[ U P D AT E ]
Shift in private
equity strategies
encouraging
outsourcing
NEW PRODUCTS AND STRAT-
EGIES AT PRIVATE EQUITY
FIRMS WILL ENCOURAGE
FURTHER ADOPTION OF OUT-
SOURCING, ACCORDING TO
SS&C.
G
one are the days when a long/short
equity hedge fund could simply launch
and raise a yard in less than 12 months.
Nowadays, many managers are often wait-
ing up to three years before they reach the
coveted $100 million mark. Having grown
into an institutional and arguably oversized
industry post-crisis, hedge funds are finding
it difficult to raise and make money, mainly
because they have been crowded out of all
the lucrative trades.
Meanwhile, private equity is attracting
capital at lightening pace, smashing all
sorts of fundraising records along the way,
but it masks a long-term problem, which
has already afflicted hedge funds, namely a
drop-off in profitable investment opportu-
nities due to a surplus of disposable cash.
With more private equity managers chasing
deals, prices have inflated and returns could
drop precipitously as a consequence.
Strategy diversification is therefore
warranted. In the case of hedge funds,
more managers are piling into illiquid assets
offering decent premiums, whereas private
equity is departing from its traditional LBO
comfort zone. “There has certainly been
strategy diversification across the entire
closed-ended funds space, which includes
private equity managers,” explained Joe Pa-
tellaro, managing director and head of SS&C
Global Private Equity Services.
The last few years have seen private
equity managers add to their organisation’s
expertise to launch credit funds, mezza-
nine, loan origination, distressed debt, and
infrastructure products. Private equity is
diversifying because of client demand and
it is also a means by which to mitigate risk.
Should one market dry up, then a credit
portfolio could be a useful counterbalance to
help ensure returns are maintained.
Direct lending products have been very
popular at private equity, who have jumped
in on the action as banks pull back in
response to Basel III capital requirements.
“Direct lending funds are filling the gaps left
by the banks in the mid-market SME space,”
said Bhagesh Malde, global head of real as-
sets at SS&C Technologies. With more man-
agers pursuing unique or new strategies, it
is prompting them to outsource elements of
their business operations.
“Shifts in strategies by managers intro-
duce new complexities across their busi-
nesses and in their operations. Some private
equity managers are therefore consider-
ing outsourcing middle- and back-office
processes to providers offering multi-asset
class solutions in response. Many managers
see outsourcing as a useful tool by which
to reduce their operational costs, and focus
their resources on delivering returns,” high-
lighted Patellaro.
Private Equity Issue 2018
globalcustodian.com
7