The ongoing growth and scale of the private equity real estate fund industry, coupled with the need for increasingly sophisticated technology platforms, is driving a further shift from insourced to outsourced fund administration models. The environment in which fund managers are operating has become a lot more complex, explains Anita Lyse, group sector head, real assets at Luxembourg-based fund administrator Alter Domus.

“What we have started to see as we enter the so-called ‘third generation’ of fund operations is the concept of interoperability of technology and operations between managers and administrators,” says Lyse. “That is still a recent development. There is so much more that can be done when it comes to harnessing the tools of automation, machine learning and AI. In many ways we are on a never-ending journey.”

What are the key factors driving the evolution of real estate fund operating models?

The real estate industry has shown double-digit annual growth over the past 20 years, both at the local level and globally. That is going to continue, albeit at a slower pace. At the same time, we have seen industry consolidation, with managers becoming bigger and more global. Then there is the regulatory environment which is leading to increased reporting requirements.

And lastly, as investors become more sophisticated, they are also asking for more types of reporting. With fund managers increasing in size, they need to scale up their operations and manage that growth process just as we ourselves did. Alter Domus started out in 2003 in Luxembourg as a spinoff of PwC. Back then, we were not a fund administrator at all, but a small corporate services provider only.

In fact, if you look back 20 years or even 10, there were not that many options out there for a global real estate investment manager to outsource to, that is, specialized providers with a strategic focus on real estate who understand the entire value chain. Real estate fund administration is not only about fund accounting, but also about property accounting, and reconciling the two is easier said than done.

Fund administrators have come a long way to be fit for purpose for these global managers. In the early days of the global financial crisis, we took a step up in the value chain by going into fund administration. And now, 15 years later, here we are with more than 5,000 people, 39 offices across the three main regions globally and $2.5 trillion in funds under administration.

How is the accelerating digitization process impacting the fund management industry?

Traditionally, fund administration was largely an insourced activity and Excel was very widely used. Only smaller bits and pieces were outsourced initially, but as the fund administrators became better and more professional, they started using dedicated operating systems and technology platforms. Now we are seeing a move away from emails for communication, with clients and investors as part of the fund administration process, and instead using digitized solutions and workflow applications across many activities. These tools significantly reduce the use of emails in fund operations, which saves time and minimizes the risk of error.

The whole concept of how you run fund operations in the alternatives space is becoming more sophisticated and it is now starting to catch up with the UCITS (Undertaking for Collective Investment in Transferable Securities) business – a regulatory framework for mutual funds in the European Union. While standardization is quite easy in the UCITS business, it is much more difficult in the alternatives world, but that is where the industry is heading. If you have reached a certain size, operate globally and need scale, then there is really no other choice than to try to standardize as much as you can.

One of the big challenges for us as an organization was to find a solution to facilitate the approval process of accounts payable for our real estate clients and to create dashboards around that, so everybody knows what the status is and can retrace each step via an audit trail. It comes down to managing the volume of these repetitive processes. Digital workflows give the client greater insight into their fund administration, and that transparency enables them to improve their risk management and the efficiency of their operations. It also frees up time for everybody involved in the repetitive, low-value tasks of the fund administration process and enables them to focus more on activities that add value.

In what way are environmental, social and governance concerns affecting the fund management industry?

ESG is adding a layer of complexity, as managers, investors and regulators are all asking for more data and reporting around these issues. The market has more maturing to do in this area, as there is still a lot of room for improvement and standardization. In that respect, I think we are going to see a further evolution of the industry in the next few years. This is also very much an ongoing work in progress.

In what way is the European real estate fund administration market evolving?

Initially, we operated exclusively in Luxembourg, which is the largest fund domicile in Europe. I do not think that is going to change any time soon, so we are going to continue to grow our Luxembourg fund business. In terms of the offices, we have locations across Europe today, and we also have a presence in the Channel Islands, which are likewise large and significant fund domiciles. But there are also plenty of opportunities in the local investment markets, such as France, Germany, the Netherlands and Spain.

