In a recent Preqin article, Alter Domus’ Tim Toska was joined by leaders from across the industry, including BlackRock, KKR and Schroders Capital, to give their expert views on deals, fundraising, and performance in the year ahead.

According to Tim, “The peak of the interest rate cycle should reignite M&A and IPO markets, helping to clear the backlog of unexited assets sitting in GP portfolios. Securing exits will be the number one priority for GPs in 2024, as they strive to return cash to LPs and get fundraising moving again. An increase in deal activity, and the continued development of liquidity strategies and more creative fund finance solutions, should ease the concerns of investors.”

You can read the full article on the Preqin website.

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Luxembourg, London, and Chicago, January 4, 2024 – Alter Domus, a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry, announced today new capabilities to support the launch and ongoing administration of open-ended private market funds and closed-ended private market funds with liquidity management features including European Long-term Investment Funds (ELTIFs).

A confluence of factors, including an increase in retail demand for non-traditional assets, as well as regulatory changes in the EU, US, and UK to broaden access to private market investments, are enabling the democratization of alternative funds. This is driving significant demand for capabilities to manage open-ended funds among Alter Domus’ clients, which include 90% of the top 30 alternative investment managers.

The new open-ended fund solution expands the capacity of Alter Domus’ comprehensive fund administration suite, which includes fund formation, investor and transfer agency services, investor and regulatory reporting, fund accounting, cash management, capital administration and tax services.

Key features and functionality include:

• Ability to support increased frequency of net asset value (NAV) calculation and more streamlined settlement processes.
• Increased connectivity to distribution networks for settlement of trades and more responsive functionality to handle more complex distribution channels, such as individual investors and wealth advisers.
• Enhanced investor and regulatory reporting to account for increased volume of liquidity events.
• For Luxembourg-based funds, Alter Domus provides direct support as a registered transfer agent (TA). For North American and UK-based funds, Alter Domus works in partnership with leading TA systems.

The new capabilities will be supported in part by a partnership with Temenos Multifonds, featuring a platform that seamlessly integrate SWIFT and NSCC counterparties to find new efficiencies and reduce risk to support retail-style scale and volume, and facilitate open-ended fund liquidity management via a suite of tools.

Alter Domus CEO Doug Hart, said: “Increased appetite from individual investors in private assets, coupled with regulatory tailwinds such as ELTIF 2.0 in the EU, and redefinition of accredited investors in the U.S., are creating significant opportunities for our clients to serve a broadening base of investors. As a leader in our space and a trusted partner to our clients for more than 20 years, we’re committed to being ahead of the curve to deliver the solutions they need to explore new fund structures and seize the opportunities in front of them.”

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.

Media Contact

[email protected]

Opening on December 4, the Alter Domus Wecker satellite office has capacity for 24 employees, and follows the opening of satellite offices in Steinfort and Frisange earlier this year to cater for cross-border employees from Belgium and France respectively.

Alter Domus employs more than 1,000 people in Luxembourg, with their headquarters located in the Cloche d’Or district, and the opening of a third satellite office is part of the company’s ongoing commitment to provide flexible working arrangements for employees.

The network of three satellite offices also adds to Alter Domus’ status as an employer of choice in the Benelux region, complementing the existing range of employee benefits and the company’s continued focus on learning and development.

Ismael Dian, Executive Client Director, Real Estate, officially opened the Wecker office for Alter Domus, and heads the Luxembourg-based German desk, specializing in servicing real estate and multi-asset German clients.

Alter Domus’ newest satellite office is a key new location for all of our colleagues commuting from Germany, and particularly for our German desk. The Wecker satellite office will be a further reason for talented German professionals to join Alter Domus and makes us an even more attractive employer.”

Ismael Dian, Executive Client Director

Beyond Luxembourg, Alter Domus employs more than 5,100 professionals across more than 35 offices worldwide.

Private Equity in 2023: resilience in challenging circumstances

Private equity has experienced a challenging 2023.

Rising interest rates and the lack of consensus on future rate decisions have made it difficult to price risk, driving a wedge between buyer and seller pricing expectations, with negative consequences for deal flow and fundraising. Higher debt servicing costs and tightening availability of debt have not helped either. In the face of these headwinds, exit and buyout deal value suffered double digit declines over the first nine months of 2023.

