[ C O V E R
S T O R Y
|
O U T S O U R C I N G ]
B
eing a long-only/hedge fund
administrator today is a brutal
and predatory business. Such is
the saturation of providers in the market
that experts are anticipating the industry
could contract tenfold as consolidations
and closures accelerate. The problems
facing the sector are multidimensional.
Its fund management client base is facing
cost pressures as investors and regulators
such as the UK’s Financial Conduct Au-
thority scrutinise their fees and charges
with growing zeal.
Managers – eager to restrain costs and
demonstrate value for money to clients
– are squeezing their administrators’
the turn of the $3 trillion private equity
industry to follow suit. Estimates suggest
that just 30% of private equity managers
in 2017 used an external administrator,
and Preqin is predicting this will rise to
45% over the course of 2018. For adminis-
trators, private equity is a godsend.
Why private equity makes for a great
client
“Private equity is one of the few asset
classes whose AuM is growing briskly
while the seven to 21-year fund lifecy-
cles of private capital funds makes for a
compelling commercial case at securities
services,” says Ian Lynch, global head of
“Based on what I have seen, a lot of the boutique private
equity and real estate administrators are either up for sale or
will be up for sale fairly shortly.”
BHAGESH MALDE, GLOBAL HEAD OF REAL ASSETS, SS&C TECHNOLOGIES
fees thereby deflating revenues in what
was already a fairly low margin business
model. Attracting new clients is not easy
for administrators either. Most existing
fund managers are indisposed to chang-
ing administrator due to the operational
complexities – real or exaggerated - it
creates, while launch mandates are higher
risk and more vulnerable to going out of
business than established shops.
Fortunately, it is not all bad news for
fund administrators. Just as hedge funds
moved away from the self-administration
model a decade ago and appointed third
party providers in their hordes, it is now
16
Global Custodian
alternative investors at BNP Paribas Secu-
rities Services. Private equity’s transition
away from self-administration has been
driven by a mix of institutionalisation
and business upsizing, investor pressure,
regulation, reporting and strategy diver-
sification.
Antipathy to outsourcing however, has
never been in short-supply at private
equity funds, with managers reluctant to
delegate to providers who they assumed
did not understand their asset class. But
with more fund administrators aggres-
sively hiring private equity experts and
investing heavily in their systems and
Private Equity Issue 2018
products, this argument no longer cuts
the mustard. Nonetheless, appointing a
fund administrator is not always as clear-
cut as it appears.
Since the private equity outsourcing
trend first emerged, industry watchers say
there has been a noticeable growth in pro-
viders – usually hedge fund administrators
- purporting to be experts in the private
equity field, when they are anything but.
Many hedge fund administrators are strug-
gling to on-board new clients, and have
been opportunistically chasing private
equity to offset the dry-up in business.
Expertise versus inexperience
While these providers may be entirely
competent at servicing the needs of hedge
funds, private equity is a much more
complicated asset class and structure. Any
attempt by administrators to service the
nuanced needs of private equity – such as
their bespoke waterfall distributions or
management fee calculations – by utilis-
ing hedge fund technology platforms and
teams will naturally end in tears.
“There are a large number of players in
the administration market,” says Cesar
Estrada, senior managing director, head
of product management for private equity
& real assets fund services at State Street
AIS. “Combing through SEC Form ADV
filings shows there to be circa 500 plus
administrators servicing private market
funds at the moment. We do get worried
about the quality of the competition in
the marketplace.”
Managers should therefore scope out
administrators who have invested in
their private equity businesses, hired the
correct expertise and built technology
systems capable of handling real assets.
“The accountancy skills required in
private equity administration are far more
complex than many other asset classes, so
it is all about having the right expertise,”
acknowledges BNP Paribas Securities
Services’ Lynch.
Who to go for?
There is no right answer as to whether pri-
vate equity should appoint a bank provider
or a standalone for administration, as there
are a number of advantages and disad-
vantages with each. Banks highlight they
have balance sheet and resources, which
means they can invest in their services and
technology, and provide a more expansive