Our most recent office opened in Milan. That was largely driven by a client’s need for services to help them with the administration of the local property-owning entities of their real estate investments in Italy. And now that Brexit has been done and dusted, we also see a lot of traction in the UK. It is a significant jurisdiction for us and a place where we see a lot of growth opportunities. The UK ranks among our fastest growing offices in terms of our real estate business.

We are also seeing further rationalization of service providers by larger fund managers. A pan-European real estate fund manager, for example, may have appointed fund administrators on a fund-by-fund or even a deal-by-deal basis in local investment markets, and now they have a very fragmented and patchy model. They may not necessarily want to work with only one service provider in Europe, but they certainly do want to rationalize. And the larger players, in particular, do not just want a service provider, they want a long-term partner.

Where is the greatest potential for the shift from insourcing to outsourcing of real estate fund administration?

In the US. It is the world’s largest real estate market, and it lags on the outsourcing curve compared to Europe, where the outsource model is a lot more common. There is a desire to outsource more in the US, but there has traditionally been a lack of solid providers who also understand the entire real estate value chain. We think there are massive opportunities in the US market, and it is one of the focus areas for our own growth as a business. We have a pretty good presence in the Asia-Pacific market, too, and want to continue to grow there as well.

In the US, a typical setup for a fund manager has been to work with their own technology and people. But they have now started on the outsourcing journey via co-sourcing, which is a bit of a hybrid between a full-blown outsourced model and the traditional model. Co-sourcing is essentially a setup where the fund manager retains their own technology platform and data warehouse, while we, as an administrator, will have access to that and effectively perform the processes using our client’s technology stack. The benefit for the client is that they remain the owner of the data, and for some clients that is important. This model is gaining increasing traction in the US market in particular.

When we enter into a co-sourcing agreement, it sometimes comes with what we call a ‘lift out’ that includes the takeover of a part of the back and middle office of our clients. Our client’s staff become Alter Domus employees and they may continue to work in the fund manager’s existing systems or sometimes we take their technology with us. If the fund manager believes their tech stack is outdated, unsustainable or not scalable, we would go through a lengthy process of data migration from their legacy systems – typically also including a stack of Excel sheets – into our technology solution.

We have done several lift outs in various places in the US, some small and some quite sizeable. People are at the core, so you need to make sure you get that right to ensure the continuity of the operations. It is never a question of ‘plug and play,’ but we have developed what we think is a strong playbook because we have been through the process many times. In real estate, historically, back offices have been bigger than in other asset classes because of the greater complexity of real estate as an investment product.

This article was originally published in PERE’s Value Creation Report.

• Share on LinkedIn
• Email this Page
• Share on Facebook

Given ongoing fundraising challenges in private markets, how do you see funds addressing liquidity issues?

Managers are getting creative; continuation funds are on the rise and secondaries activity has stepped up significantly in the last 18 months as GPs have sought to provide liquidity to LPs to allow them to re-up into their next funds. Those solutions all work, but we will potentially see private equity hold periods getting longer than the three to four-year turnarounds that have been typical. Extended periods of high interest rates will lead to returns coming not from leverage, but from longer hold periods, creating efficiencies and driving value creation.

Meanwhile, we feel the markets are starting to rebound, and macro trends in the US are now going in the right direction. The IPO markets should follow, and we would expect Europe to follow and liquidity to gradually return.

There are also opportunities for managers to raise open-end funds from retail-type investors. Those managers with larger platforms have big ambitions to expand and diversify their LP bases and there is a significant amount of capital there to be raised. Broadly, the opportunity for fundraising starts to look better going forward, whether tapping existing LPs or a new LP base.

What has been the impact of recent regulatory developments for managers?

Most of the regulatory developments related to the US Securities and Exchange Commission’s Private Funds Rule are a 2025 problem, with nothing new required until then. Right now, managers are trying to understand what they need to do, and we are looking at how we can be part of the solution.