A slowdown in deal activity and overall uncertainty has seen fundraising activity flatline after a long run of expansion. According to Pitchbook, private equity fundraising is on track to close the year only slightly ahead of figures for 2022. Macro-economic uncertainty has favored bigger managers, with funds that are $5 billion or larger representing almost half (47.2 percent) of capital raised during the first nine months of 2023, according to Pitchbook. This has left a smaller slice of the fundraising pie available to managers raising lower amounts.

All managers, regardless of size, however, have found fundraising challenging. LPs have ramped up due diligence and delayed decisions before making commitments. This has prolonged timelines from first close to final close.

The lack for distributions and cash flow concerns have seen LPs and GPs turn to secondaries markets to source liquidity, but even in this space pricing dislocation between sellers and buyers has impacted activity. According to Jefferies H1 2023 Global Secondary Market Review, GP-led secondaries deal slid 25 percent year-on-year over the first half of 2023, with LP-led transactions declining 24 percent. The share of LP deals of the overall market, however, has increased to 58 percent, up on the previous year. Volumes may be down, but LPs continue to turn to secondaries markets to rebalance portfolios and secure liquidity.

In addition to dealmaking, fundraising and liquidity pressures, managers have also had to navigate increasing regulatory complexity and change. In the summer of 2023, the US Securities and Exchange Commission (SEC) adopted the Private Funds Rules aimed to address practices that may impose significant risks and harms on investors and private funds. The new framework will change the way private equity firms engage with investors and may help to improve transparency and industry best practice, but will add to the regulatory, compliance and reporting workload for firms.

For all the challenges that have faced private equity in 2023 – both commercial and regulatory – the industry has demonstrated its ability to adapt to change and innovate.

As market conditions have become more challenging, quality has shone through, and it has been a focus for investors during due diligence to identify top performing managers that have shown the ability to navigate through market turmoil with sector/industry expertise and value-add initiatives.

Private equity firms have also made great strides forward to respect to unlocking investment from retail investors. Recognizing the huge potential retail investment presents (Bain & Co reports that some large managers anticipate between 30 percent and 50 percent of new capital raised to derive from the private wealth segment[1]), the industry has teamed up with various tech-enabled fundraising platforms to build pathways for individual investors to access private equity. Firms have also explored how feeder vehicles, open-ended funds, 40 Act Funds and European Long-Term Investment Fund (ELTIF 2.0) structures can help to democratize an asset class that has traditionally been limited institutional investors.

Firms have also invested significantly in technology or have looked to third party service providers to improve not only back-office efficiency, compliance and investor reporting, but also to support front office deal origination and value creation functions. Automation and AI are set to have a transformational impact on the industry over long term and allowing managers to differentiate their offerings to investors and drive value across their portfolios.

In the most difficult period for private equity in well over a decade, managers have continued to branch into new arenas and find value for investors, showcasing the resilience and creativity of the asset class in the face of broader macroeconomic challenges.

Private Debt in 2023: defying the odds

Private debt has emerged as one of the standout alternative assets strategies in 2023, delivering consistent returns for investors and winning market share from banks and syndicated loan markets.

Despite rising interest rates – which have seen syndicated loan markets grind to a halt and sparked a regional banking crisis in the US – private debt managers have continued to secure support from investors and source opportunities to deploy capital.

Forecasts from Pitchbook put private debt funds on track to raise more than $200 billion for the fourth consecutive year, with fundraising set to rise by around 10 percent year-on-year in 2023.

Fundraising resilience has reflected the asset class’s steady risk-adjusted returns (M&G figures show private debt outperforming public markets in 2022 and posting 8 percent returns) and strong positioning in a rising interest rate environment, with floating interest rates boosting returns from private debt long books.

Private debt managers have also emerged as the go-to option for deal financing, winning market share as other lenders have retrenched. Blackstone analysis showed private credit accounting for 86 percent of loans in the leveraged buyout market in year to November 2023.

Borrowers have valued the flexibility, speed of execution and reduced syndication risk that private debt players can offer, and with $425 billion of dry powder available to deploy, private debt has become established as a one of the biggest pools of liquidity available to companies and financial sponsors.

Private debt has also offered investors and borrowers optionality. Direct lending (where managers provide senior debt to finance M&A deals) accounts for the largest portion of the asset class, but private debt also encompasses mezzanine (subordinated debt that represents a claim on a company’s assets which is senior only to that of the common shares and usually unsecured) and distressed debt strategies. In markets characterized by tight liquidity, private debt has provided a variety of options to borrowers to fill out capital structures, and a mix of risk-return options for investors.

