After a challenging two years punctuated by rising interest rates and post-lockdown dislocation, there is cautious optimism among real estate investors and operators that markets are stabilizing.

As green shoots start to emerge, Alter Domus assesses and compares the key drivers of growth and investment opportunities across the US, European and Asia Pacific markets.

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United States

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Office

Despite an improvement in overall sentiment across US real estate, the office sub-sector has remained challenging, with investors and operators not only having to adjust to a higher interest rate environment, but also the secular shift in office space demand following pandemic era lockdowns.

According to CBRE, tepid economic growth and the entrenchment of hybrid and homeworking have put the brakes on demand for office space and driven up vacancy rates. CBRE forecasts show vacancy rates climbing to almost 20% in 2024, with a survey of US office occupiers highlighting plans to reduce office space through the course of 2024.

Slowing demand has already filtered into new build activity, with Cushman and Wakefield figures showing that construction pipelines have fallen below 50 million square feet (MSF) – the lowest levels since 2013.

The US office real estate slowdown, however, is not universal, with certain locations and categories proving resilient and continuing to grow.

CBRE, for example, has observed steady growth in the Las Vegas market, where a business-friendly tax regime has attracted new companies and driven up office-using employment. Miami is another hot market, with asking rents showing year-on-year growth of around 6%, with the Nashville market also enjoying steady demand for office space.

Logistics

Demand for US logistics real estate has trended lower during the last 12 months, with Prologis analysis estimating demand at 195 million square feet at the end of 2023 – below the 490 million square feet of new space that became available as projects launched in 2022 reached completion.

Vacancy rates have also edged higher, but there is an expectation that vacancies will peak below long-term averages this year.

The continuing growth of global e-commerce sales, and ongoing efforts to “near-shore” supply chains in the face of rising geopolitical tensions, will support long-term rent growth, which although down from the levels observed at the peak of the market in 2022, has settled above pre-pandemic levels in North America, according to JLL.

Ongoing demand for sites that meet best practice ESG standards, and can support increasingly specialized warehouse picking and packing technology, are also set to spur ongoing investment.

Retail

The long-term secular shift to online shopping has continued to weigh on US retail space, with Colliers recording an increase of 10 basis points in US retail real estate vacancy rates in Q1 2024.

There is a growing sense, however, that the retail real estate space may have bottomed out, with supply-demand dynamics shifting back in favor of landlords, particularly for space in prime locations and high-end shopping malls.

According to JLL leasing rates have reached 35.1% in 2024, an improvement on rates for the prior 12 months. Demand for small spaces of less than 2,500 square feet has proven particularly robust, with casual dining and fast-food chains snapping up these smaller spaces.

Regionally, JLL has also noted strong growth in markets across the Sun Belt, where rising populations and strengthening buying power have supported steady demand for retail space.

Residential

US house prices have proven remarkably resilient through the rising interest rate cycle, and even though mortgage costs have increased, the National Association of Realtors anticipates that house prices will still edge higher by around 2.6% in 2024.

Apartment occupancy rates are also expected to remain robust and well-above the 90% threshold according to the CBRE.

Investors and developers, however, are taking the time to ensure that investment in additional residential real estate construction is targeted in the right areas, with demand bifurcating between different regions.

CBRE, for example, notes that rental growth and occupancy rates for multifamily real estate is expected to be strong in the Midwest, Northeast and urban centers of New York, Washington D.C. and Chicago, whereas the Mountain and Sun Belt regions, where supply-demand imbalances are less acute, will see softer demand and rent growth.

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Europe

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Office

As has been the case in other regions the combination of a higher rate environment and increased homeworking post-COVID have proven challenging for office real estate in Europe.

According to abrdn, take up of European office space was down by almost 20% year-on-year in 2023, and some 16% off the long-term average.

The downswing in European real estate office space has not been universal, however, with demand for prime office in key locations continuing to show growth.

Prime office yields have rallied strongly from the lows of 3.2% seen at the trough of the market in the middle of June 2022, improving to 4.6% by the end of Q1 2024, according to BNP Paribas figures.

Logistics

The last 12 months have been a period of reset and recalibration for the European logistics sector after a red-hot period of activity immediately following the pandemic.