A lot of the data that will be required by regulators is already there, so this is about being able to pull that out and put it into a digestible format. This regulation is a significant shift for the market that justifies us putting the resources into creating a new service to assist clients on the reporting demands these regulations have created, and we have a product almost ready to go before next year’s compliance deadline.

Bar any significant political change, we see the SEC becoming more involved in oversight, which creates a further opportunity for administrators that have data and regulatory reporting capabilities. In the US, managers have not been subject to the same level of disclosures and regulatory reporting, but in Europe this is very much part of our product offering.

What themes are you seeing in the evolution of operating models for private funds?

One of the big themes we are looking at is the opening up of the private funds market and the way that is driving how the back office is run. We have seen the market move from a partnership approach with minimal reporting to managers now having to comply with Institutional Limited Partners Association standards and regulatory requirements around reporting to LPs, and those requirements continue to increase.

Even if the US decides against further rulemaking, Europe is a regulatory hotbed, and it is not going to get any easier for managers to navigate that. That is driving more outsourcing around core functions, as well as funds looking to outsource more ancillary functions. The outsourcing pie continues to grow because there is much more that managers need to report on. We are also seeing more co-sourcing as a middle ground, where we provide the expertise and the people, but the data and systems remain with the client.

Meanwhile, since the pandemic, hiring challenges and increasing costs have given managers cause to reflect on their operating models and cost bases. With quieter dealflow, CFOs and COOs have been able to step back and review approaches, so we see a lot of larger managers engaging with us as a result.

Finally, consolidation in the industry and the M&A going both ways as alternatives seek to acquire traditional asset managers and vice versa is shifting the approach to the back office. Traditional asset managers come to alternatives from a very different margin environment, which drives more focus on the right cost models and making use of technology and workflow tools to gain efficiencies. Likewise, as alternatives platforms diversify into new sectors and strategies and become larger and more complex, more firms are investigating outsourcing options.

How is consolidation impacting the service models of fund administrators?

For fund administrators, we need to take on the challenge of building up the people, processes, sector expertise and geographical reach that our clients need access to. That is core business for us and inevitably if we are scaling up for one client, we are doing it for 10 or 20 others. That is a challenge we need to keep ahead of.

The arrival of open-end funds in alternatives was a big evolution that we had to create solutions for and address, which we were able to do. Now, as managers get bigger and more institutionalized, and as private markets merge with traditional asset management and the investor base includes more private wealth, the reporting requirements are elevated, and operating models need to reflect that. There will be a point where the line between traditional and private fund administration services becomes blurred, so we need to continue to look carefully at what is coming and what we need to solve for.

How is the industry embracing artificial intelligence and automation?

Internally, we are now using AI in various parts of the business. For clients, automating the subscription process is now relatively well advanced, but there is still a lot of manual process. That is definitely a focus for managers and something they are expecting administrators to be able to solve. We have taken steps to build on the existing digital subscription process we have, in direct response to manager demands.

From an analytics perspective, for managers that are maybe partially outsourced or those with multiple administrators using multiple systems alongside inhouse systems, there is a need to consolidate data in one place. Having a single data lake that you can manage, secure and be able to use efficiently for maximum impact is critical, whether in relation to deal sourcing, transaction management or valuations. That is something managers are looking to administrators to help with, so funds don’t need to build that infrastructure in-house.

Clearly in private markets there is more and more data, firms are getting bigger and deploying more strategies, so pulling all the data together in one place is becoming more important. AI and automation are still relatively new, and firms are at different stages of the journey with different priorities. Those with leaner middle- and back-office teams can see the benefits and are now looking to embrace AI and automation to a greater degree.

This article was originally published in Private Funds CFO’s Future of Fund Services Report.

• Share on LinkedIn
• Email this Page
• Share on Facebook

We have seen significant fund closings and even bigger fund launches in the opportunistic credit space. Why is that corner of private debt proving so attractive?