Of course, private debt has not been completely insulated from macro-economic headwinds. According to the Lincoln Senior Debt Index (LSDI), for example, which tracks portfolio companies backed by private equity firms and private lenders, direct lending loan defaults doubled in 2023 from levels observed in 2021.

Private debt is still a relatively nascent asset class that only really came to the fore in the aftermath of the 2008 banking crisis, and many managers will be steering portfolios through a downswing in the credit cycle for the first time. Markets will be watching closely to see how managers respond to portfolio distress.

Overall, however, private debt has delivered for investors and borrowers in 2023. According to Preqin figures, private debt assets under management (AUM) grew by more than 460 percent to $1.4 trillion between 2010 and 2022. After a strong year, this rapid expansion of the asset class may be only the beginning.

Real assets in 2023: a market in transition

Real assets fundraising and deal flow felt the effects of rising interest and higher financing costs in 2023, which forced investors and managers to recalibrate risk appetite and return expectations.

Soaring financing costs have not only directly and negatively impacted asset valuations, but have also put the brakes on transaction activity in most markets. Current Preqin numbers suggest that 2023 will record the lowest levels of transaction volumes for the past decade in both real estate and infrastructure.

The rising interest rates led to a delta between buyer and seller expectations, with buyers reluctant to pay high valuations for assets when financing costs are elevated, while sellers have held on to assets rather than selling at a discount into a falling market. Pockets of price correction had already emerged early for assets directly impacted by Brexit and COVID, and now more recently also as a result of inflation and increased interest rates, but the bid-ask spread remains high in several sectors and markets today.

Real assets fundraising, meanwhile, has also been on a downward trajectory in 2023. PERE figures showed a 38 percent decline in year-on-year real estate fundraising activity over the first nine months of the year, while CBRE analysis of Infralogic data showed 2023 infrastructure fundraising sliding to the lowest levels in more than a decade.

Against this tougher backdrop real assets managers have focused on reshaping their organizations and ensuring that operational models are fit for purpose. This has been particularly noticeable in real estate, where historically back and middle offices have tended to be larger than in other sectors.

Alter Domus has noted several examples of managers transitioning to a fully outsourced model. This has enabled managers to reduce technology, premises and staff costs, with parts of their back and middle office teams being lifted out by an administrator. Co-sourcing, a hybrid option, has also gained popularity.

But while it has undoubtedly been a challenging year for real assets managers, firms with scale have continued to secure strong support from investors. Compelling investment opportunities have also continued to emerge in real assets subsectors such as renewables and data centers.

Large managers who raised new funds in 2023 included Brookfield, which closed its largest on record at the end of 2023, securing $28 billion for its flagship infrastructure vehicle. Global Infrastructure Partners and Blackstone have also signposted their intent to raise new infrastructure funds of similar size.

The success of the Brookfield raise has shown that investors still trust established infrastructure managers with large investment platforms and strong track records to deliver inflation-indexed returns in an inflationary environment. Investors have pivoted decisively towards managers seen as having a “safe pair of hands” over newer managers that are still building their track records.

In addition to scale, expertise in renewable energy and energy transition has been another valuable differentiator for managers in infrastructure and real estate. Trillions of dollars of investment will be required to wean economies off hydrocarbons and reduce emissions, and governments around the world have put comprehensive funding and incentive packages in place to achieve net zero carbon emissions by 2050.

Managers with experience in building out wind and solar farms, electric vehicle charging points and wave and hydrogen power stations have been in high demand.

Environmental factors haven’t been limited exclusively to projects with a specific climate and emissions focus. Environmental, social, governance (ESG) has also impacted “vanilla” real estate and infrastructure assets, as sustainability becomes a greater priority for businesses and consumers.

Historically there has been little price drift between sustainable and unsustainable assets from a valuation perspective, but this has started to change as tenants demand more efficient buildings and investors construct portfolios to meet ESG targets. Although this trend is still emerging, and quantifying the precise contribution of ESG to valuation uplift remains tricky, there is now an industry consensus that the implementation of ESG best practice does go to value on exit.

Real assets may have been on the backfoot in 2023, but top tier managers with strong ESG and climate track records have continued to find opportunities and create value for investors in an otherwise challenging market.