Weak economies across the region coupled with the topping out of online shopping growth have resulted in lower new build supply coming to market, as developers readjust to softer demand.

Rents, however, are still growing and according to CBRE are set to expand by 4% in 2024, which is well below the double-digit rent growth observed at the top of the market, but more in line normal run rates. Regional trends are also emerging, with CBRE anticipating that Italy, Germany and Spain will see the biggest jumps in rental growth in 2024.

Certain segments on the market are also performing better than others, with modern units that meet high ESG standards attracting more attractive rents than older sites in need of refurbishment. CBRE anticipates that widening gaps in rents will lead to a two-tier market.

Retail

The long-term secular headwinds challenging European retail real estate have shown little sign of abating, with abrdn recording an increase in shopping center vacancy rates to 12.7% by the end of 2023.

With the market at a low ebb, however, there are opportunities emerging to invest at attractive entry valuations. Retail real estate attracted just under a fifth of total real estate investment in Europe in 2023 – a meaningful increase that points to the potential value still on offer in the segment for investors.

Indeed, JLL notes that prime shopping center and retail park sites in Europe have continued to deliver attractive yields through the investment cycle, and outperformed other categories such as office and industrial assets. With corrections in rental rates having already worked through the market, there is also room for rental growth in the coming months and years.

Residential

Population growth in urban centers has provided a solid foundation for residential real estate in Europe’s capitals, with the CBRE forecasting a 3% rise the number of households in major European cities during the next five years.

These solid underlying fundamentals have made residential real estate one of the most resilient industry segments through the rising interest rate cycle, and while new rent regulations do pose risks for investors, vacancy rates in Europe’s top thirty cities have been low, and some cities have seen double-digit rent growth, according to abrdn. Limited new supply across Europe has supported rental growth and industry cashflows.

As has been the case on logistics, however, sustainability is a looming challenging for residential landlords and investors, who may have to make significant investments to upgrade existing housing stocks to meet higher emissions and environmental standards.

According to CBRE, the European Commission’s Energy Performance Buildings Directive (EPBD) demands that all homes across the EU will have to meet energy performance certificate ratings (EPC) of class E by 2030 and class D by 2033. At present, a quarter of European housing stock is below class E, with a further 49% below class D.

In addition to absorbing extra cots to upgrade properties, investors will also have to be alert to the risk of assets that are lagging on ESG being cast adrift as demand for ESG compliant properties grows.

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Asia-Pacific

Office
Macro-economic headwinds have taken a heavy toll on APAC’s office market, with average prime rates falling to 3.2% year-on-year in Q1 2024. According to Knight & Frank this represents the seventh consecutive quarter of declining rates. China’s tier-1 cities have been in the frontline of for the downswing, but few APAC jurisdictions have been insulated, with Singapore, Melbourne, Sydney and Tokyo all suffering rental rate declines, according to abrdn.

Prime office sites in Seoul have bucked the trend, with sustained demand keeping a lid on vacancy rates, while in Australia investors are still deploying capital in selected prime office assets. Overall, however, the market is set to remain challenging, with Knight & Frank forecasting that vacancies will continue to edge higher as new supply continues to flood the market.

Logistics

Logistics real estate has been an indirect beneficiary of the tough conditions facing the office segment, with international investors shifting allocations away from office and into logistics.

According to CBRE, logistics leasing in China has held up well, with international e-commerce businesses, third-party logistics (3PL) providers and manufacturers all supporting demand. 3PLs and e-commerce companies have also sustained demand in Korean market, although an oversupply of space has kept vacancy rates elevated. Occupiers are, however, pivoting towards shorter leases in the face of macro-economic risk.

The broadly stable backdrop has supported healthy demand for logistics space across APAC overall, with Savills reporting year-on-year increases of more than 20% in logistics and industrial real estate absorption rates (the amount of space leased less the amount of space vacated).

Retail

Retail has been another bright spot in APAC real estate markets, with abrdn reporting year-on-year rental growth of close to 6% at the back end of 2023.

Momentum from the lifting of lockdowns and the reopening of tourism has supported the retail segment, and the outlook for leasing pipelines is positive, with a CBRE industry survey showing that two-thirds of retail brokers are reporting increases in leasing enquiries and site viewings.