Opportunistic credit, or special situations, is proving popular for a lot of the same reasons that private credit as a whole is attracting the attention of investors. The difference, of course, is that opportunistic credit funds offer a potentially greater uplift, particularly if you are talking about heavily distressed scenarios. Those types of restructuring deals come with significant outsized return expectations when the distressed assets get restructured or repositioned.

We have seen institutional investors increase allocations to private credit consistently in recent years to take advantage of the yield profile offered by those investments, which are now in the high single to low-double digits for performing loans, even stretching into the mid-teens. On a levered basis, you can go even higher. When you consider a special situations or opportunistic credit strategy, you are looking at returns in the 20-30 percent bracket, which is clearly attractive. I think that is the fundamental draw these funds are able to offer to investors anticipating a credit cycle correction.

What are the key macro factors propelling this opportunity set in the current market environment?

The impact of higher interest rates is starting to make itself felt. A lot of businesses, and particularly sponsor-backed businesses, are beginning to feel the pressure of that increased interest rate burden. At the same time, there has clearly been a profound impact on the consumer, in terms of maintenance of household budgets and the ability to consume. That, in turn, is having knock on implications for the companies manufacturing and selling products to consumers, especially if they have meaningful levels of indebtedness.

I think those trends will continue this year. We have not seen the same level of refinancing that we did a few years ago. Deals are not being restructured at the same velocity and that is inevitably going to impact borrowers, with structural defaults and covenant breaches pushing some credits into meaningful restructuring scenarios, which is often a precursor to a broader market trend that might lead more distressed opportunities.

There have been some aggressive predictions made, suggesting that private debt default rates could reach 5 percent this year. What are your thoughts on that and what implications could that have for opportunistic credit?

Yes, Bank of America research produced in October last year estimated that private debt defaults would soon reach 5 percent, thereby exceeding de[1]fault rates for syndicated loans, based on the fact that around one-third of deals in debt fund portfolios were due to mature within 30 months. That default risk is certainly one cloud hanging over the private credit industry right now, while at the same time creating potential opportunities for opportunistic credit managers.

Which loans are particularly at risk and therefore where do you see opportunistic plays emerging?

Private debt, as an industry, is still relatively young. It only really emerged as a fully-fledged asset class in the aftermath of the global financial crisis, when banks were retrenching from new lending to rebuild balance sheets and manage legacy portfolios.

Since that time, the private debt industry has expanded rapidly. In fact, according to PitchBook, it has swelled from $280 billion in assets under management in 2009, to $1.5 trillion in 2022, as managers have seized the opportunity to fill the void left by banks.

During that time, private credit has never really had to tackle a true market downturn and many of these credits now maturing were issued in a bull market, characterized by high levels of leverage and loose terms. Meanwhile, some managers, particularly those looking to build market share, took on more marginal transactions with especially aggressive capital structures. Those are the credits that will be particularly exposed.

In general, I would say that larger and more established platforms will have been less likely to chase the market in 2021 and 2022 and will therefore have more resilient portfolios. Those managers are also more likely to be well resourced when it comes to managing out any credits that do fall into stress. By contrast, newer managers with smaller teams are likely to come under more pressure. Ultimately, this could lead to a bifurcation in the private credit market, with top tier firms attracting an ever-larger share of both dealflow and fundraising.

Are there any particular sectors where opportunistic credit situations are more prevalent, in addition to consumer and retail?

With the exception of consumer and retail, I wouldn’t say that there is any pronounced trend with regard to the industry focus of our clients in this space right now. We are still in the early stages of how this interest rate environment is going to play out, so I think it is too early to tell. However, I would say that there has been a fair amount of portfolio rebalancing in the oil and gas industry. A lot of the traditional lenders in that space – the big retail banks – are starting to rotate out.

How is the opportunistic credit GP landscape evolving? Are we seeing many new entrants?

I think the players that have been active in this market for some time are continuing to raise funds to take advantage of the anticipated market dislocation. But I would say we are also seeing new managers looking to build teams in or[1]der to enter the space. Some of these new entrants are big name asset managers with a strong legacy in private equity. Others have a strong legacy in direct lending. They are not only looking to access these opportunistic credit deals, but also to market new strategies and new funds to their existing investor base.