On the global stage, the narrative of AuM growth amongst administrators presents a landscape of rapid expansion and strategic realignment. Alter Domus tops the list with a net growth of $54.1 billion. Compared with its third rank in Europe, this global standing points to its expansion strategies and successful global positioning, surpassing regional limitations to claim a more prominent role on the world stage.”

Funds Europe Private Markets Administration Survey 2023

Sandra Legrand explained how Alter Domus has continuously adapted to emerging developments in the private markets sector.

As investment franchises grow, so do investments and the attention needed for middle- and back-office operations: expertise, technology platforms and trained resources. Add diversification in investor groups, targeted investment markets or asset classes, and fund operations can choke development and innovation. Alter Domus has responded by developing digital and operational solutions, allowing asset managers and owners access to expertise, technology and resources. Our approach is flexible, adapted to their strategic objectives, and focused on removing the burden of day-to-day production and stakeholder management while allowing them to focus on investors, investments and risk management while retaining data oversight and control.”

Sandra Legrand, Regional Executive Europe & Asia Pacific

See the full ranking and read the complete report on the Funds Europe website.

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How the need for enhanced returns and the search for new avenues to raise capital has reshaped the alternative market dynamics

2022 has been a difficult year for capital raising for PE funds showing a decline of 11% in comparison to the 2021 all-time high, according to Preqin data. This has been due to the decrease of LP commitments and Institutional investors reducing their exposure by approximately 3%. Interestingly, a new market has been forming by private individuals and wealth managers demand for diversification and higher returns. As such, GPs and Managers have been forced to seek fresh means of accessing capital to support new vintages.

Mix into this dynamic new regulatory enhancements which have enabled the creation of “Hybrid Funds”. These are effectively the traditional alternative fund strategies we know however incorporating open-ended features and accepting retail investors. This ‘retailisation’ of alternative funds is a term now widely utilized within the industry.

These favorable regulatory adaptations can be a game-changer. For instance, the European Long Term Investment Fund 2 regulation (“ELTIF 2.0”) has been met with positive reactions from both investors and managers.

The new regulatory landscape and ELTIF 2.0

The adoption of the new regime in Europe was completed in April 2023 and comes into force in January 2024. This will replace the existing ELTIF regulation, which has struggled to find its place within the structuring toolbox of Fund Managers as a viable solution. Similar adoptions can also be seen in the rest of the world with the Financial Conduct Authority (FCA) developing the open ended LTAF funds, and in the US defining “accredited investors” which enables certain investors with a level of sophistication warranting a reduced need for protection to invest in alternative products.

The original regime however failed to obtain significant traction with only 83 funds launched. This was predominantly driven by the high level of restrictions which reduced the flexibility that alternative strategies need to flourish.

The much-anticipated ELTIF 2.0 regime has taken a step in the right direction by making it a more attractive vehicle for addressing the “retail market” for alternative asset managers. Key impacts on the PE world include:

• Funds can now be structured as open-ended Funds with a minimum annual subscription and redemption opportunity
• The removal of the 10 million minimum value threshold for eligible real assets; opening up investment opportunities
• The minimum threshold for investments into eligible assets has also been reduced from 70% to 55%
• It’s now possible to invest into other EU AIFs and not just other ELTIFs hence liquidity management can also be addressed through AIFs with similar strategies to manage the liquidity requirements
• Rules on distribution have enabled the use of a marketing passport across the EU and now allow for retail investors (additional restrictions apply if purely marketed to retail investors)

These “Hybrid Model” setups will require a shift in mentality and operations for both service providers and asset managers:

For Administrators this will require a variety of tools that are able to manage funds with open ended features which were primarily associated to the UCITS world. Additionally, there is a need for systems that can handle portfolio accounting for both illiquid and liquid assets.

For Depositories, the retail regime is geared towards optimal protection of the investors, insofar that only Banks can operate as Depositary for the ELTIF 2.0. This will open the road for specialized banks who will need to blend liquid and illiquid setups together to manage these hybrid funds.

For asset managers there will also be a steep learning curve in managing investors with liquidity requirements that PE firms are unfamiliar with. This could lead to the need for restricted redemptions, highlighting the complexity of incorporating such liquidity measures into their portfolio.

With these challenges comes the added value that such structures benefit:

1. GPs/Managers by paving the road to new distribution channels reaching both Private and Professional investors and
2. Pension and retail savings funds seeking diversification and better returns in an asset class which initially could have been out of scope.