The market is, however, splitting into two tiers. In Hong Kong, for example, demand for prime locations and tier 1 high streets has been strong, according to CBRE, whereas sites that fall outside these locations are encountering high vacancy rates.

Residential

Growth in urban populations is set to carry APAC residential markets through near-term headwinds, with long-term housing demand in cities boosted by forecasts that 19 cities in APAC will have populations of 10 million or more by 2030, according to Knight Frank analysis.

The favorable long-term demographics buoying residential real estate have shielded valuations from wider market dislocation, with Knight Frank reporting dips in pricing of less than 1%.

These solid fundamentals present an attractive mix of investment opportunities for, according to abrdn, ranging from hotel-to-rental apartment conversions in China to multifamily opportunities in Japan’s largest cities.

Now that we’ve set the scene for the current deal environment and fundraising conditions that real estate asset managers are encountering, we turn our attention to another real estate trend shaping these fund managers’ challenges and opportunities: the specter of refinancing 

With the outlook for real estate deal activity and fundraising improving, the biggest financial challenge facing real estate investors in the coming quarters will be refinancing. 

Billions of dollars of real estate debt – issued at bargain-basement rates at the peak of the credit cycle in 2021 – will mature in the next 12–36 months and must be refinanced at much higher costs. 

According to Morgan Stanley analysts more than US$1.5 trillion of commercial real estate debt falls due for repayment before 2025. The delta between office and retail property valuations at the top and bottom of the market could be as wide at 40 percent, according to Morgan Stanley, resulting in heightened risk of default across the sector. 

In this article, we explore the challenges real estate asset managers face as a result and the resources they can seek out to help mitigate the impacts. 

The road from low rates to daunting refinancing

As interest rates hit new lows in 2021 in reaction to a Covid-rattled economy, real estate managers saw their investment target options open up. 

Alongside the boon for real estate, private debt strategies experienced a rush from managers and investors eager to take part in the attractive terms. Real estate debt wasn’t left out of that equation. Managers with pure real estate strategies hurried to stand up debt strategy arms to meet soaring investor demand while those already raising real estate debt funds basked in the rush on their fundraising efforts.  

Now, three years down the line, real estate managers and real estate debt managers alike are staring down the maturities of their loans. 

Banks and capital markets are not completely shut, and there will be liquidity available to refinancing these debt maturities, but with interest rates settling at elevated levels relative to the last five years, interest rate coverage ratios could be a factor in determining whether senior loan and bond lenders will be able to fully refinance maturing debt facilities. 

This could open up opportunities for junior capital providers to gain traction in capital structures, with mezzanine and preferred equity as some of the solutions that real estate companies could turn to when topping up capital structures. 

As in the fundraising space, the upcoming refinancing wall could also lead to a split in the market between haves and have nots. Real estate borrowers in resilient sub-sectors that exercised restraint at the peak of the credit cycle should find refinancing relatively straightforward.  

As one example of a resilient subsector, also mentioned in our previous article, the data center real estate market continues to perform, especially as we increasingly integrate AI and machine learning features into our daily lives and create a greater need for physical computing space to power that demand. 

Borrowers that took on leverage too aggressively and are in weaker performing real estate sub-sectors will find it much more difficult and could encounter financial stress and distress. For example, many employers are still allowing for hybrid or fully remote work post-pandemic, and the office building sub-sector is still under close watch by the industry for fear of a crisis when these loans come due. Rebound rates can vary vastly city by city. 

Arm your firm with resources and industry expertise

In a long game like real estate investing, we all know there will be times of feast and times of famine. Real estate managers can’t control the macroeconomic factors – only the way in which they run their funds, select their investments, create value, and manage risk. 

When facing headwinds like the impending wall of real estate debt maturities we find ourselves with now, it’s essential to focus on the operational elements that are under a firm’s control. In getting back-office operations in order, funds can free up their teams to focus on value-added activities rather than getting bogged down in the administrative and technical challenges that come with managing a complex portfolio of properties. 

Alter Domus has guided real estate managers through multiple cycles of the market over the last two decades. We’re prepared to help you operate through this challenging credit market with your choice of service model – outsourcing, co-sourcing, and lift-outs – as well as full back-office services including fund accounting, loan servicing, transfer agency, and far more. 

