fund administration?
I think, perhaps, the touch points are less frequent and investments
are for longer duration. You don’t have the high turnover you see in
the hedge fund space, so frequent experience of client service, daily
reporting, resolving breaks etc. is not, on the whole, part of the
private equity world.
Another thing that struck us was the varying response rate for the
different service categories. Nearly everyone gave a rating for Cli-
ent Service and Relationship Management, but on the other hand
only 30% of respondents gave any kind of rating for Investment
Execution and only 40% for regulatory reporting. Does that mean
that private equity clients don’t necessarily use those services or
are they getting them from another provider?
Investment execution is largely confined to the general partners
who make all the decisions. Fund administrators have no role
to play there and I’m surprised that you got as much as a 30%
response rate.
If you look at the results by the size of the client, it seems that
small clients — those with assets under management of under
$250 million — are the least generous in their scores. Of course,
it’s relative because overall scores are good, but could there be
any operational explanation for this?
Not really. It could be that some of the larger firms experience
challenges with the complexity of their fund structures and the
administrators prove their worth by handling these challenges. They
also have a large investor base, so their technology must be able to
keep track of all the various calls and distributions. The kind of help
that administrators provide to them in this regard is more complex
and therefore more appreciated.
In your provider questionnaire, you mentioned changes in the
industry that are echoed by other administrators: specifically, in-
creased allocations by institutional investors; demand for greater
transparency and disclosure; and outsourced fund administration
services. Can we just unpack those a little more? One provider, for
example, mentioned an increasing convergence of private equity
and hedge funds, forming hybrid vehicles. Is that a natural conse-
32
Global Custodian
The Private Equity Issue 2017
quence of increased allocations to private equity by institutional
investors?
My view is no. We have seen hybrid structures, where part of the
book is public and part of the book is private, but that is not really
a trend. Perhaps some providers have a larger book that points to
that conclusion.
What are the consequences of this increased allocation from
institutional investors for you and your peers?
Institutional investors will expect greater standardisation in
reporting. They may well have made investments in multiple
private equity funds and they need a standard base for comparison.
Transparency is another priority, particularly with regard to expenses
and allocations for each fund. In the private equity world, when a GP
is evaluating investment opportunities, he is generally not evaluat-
ing for one fund, but rather for multiple funds. There are expenses
incurred in performing investment evaluation. The correct allocation
of these expenses to each of the funds is an important issue from a
transparency perspective. Are they accurate and do they reflect the
investments that each fund has made into that investment?
Finally, institutional investors such as pension funds, endowments
and sovereign wealth funds would expect the back-office operations
of the funds in which they invest, also to be institutionalised. When
they have to respond to due diligence questions, it gives them
comfort to know that the back-office operations are handled by an
institution rather than in-house. A more arms-length relationship is
important to them.
Does regulation play a part in the demands for greater transpar-
ency and disclosure of institutional investors?
Yes, it does. Such investors are subject to heightened regulatory
scrutiny.
How far behind hedge funds are PE firms in moving to outsourced
administration?
Today, according to a survey I saw recently, 30% of PE firms out-
source their fund admin operations. That is expected to reach the
45% mark in the short to medium term. I also expect the value of
outsourcing to become more apparent in helping to attract capital
from larger allocators.