The looming AIFMD 2.0 could however incorporate new limitations, but as of now the ELTIF 2.0 has been branded by many as the new UCITS for Alternative Funds.

The Luxembourg advantage and where we go from here

The success that Luxembourg has had over the last 30 years has undoubtedly enabled the country to become one of the most established Fund domiciles globally. The initial drive for this success was through the retail funds world in UCITS. The adoption of the AIFMD in 2013 has opened the space for alternative managers to replicate their strategies and develop a market for professional and institutional investors as well. This has further solidified Luxembourg as the go-to country for the launch and management of Funds.

The level of stability, history and services available in Luxembourg also makes it a prime mover in the domicile of these new Hybrid ELTIF 2.0 Funds. It offers both the regulatory supervision and comfort for investors as well as a plethora of established names in service providers which have adapted over the years to meet clients’ and investors’ needs.

Additionally, within its own structuring toolbox, Luxembourg already has the approved UCI Part II Funds (17 Dec 2010 Law). These funds offer eligibility in all types of assets, however, distribution can only be to professional investors but could accept any type of investor into the fund. In theory, therefore, retail investors could also enter the fund.

With a broader product line and willingness to service these type of hybrid funds as shown by the adoption of the original ELTIF regime, Luxembourg clearly places itself as the primary location for the development of the ELTIF 2.0 Funds. This is further enhanced with a booming retail and alternative offering, a successful history, readily available staff, and first-class service providers. Ultimately, it has the expertise for the development and success of the reutilization of the alternative Fund Industry.

This article was originally published in LPEA’s Insight Out Magazine.

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How do we define financial spreading?

Financial spreading is the process of taking bespoke financial statements and representing the data in a standard, structured format. The key thing to note is that since private market financial statements have variable reporting formats, financials must be standardized first before undergoing credit analysis. This requires an analyst to manually populate a structured template with the information from the tables within a financial statement which can take a huge amount of time to complete.

Can this manual work be outsourced?

Yes, private debt managers will often outsource this work to save on costs. However, we’ve spoken to many chief operating officers and chief risk officers in the last couple of years and the message we’ve heard is that turnaround times are not generally improved via outsourcing; they’ve also highlighted how credit analysts often need to manually review and correct errors in outsourced work to ensure that the spreading has been done correctly.

How is partnering with Alter Domus to perform data extraction different?

A good question. Alter Domus’ Digitize – Corporate Financials solution uses machine learning and automation to significantly reduce the time to digitize financial information and ensures high-quality, accurate data by leveraging in-house experts for quality checks.

It’s important to emphasize the human element here. Computers may be fast, but they need some human help to ensure that the spreading is performed correctly. At the end of the day, we’re generally dealing with unstructured original documents in non-universal formats, and that’s where our dedicated data science team steps in to work in tandem with our market leading tech.

It’s worth highlighting that unlike general machine learning models, Alter Domus’ machine learning capability is trained on millions of financial statements to identify tables, columns, and fields and extract data from tables.

The client’s raw data is extracted from PDF formats using advanced Deep Learning models. A manual raw data extraction quality check is put in place to verify the extracted results and provide a feedback loop back to the machine in a continuous, supervised learning process. If an Excel file is provided, then the data does not need to be processed by this initial step as the raw data is already digitized.  

So, the data is ingested and digitized. What happens then?

After the extraction process, the data is normalized, aggregated, and checked through automated QA testing, after which it’s then validated by an in-house credit analyst. This as-reported output flows into two views. Firstly, a Management Account View and, secondly, a Universal View.
The Management Account View is the aggregated time series data for a single borrower based on the reported line items from the original raw PDF data. This view is different among borrowers. The Universal View is the aggregated time series data in the Alter Domus standardized template, which is the same across borrowers.

The conversion into the Universal View is done by applying Alter Domus’ rule set to automatically map reported line items into corresponding categories. If the client has their own custom template, Alter Domus will work with the client to define their own category definitions to create their own custom mapping rules.  Once again, our data science team will always perform a last QA check before delivering the final output.

Ultimately, where other solutions simply provide clients with raw data output, our system and methodology provide users with tailored, customized data that can be seamlessly deployed to whatever downstream systems – from portfolio or asset monitoring platforms to risk modelling and reporting tools.  The point is that data is now primed and ready for deeper analysis.  