Ready to empower your staff to outsource challenging workflows so they can work on higher-value problems and processes? Reach out to our team to start a conversation. 

The private capital industry has undergone a period of remarkable expansion during the last decade, with assets under management growing at a compound annual growth rate of 14 percent in the ten years between 2013 and 2023 to reach US$14.5 trillion.

As more capital has flowed into private markets, regulatory scrutiny of the asset class has inevitably followed (particularly given the industry’s focus on growing its non-institutional investor base), culminating with the US Securities Exchange Commission (SEC) adopting new rules in 2023 to strengthen regulatory oversight of private funds managers.

The rules, which run to more than 600 pages of text, represent the most significant overhaul private markets regulation in the US since the 2008 global financial crisis, and will place significant additional disclosure and reporting costs on managers.

The rules are only set to come into force beginning in September 2024, and a group of private markets managers have mounted a legal challenge against the SEC rules, which if successful could oblige the SEC to review its plans.

But as things stand some of the main reporting and disclosure requirements the industry will have to be ready for include:

1. Mandatory Quarterly Reporting

With the aim of improving transparency, the SEC will require registered private fund advisers to provide quarterly statements to investors with detailed information on fund fees, expenses and performance.

2. Annual financial statements and audit

The new rules will also require private fund advisers to produce and distribute and annual financial statement and audit for each private fund they advise.

3. Fairness opinions on GP-led deals

Managers undertaking GP-led secondaries transactions will be required to obtain independent, third-party fairness opinions on deal valuations.

4. Preferential treatment

The new rules will also prevent private fund advisers from providing any investors with preferential treatment regarding redemptions and information that would have a negative impact on other investors.

In all other case of preferential treatment, the SEC has adopted a “disclosure-based exception to the proposed prohibition”, that will include “a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors”.

This could have serious implications for the use of side letters (which grant specific rights to certain investors), which have become more and more prevalent across the industry.

5. Restricted activities

The rules will also restrict any activity that is against the public interest or compromises the protection of investors, and private fund advisers will not be allowed to charge investigation costs to funds when sanctioned for violation of the Investment Advisers Act.

Counting the cost

Compliance with the new rules is expected to be costly, with managers not only having to produce additional reporting and disclosure, but also track potentially hundreds of side letters and make disclosures on these side letters to all other investors.

The FT reports that as part of its rulemaking process the SEC estimated that meeting the annual audit statement and quarterly reporting requirements could cost the asset class up to US$961 million a year, with rules and disclosure around fee costs and preferential treatment a further US$938 million of costs.

Implementation will be complicated even for large managers that already have sizeable back-office infrastructure in place. For smaller players the investment in additional general counsel, compliance and reporting resource the poses an even bigger challenge.

Help at hand

Managers, however, do not have to shoulder additional reporting and disclosure requirements alone, and can turn fund servicing partners with the size, experience and technology to handle additional regulatory obligations efficiently and cost-effectively.

Alter Domus, for example, has a range of technology, AI and automation tools at its disposal to help clients meet their obligations without incurring significantly higher costs or having to divert investment from the front office functions to bulk out the back-office.

Managers and funds will already have much of the data regulators are asking for to hand. The help of a partner that understands what data is required, how to collate it and structure the data into a coherent format can remove much of the heavy lifting and the pain points that managers would face if operating in isolation.

Alter Domus is already building out a new service offering to support clients on the regulatory front, which will be available to market before the new SEC rules come into force.

The fact that Alter Domus can service hundreds of clients through its platform – as a opposed to one manager having to build all this capability in-house just to service its own funds – also allows it to leverage its infrastructure at scale and materially bring down regulatory compliance costs for its clients.

Alter Domus also has significant experience operating in other jurisdictions, such as Europe, where regulatory regimes for private markets have been more demand, and is well versed in servicing complex fund structures – an especially valuable skill set when it comes to tracking and coordinating any preferential disclosure requirements that may be required.

The new SEC rules undoubtedly represent a step change in regulatory load managers have to carry. Partnering with a responsive fund services provider, who has a birds-eye view of the industry, can help teams to meet the rising tide of compliance and regulatory demands without compromising their focus on the core business of sourcing deals and delivering returns.