How do you see the opportunistic credit market evolving?

I think that there will be a lot more borrowers testing the limits of their credit agreements. That is going to lead to forced divestment for the legacy credit funds that are currently holding onto those assets. It will therefore also lead to opportunities for opportunistic credit funds to participate.

There will probably be some initial mispricing of risk with those credits, but over time, and as the volume of dealflow grows, I think the market will establish a cadence and risk will begin to be priced correctly.

Perhaps, the biggest issue that I see on the horizon is the fact that some of these broadly syndicated loans are billions of dollars in size, which is not something that special situations of opportunistic credit funds have come across in a while. They have more typically dealt with mid-market private credit loans of a couple of hundred million dollars. It will be interesting to see how managers choose to participate in those situations and how pairings of certain GPs plays out.

This article was originally published in PDI’s Opportunistic Credit and Distressed Debt special report.

• Share on LinkedIn
• Email this Page
• Share on Facebook

Luxembourg, London and Chicago, March 4^th, 2024 – Alter Domus, a leading global provider of end-to-end tech-enabled fund administration, private debt, and corporate services for the alternative investment industry, today announced that it has secured a new strategic investment from Cinven. Cinven is a leading international private equity firm focused on building world-class global and European companies. The transaction gives Alter Domus an Enterprise Value of €4.9 billion ($5.3 bn).

Through the transaction, Cinven will support the long-term strategic growth of Alter Domus, working in close partnership with the founders of Alter Domus and Permira, who will continue to be significant shareholders. Their continued involvement and investment in the firm is a huge endorsement for Alter Domus as a business, its global growth strategy to date and its future potential. The new structure means Alter Domus will now benefit from the support of three fantastic partners in Cinven, Permira and the founders, and this transaction strengthens the capital base of the company enabling it to focus on the next stage of its growth.

Established in 2003, Alter Domus is one of the largest fund administrators globally, with over $2.5tn assets under administration (AUA). Solely dedicated to alternative assets, Alter Domus offers end-to-end tech-enabled fund administration and corporate services across three sectors: private equity, real assets and private debt. With the support of Permira since 2017, the firm has grown rapidly to meet the evolving needs of its client base, building a global network that now spans 23 jurisdictions, servicing 90% of the top 30 asset managers globally. Since Permira’s investment, Alter Domus has increased revenue, EBITDA and employee numbers by 5x.

Additional investment characteristics of Alter Domus that were attractive to Cinven include:

• Its impressive financial track record, with Alter Domus having consistently outperformed the market, delivering double-digit organic growth and attractive margin performance;
• Alter Domus represents a scarce, market-leading global fund services platform that delivers market-leading service levels to a blue-chip customer base including 90% of top-30 asset managers served;
• It is a proven M&A platform in the fragmented fund services market that has a successful track record of acquisitions, and a strong further pipeline of potential buy and build opportunities across a range of markets and geographies;
• The company operates in attractive markets, with the fund services subsector benefitting from the structural growth of private capital markets, increasing regulation and a continued trend towards outsourcing of fund services, together with downside-protection through strong revenue visibility and cashflow generation;
• Alter Domus has received significant investment in the tech-enablement of the company – resulting in best-of-breed third-party platforms, workflow automation and a leading data and analytics product capability to better serve the increasingly complex needs of its global client base; and
• It has an experienced and highly respected management team that has led the strong performance to date.

In little more than two decades, Alter Domus has grown from being a small Luxembourg-based spin-off from PwC to become a world-leading fund administrator. The investment from Cinven is a significant milestone in the development of Alter Domus as it continues along this trajectory. Together with Permira, we are confident that Cinven is the perfect partner as it continues to grow and scale internationally, and I am excited to continue to be a part of the Alter Domus journey.