What does this mean for our clients?

Effectively, it means they can import the formatted financials to their downstream systems the day after the source documents have been uploaded instead of waiting up to 3 days for a standard outsourcer to do the same work. That’s a significant difference in time and allows our client and its teams to focus on higher-value tasks.

Digitize – Corporate Financials goes beyond simply providing a digital representation of the borrower financial information, which is where most outsource companies service finishes. To provide consistency for comparing data over time and across borrowers, all values are converted from reported units to actual units during the automated process. In addition, the service automatically processes the data restatement from pro forma reports when available and provides period over period change information to identify reporting outliers.  

We think having humans and machines working in lockstep is essential for us to speedily provide our clients with accurate data that’s been honed and harmonized to meet the exacting needs of their specific organization.

Interested in finding out how we can help you achieve a new level of data sophistication? Get in touch today to speak with a member of our Sales Team.

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The market’s always in flux, regulatory requirements can seem like moving targets, and investor demands for more information, more transparency, and more timely reporting can stress even the best in-house staff and systems. And that’s not even to mention the effect growth, spin-offs, mergers, and acquisitions have on daily operations.

Trying to keep up with it all can drain resources and shift the focus away from strategy and returns, which is why so many fund managers are outsourcing administrative responsibilities to reduce day-to-day burdens.

Yet even outsourcing is evolving. Long gone are the days of task-oriented, commoditized relationships with multiple providers, each furnishing different ancillary services. They’ve been replaced by deep partnerships with asset class specialists — experts who can provide all the jurisdictional, operational, and systems support a fund manager needs across the globe.

And while that’s a highly successful model, still another concept is emerging, driven by the need for real-time data. It’s called co-sourcing, and it’s a hybrid way for fund managers and administrators to work together.

Co-sourcing ensures data control

Co-sourcing exists at the intersection of insourcing and outsourcing. Under the co-sourcing model, the administrator handles the day-to-day back- and middle-office operational activities while the fund manager retains ownership and control of their in-house technology and data solutions. That reduces the back-and-forth of information between the administrator and fund manager, meaning the fund manager can access the data in real time to speed decision-making and respond more quickly to investor requests. The administrator can also retrieve the information required to perform stakeholder management functions, but data confidentiality, integrity, and security remain firmly in the hands of the fund manager.

Lift-outs: Lower expenses, same trusted talent

As fund managers grow their investment franchises, meeting data demands can become increasingly challenging, to the point where it takes nearly continuous reinvestment in technology and in-house operations just to stay even. But making non-stop capital expenditures isn’t always feasible or attractive, and neither is shouldering rising human resource costs.  

As an alternative, some administrators will conduct a “lift-out” of the fund manager’s operational teams, making them their own employees. Although the staff now fall under the administrator’s overhead, they remain completely dedicated to the fund and its activities. In other words, there’s no loss of talent or attention, but the cost center changes, and the fund manager is freed from the complexity of managing a back or middle office.

Staying a step ahead

Choosing the right fund administrator is a decision no one takes lightly; there’s just too much at stake. But ultimately, a good administrator will provide white-glove service; add value to the portfolio, risk management, and investor teams; and constantly upgrade their technology.

Most of all, they’ll be innovators who know how to stay ahead of the market and the industry, making the concept of “business as usual” not so unusual in the end.

This article was originally published in Funds Europe’s Private Markets Fund Admin Report.

Learn more about Alter Domus’ Strategic Co-Sourcing and Outsourcing services.

How robust is the LP-led secondaries market right now?

The secondaries market is more robust than we have ever seen it. Capital raises are up – there was a 30 percent jump in secondaries fundraising in the first half of this year, versus 2022. On a relative basis, the jump is even more pronounced, seeing as the overall fundraising market for private equity is pretty flat.

Secondaries had always been a single-digit percentage of the overall marketplace, but now we are seeing it move into the low double digits. Furthermore, LPs are now leading the majority of secondaries deals, which is quite different to the situation we have seen in the past few years.

This is a logical result from the market dynamics that are playing out. In a prolonged low fundraising marketplace, we are seeing concentrations build within LP portfolios due to fewer new funds being launched. Distributions have also slowed in the last 12-18 months, so there is a significant change in the return perspective – we are going from more of an IRR-led model, to a distributed to paid-in capital or a return on capital model.