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In a survey of more than 110 institutional investors for its most recent LP Perspectives report, Private Equity International (PEI) found that 87 percent of respondents cited GP team size and investment capacity as a significant factor in the manager selection, aside from track record.

Track record is still paramount, but LPs are not banking on the returns of a manager’s most recent fund as the only predictor of sustainable, long-term performance. Investors have recognized that how a manager functions operationally and the returns it is able generate are not mutually exclusive.

Indeed, a robust back-office provides dealmakers with the tools to run a successful front-office, especially as data analytics and AI become important differentiators when it comes to deal origination and execution. Deal processes are more competitive than ever, and speed of execution relies on dealmakers having back-office and operational support in place to collate deal intelligence, data, research and deal pipeline information and make it readily available.

Sound operational infrastructure also signals a manager’s future trajectory. How well-equipped is a manager’s operational model to cope with a scale-up in team numbers, funds and strategies and assets under management?

The operational robustness of a firm is also crucial for LPs that want to mitigate downside risk and build comfort around a manager’s processes for client onboarding, cyber security, cash management, fund accounting and investor reporting.

Having the best technology and back-office infrastructure will not secure LP support in isolation, but without it, managers will find it increasingly difficult to gain traction with LPs – even when returns are strong.

Meeting the operational challenge

Keeping pace with the increasing focus from investors on operations and back-office poses a unique set of challenges for smaller managers

For a large manager operating at scale, investment in back-office teams and technology represents a smaller percentage of assets under management (AUM) than it does for a smaller firm. Large managers executing a higher volume of deals across multi-fund platforms can also run a higher volume of transactions through their back-office channels, justifying the investment in the back-office.

Smaller managers, however, do not have to make huge upfront capital expenditure into order to upgrade operational infrastructure and meet LP “table stakes” for fundraising.

Working with a fund administration partner that is already operating at scale and investing in technology and people consistently can provide managers with best-in-class operational support at competitive rates. Fund services specialists have much large global footprints, that are more cost-effective and enable managers to benchmark fund costs

LPs will be familiar with leading fund services providers and will already have diligenced and built comfort around the capabilities of these providers.

Fund services providers will also have experienced teams in place that understand investors demands and requirements and help managers to meet these requirements and lock in investor support.

This experience is supported proprietary technology designed to address investor demands. Alter Domus’ Investor Portal, CorPro, for example, is built to assist investors with everything from onboarding through to fund reporting and fielding bespoke information requests. Alter Domus’ Digital Workflows Application, which harnesses automation and AI technology to enhance transparency and operational efficiency across the private equity fund administration process, offers new levels of digitized data accuracy, positively impacting the investor reporting process.

Choosing the right operational model

A fund services partner can also provide valuable counsel on how to build a model that is the right fit for a manager’s requirements, and put the infrastructure in place to support a firm operationally for the long-term.

Alter Domus advises managers on how to up-tier operational models that are pressing against their limits and how to put structures in place that will give LPs the necessary comfort in fundraising processes and due diligence.

Whether that involves outsourcing or a co-sourced model, creating a bespoke operational backbone that addresses each firm’s individual requirements, and that can be scaled to match growth, covers the bases with respect to what LPs want to see from a manager operationally.

Partnering with an established fund services provider allows managers to back up solid returns performance with a best-in-class back-office capability that can support future growth, reduce downside risk exposure and meet LP due diligence requirements.

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The technology infrastructure required to run a private markets firm a decade ago couldn’t be more different to what is expected in the current market.

General partners used to be able to run their organizations using a basic accounting software package, spreadsheets and email and focus resources and time on the core front-office functions of sourcing and exiting investments.

As the private markets industry has expanded, the operational demands facing managers have ratcheted up. Deal and fund structures have become more complex (see Part 1) and investor and regulatory reporting expectations have increased.

As a now mature industry responsible for managing significantly higher volumes of investor dollars than a decade ago, managers have had to reappraise their operational backbone and investment in back-office capability.

Technology has served as a key enabler for helping managers to address the profound shifts in expectations around how they run their businesses, but the implementation of new technology, systems and processes comes with significant upfront capital expenditure and ongoing maintenance costs.

For large-cap firms managing vast, multi-strategy platforms, size makes it possible to keep the required technology expenditure as proportion of a manager’s total expense ratio in check. For managers with a much smaller family of funds to manage, keeping technology expenditure in check can be incredibly challenge.