Alter Domus Founder and Chairman of the Supervisory Board, Rene Beltjens

With an enviable track record of investing in fast-growing, world-class businesses, we are thrilled to welcome Cinven as an investor in Alter Domus. Cinven shares our strategic vision and commitment to developing long-term technology-enabled partnerships with the leading alternatives firms globally through the delivery of operational and client service excellence. Together we look forward to further accelerating our international growth and delivering innovative new services to our clients.

Alter Domus Chief Executive Officer, Doug Hart

Cinven is delighted to make this investment in Alter Domus. Fund services has been a priority subsector for Cinven’s Business Services team due to the attractive business model characteristics and strong growth drivers. Cinven’s Business Services and Financial Services sector teams have worked together in close partnership and have followed Alter Domus closely over many years and admired it as a global leader, with blue-chip clients and leading service levels. Looking forward, we see significant potential for further growth and we look forward to working with the management team and shareholders in the next phase of its journey.

Cinven Partner and Head of the Business Services sector team, Rory Neeson

We would like to thank René Beltjens, Doug Hart and the entire Alter Domus team for their hard work and passion that has allowed our partnership so far to be so successful. The company is now well positioned as a global leader to enter its next phase of growth with the support of an aligned set of shareholders, and we’re looking forward to working closely with Cinven, the founders and management to continue capitalising on the growth opportunity ahead.

Global Head of Services at Permira, Philip Muelder, and Chris Pell, Principal at Permira

The transaction is subject to regulatory approvals and other customary closing conditions.

Alter Domus was advised by Goldman Sachs International and Raymond James (M&A), DLA Piper, Jamieson Group (Dedicated advisors to management), Oliver Wyman (Commercial), EY (Financial & Tax) and Clifford Chance (Legal), Kroll (Compliance), Crosslake (Technology).

About Alter Domus

Alter Domus is a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry with more than 5,100 employees across 39 offices globally. Solely dedicated to alternatives, Alter Domus offers fund administration, corporate services, depositary services, capital administration, transfer pricing, domiciliation, management company services, loan administration, agency services, trade settlement and CLO manager services.

Find out more at www.alterDomus.com.

About Cinven

Cinven is a leading international private equity firm focused on building world-class global and European companies. Its funds invest in six key sectors: Business Services, Consumer, Financial Services, Healthcare, Industrials and Technology, Media and Telecommunications (TMT). Cinven has offices in London, New York, Frankfurt, Paris, Milan, Madrid, Guernsey and Luxembourg.

Cinven takes a responsible approach towards its portfolio companies, their employees, suppliers, local communities, the environment and society.

Cinven Limited is authorised and regulated by the Financial Conduct Authority.

In this press release ‘Cinven’ means, depending on the context, any of or collectively, Cinven Holdings Guernsey Limited, Cinven Partnership LLP, and their respective Associates (as defined in the Companies Act 2006) and/or funds managed or advised by any of the foregoing.

For additional information on Cinven please visit www.cinven.com and www.linkedin.com/company/cinven/.

About Permira

Permira is a global investment firm that backs successful businesses with growth ambitions. Founded in 1985, the firm advises funds with total committed capital of approximately €80bn and makes long-term majority and minority investments across two core asset classes, private equity and credit.

Permira is one of the world’s most active investors in the Services sector, having deployed over $11.5 billion to partner with more than 40 companies globally. Current and previous investments from the Permira funds in the sector include: Acuity Knowledge Partners, Axiom, Cielo, Clearwater Analytics, DiversiTech, Engel & Völkers, Evelyn Partners, Kroll, Motus, Relativity, Reorg and Tricor.

The Permira private equity funds have made approximately 300 private equity investments in four key sectors: Technology, Consumer, Healthcare and Services. Permira employs over 500 people in 15 offices across Europe, the United States and Asia. For more information, visit www.permira.com or follow us on LinkedIn.

Media Contact: [email protected]

Katherine-Hope Keown: +44(0)7512 309360

Read Cinven‘s press release here.

Read Permira‘s press release here.