Partners providing support

Working with a fund servicing partner provides a pathway for managers to make the necessary investment in technology infrastructure without allowing capital expenditure on technology to drain resources from a firm’s core competencies of dealmaking and portfolio company.

A fund services provider with a global footprint, managing thousands of funds on behalf of clients, can build and maintain in a technology platform of the scale that would be impossible for a single manager to match.

Scale and operational synergies put fund servicing providers in a position to provide a combination of best-of-breed industry software and proprietary tools at cost-effective rates that can be benchmarked against the wider market.

Alter Domus, for example, works daily with all the marketing-leading private markets software suites – FIS Private Markets (Investran); Allvue, eFront and Yardi – and

can also overlay best-of-breed software with proprietary technology that wouldn’t be feasible for single managers to build in isolation.

The 3rd generation of fund operations

With private equity now a mature, fully-fledged part of the financial

firmament, and volumes of funds and data exponentially rising, only the enhanced use of technology, such as Alter Domus Digital Workflows Application for private equity, can sustain and support AUM growth

Purpose built from private equity, these workflows are designed to handle the data volume and complexity of both classically structured and secondaries funds. They harness automation and AI to build a “digital bridge” between client and fund administrator, and therefore create a collaborative, non-siloed approach to working. to manage the growth and complexity of their portfolios.  

This technology heralds the arrival of the 3^rd age of fund administration and has helped our clients improve operational efficiency and transparency across their portfolios, end reliance on outdated communication channels and collate data into an analysis-ready source of truth.  

Learn more about our Digital Workflows Application for private equity here.

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High interest rates and market volatility have put the brakes on private equity exit activity during the last 12 months, with serious consequences for investor distributions and fundraising.

US exit deal value dropped to the lowest levels the first COVID-19 lockdowns in 2023, with year-on-year deal value falling by more than 50 percent to US$174.98 billion according to Dealogic data compiled by White & Case.

Exit value has suffered similar large declines in other global markets, which has seen the bank of unexited companies sitting in portfolios swell to more than $3 trillion, the highest levels on record, according to Bain & Co.

There are hopes that as the interest rate outlook stabilizes and buyers and sellers form a consensus on valuations that traditional exit routes will spark back to life, but there is widespread acceptance across the industry that managers will have to also work other exit channels – including GP-led continuation fund deals and distributions funded by NAV loan facilities – to clear the exit backlog.

New sources of liquidity

For managers with solid portfolios, there is strong appetite from both secondaries managers funding continuation fund deals and lenders offering NAV facilities to provide liquidity options.

GP-led continuation funds have created new pathways for managers and investors to monetize assets, realign portfolios and hold onto prized portfolio companies at the same time as making distributions.

GP-led secondaries have undergone an explosive period of growth, and although GP-led activity slowed in 2023, the GP-led market is still multiples larger than it was just a few years ago.

After a volatile year in M&A and IPO markets, which limited the scope for managers to secure exits and return cash to investors, the GP-led continuation fund deal market is expected to play a crucial role in helping firms to give investors liquidity and kickstart future fundraisings.

Continuation fund deals have had some exposure to the valuation disconnects between buyers and sellers in M&A markets during the last year, but drops in continuation fund transaction activity have been much narrower than observed in M&A and IPO settings, according to figures from Jefferies.

Managers have also increasingly turned to NAV financing – loans secured against the funds private equity firms manage – to inject liquidity into portfolio companies or, in some cases, make dividends to investors.

The use of NAV financing has not been without controversy, but with managers having to extend hold periods for longer than planned, capital made available through NAV loans has provided a welcome line of liquidity to keep funding portfolios and deliver some cash back to LPs.

Alternative exits: a back-office challenge

For managers with smaller back-offices than their large cap peers, these various alternative liquidity options have presented particular operational challenges.

A continuation fund deal, for example, will require substantial back-office resource to organise and execute, with ongoing administration and reporting to the investors in the new vehicle required post-deal. Putting an NAV-loan facility in place also requires back-office back-up.

For large private markets platforms with big back-office teams behind them these additional requirements can be absorbed by existing; but for smaller organisations scaling up back-office resource to accommodate a higher volumes of continuation fund and NAV financing deals is incredibly challenging and resource consumptive.

Working with an outsourcing or co-sourcing partner can help managers to handle the increasing reporting and administrative demands that come with continuation funds and NAV-facilities.

Fund administration partners will already be operating fund accounting systems and operational infrastructure at scale, and therefore be in a position to ramp up services for continuation fund and NAV loans as required.

Fund administrators also have the scale to invest in best-of-breed alternative assets software, and to supplement these platforms with proprietary tools and technology to help managers to handle the additional complexity and workloads.

Alter Domus’ Digital Workflows Application, for example, uses automation and artificial intelligence to collate data from multiple sources into a single stream ready for analysis; facilitating seamless workflows between managers and fund administrators to improve back-office efficiency.

Managers undertaking a continuation fund deal or NAV financing for the first time can also lean on the sector expertise of fund administration partners. Alter Domus, for example, works with multiple secondaries managers across its broad secondaries portfolio and is positioned to provide managers with first-hand experience and advice on what to expect from LPs and secondaries investors in continuation fund structures.

Utilizing alternative exit routes can be a daunting process for managers, but not something that they have to undertake alone.

Alter Domus is trusted by 90% of the top PE firms for our multi-sector expertise, award-winning technology and bespoke operating models. Find out how we can help you gain the upper hand in private equity.

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Corporate history is littered with examples of companies that dominated their industries for decades but neglected embrace technology and innovation and paid the price.

There are some very well-known examples: The now defunct video giant Blockbuster passed on Netflix, the once unprofitable start-up DVD postal-renting service with a current market capitalization of close to US$270 billion. Netflix disrupted its own model and utilized internet technology to produce on-demand content.

Kodak, who filed for bankruptcy in 2012, developed the first digital camera back in 1975. It was reluctant to reposition the business towards digital given the high amount of investment required and was swept aside amid the development of smart phones, tablets, and the global embrace of digital photography.

Regarding smart phones, Nokia sowed the seeds of its own decline by not recognizing that app-based software would form the basis of the mobile phone’s future. There is clear causal relationship between its focus on physical devices and its fall of market share from 51% to 5%.

Slightly closer to home for private markets is the ongoing battle for digital supremacy in the global banking sphere. The rise of so-called ‘challenger-banks’, who offer streamlined, digital-first retail banking services, has undoubtedly disrupted the industry.

The vast majority of incumbent, traditional banks – both global and regional – were incredibly slow to adapt to digital models for their consumer servicers. With legacy IT applications prevailing and technical debt building up, banks lack of clear-sighted strategy to deal with both digital transformation and changing user needs and expectation was evident at the tail end of the last decade.

It is of course incredibly unlikely that digital players such as Atom Bank, Tandem, Monzo, and Starling Bank, Revolut will replace traditional banking players. The size of wallet-share and financial resources incumbent players have is vast compared to that of the challenger banks.

However, what it has done is rapidly accelerate the digitization of these institutions in efforts to ensure account balances, reduced cost-to-income ratios, higher customer acquisition and retention either stabilize or grow. From transforming their operational technology infrastructure to building customer-centric apps, banks have had to follow where more-nimble and agile ‘new-banks’ have trod.

Indeed, challenger banks development of seamless user experiences, quick and easy account registrations have all been aped in the broader market. No banking app would be trusted without the enhanced security measures pioneered by digital first entities, and the integration with third party applications is a trend that’s set to continue across all modern platforms.

As digital services take an ever firmer grip over financial institutions’ product suites, how customer data is managed and how customer needs are need met with that technology will undoubtedly determine which banks take a greater share of future customer dollars.

What can private capital learn?

Private capital is now facing a similar technology tipping point which has the potential to reshape the long-term make-up of the market. Managers that take on the opportunities provided by cloud computing, data analytics, automation and AI will thrive. Managers that wait too long will fall by the wayside.

There are multiple areas where technology is transforming how private markets managers run their businesses:

1. Data management and investor reporting

Global private capital assets under management (AUM) climbed to US$14.5 trillion in 2023, according to Bain & Co, more than triple the levels from a decade earlier in 2013.

The rapid growth in AUM has meant more funds, more transactions and higher reporting expectations from investors who now have a much bigger exposure to alternatives to manage. With more capital at work in private markets, investors are demanding more bespoke, granular data and more frequent reporting on portfolio performance.

This demands that managers upgrade their reporting infrastructure, and technology is a key enabler of this.

Private equity’s roots lie in small, nimble teams of dealmakers with low overheads and small back-office teams. As the industry has grown, however, managers have had to invest more in back-office support to keep up with investor expectations.

Firms that move early to harness technology, outsource or co-source back-office functions, invest in cloud-enabled infrastructure overlaid with best-in-breed fund accounting technology will pull ahead of their peers. Factor in utilizing data warehousing and taking advantage of advanced data analytics and the gap will widen further still between those who have and haven’t transformed their business. 

2. Rising regulation

Growth in AUM has also led to a rise in regulatory scrutiny and step-change in regulatory reporting, compliance and disclosure.

Alongside higher expectations around investor reporting, closer regulation has placed additional pressure on manager operating and finance models.

A failure to take advantage of the technology available in the market to drive back-office efficiency and keep compliance costs in control will lead to managers having to spend more senior resource and time on regulation and compliance and less in the core business of sourcing, managing and exiting assets for the best returns.

3. Tech-enablement of the front office

AI, automation and predicative analytics are also transforming how front office functions work, with firms utilizing these tools to free accelerate deal origination and free up dealmakers to spend more time on the high-value tasks of building relationships with deal targets and running negotiations.

First-mover in the industry already have AI-enabled platforms in place that allow deal teams to expedite deal selection, benchmark valuations, monitor sector trends and combine third-party and inhouse data into a single data repository that can be mined to assess deal opportunities and get dealmakers up to speed on new deals at pace.

Managers harnessing these tools report significant benefits, with some claiming that technology has helped them to identify deal targets as much as a year before peers and achieve superior deal conversion ratios.

4. New fund structures and a broader array of investors

Private markets have a growing history of innovation where it comes to developing new ways of organizing and attracting investment. One such example is the recent momentum behind ‘Open ended’ funds (OEF), which have given retail investors an access point to alternative markets.

While this ‘democratization’ is a positive, standing up and managing an OEF is rife with complexities: from more investors and more redemption requests to a huge increase in producing accurate NAV calculations, the management of these funds can be challenging. The right technology is key to the success of these vehicles.

At the other end of the wealth spectrum, the appetite for High Net Worth Individuals (HNWI) to dip their toes into alternative waters has also grown, no doubt spurred on by the above average returns of private markets investment and an opportunity to diversify their portfolios.

Indeed, Boston Consulting Group estimate that by 2025, HNWI in private equity alone will rise to a staggering $1.2 trillion. Each HNWI’s needs may differ wildly in terms of data requirements and reporting. Meeting their needs will not be done effectively with legacy tools and systems.

The right partner, armed with the right technology

Managers do not have to undertake this transformation of their business structures alone, tech-enabled service providers such as Alter Domus have the tools and experience to support managers through this technological inflection point.

As trusted partner to hundreds of managers, Alter Domus has developed deep, lived experience of what is required to upgrade technology and operational infrastructure in practice.

The administration and fund accounting infrastructure that would have been perfectly adequate to manage a private equity fund 15-years ago is now no longer fit for purpose. Best-in-class technology and digitally powered fund operations have become essential for private market stakeholders.

Alter Domus’ Digital Workflows Application was developed as a response to the market need for a transformative technology. Workflows is designed to handle the volume and complexity of private equity funds and builds a “digital bridge” between client and fund administrator. Clients are already reaping the benefits of this market leading capability; as our partners at leading asset management house, Coller, have commented:

Alter Domus Digital Workflows application has significantly improved our fund administration experience. Its utilization of automation and AI, combined with digital access to each part of the process is enhancing our transparency, operational efficiency, and data accuracy

Coller Capital

As well as the enhanced transparency across our clients’ fund portfolio, Workflows ends the reliance on outdated communication channels such as email and phone calls and turns data into an analysis-ready single source of truth.

At Alter Domus we understand that the investment required to keep pace with technology and innovation, coupled with the risk of disruption to process that have underpinned success for decades can be daunting. However, the consequences of not acting are far more severe. Alter Domus is here to aid and support our clients in taking those next, transformative digital steps.

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