Generally, this is a space LPs want to be in, while ensuring they have proper asset allocation across secondaries and are not overly exposed. In addition, they want to be relevant players in the marketplace.

Can the secondaries market retain momentum as the broader market rebounds?

This year we’ve seen major market players raising capital for massive, multi-billion-dollar secondaries-specific funds, with many longer-term forecasts indicating that the market will continue to grow and become a bigger piece of the private equity landscape. The volume of actual secondaries transactions may be influenced by what happens with the inflationary environment and interest rates, which have caused headwinds for private equity over the last 18 months.

But there are two other factors to consider here, the first being that a secondaries play isn’t the blunt tool of its earlier years, when it was just used to generate short-term liquidity. This is a market and a strategy that have really come to maturation, and LPs are increasingly using what’s now a very nuanced instrument to actively help manage the composition of their portfolios.

Secondly, the increase in secondaries volumes and activity is attracting a lot of talent in the marketplace today – there’s been huge industry investment in standing up dedicated, specialist secondaries teams. From an Alter Domus fund administration perspective, some of the best individuals in our teams are moving into this space to continue to take on demand and support onboarding requirements for secondaries, which involve more reporting, and more detail than ever before.

What this all indicates is there’s now a very defined ecosystem around the secondaries market, and we are unlikely to see all that talent and creativity suddenly shift away from it – secondaries will likely continue to play a vital role in LPs’ strategic investment plans.

How do you see this ecosystem around secondaries evolving?

There is more demand on reporting and more demand on LP transfer process efficiency. In the past, the somewhat bespoke nature of secondaries allowed for much longer timelines for investor onboarding. Today, those timelines are truncated to the point where processes are advanced quickly to meet the timelines for the new marketplace velocity.

One aspect of that, as we look at the ecosystem’s evolution, is that there are new participants coming into the marketplace around data and analytics. There is a body of data now and more standardization. This ecosystem is allowing data and analytics, tracking, forecasting and modeling to become much more advanced. Investors can come in and have confidence to position their portfolios in an allocation structure that is more nuanced, or more advanced, than in a marketplace without data and analytics capabilities.

Turning to private markets more broadly, what are the main regulatory changes that LPs and GPs should be aware of in the next year?

The biggest change in Europe is the new European Long-Term Investment Funds Regulation (ELTIF 2.0), which comes into force in January 2024. This is going to expand the permissible investments that can be brought into a portfolio. There will be a lot less prescription in the regulation, which means there is more scope for creativity in how a portfolio is constructed. It will be interesting to see how that plays out.

The big headline that we are focused on is the democratization of closed-end vehicles. A lot of private market assets historically have not been open to retail investors, and ELTIF 2.0 will address that. Almost overnight, we will see retail investors have an entry point into private markets.

The US market, meanwhile, has historically been less regulated. There are more opportunities for high-net-worth individuals and retail investors to invest in private market funds. But the US Securities and Exchange Commission recently decided to strengthen regulation of private fund advisers, largely because it wants to protect retail investors. It is going to require a lot more disclosure, reporting and real-time assessment of the investors coming into the portfolio and the portfolio’s ability to provide sufficient liquidity and information to that investor.

There are various opinions on these rules, and they are being challenged quite vigorously in the courts. From our perspective, we are excited by the opportunity to open up private markets to a large channel of new investors. We are tracking the situation closely and are prepared to be on the forefront to ensure those investors come into an information-rich environment.

What are the challenges to supporting clients across both Europe and the US, given the complexities of the regulatory environments?

Very few firms have the size and the scale to support a complex, complete understanding of both markets. The regulatory environments and the reporting requirements are both complex, and the complexity is doubled if you need to pivot between the two. Most of our clients are naturally more familiar with their home region and look for support from service providers like us when they operate in other jurisdictions.

We have always had the ethos of being where our clients need us to be. The key thing is to find the right talent in different markets who have knowledge of the local regulations and expertise in operating in the private markets.

This article was originally published in PEI’s Perspectives Report.

The alternatives landscape is changing. While once reserved for institutional investors, pension funds and high-net-worth individuals, it is now opening its doors through the democratisation of alternative funds. A coming together of worlds so to speak, which are combining and innovating to create a hybrid world of liquid and illiquid funds, which are both now open to individual investors. 

There are a number of trends and drivers in the market that have been behind the emergence of these hybrid funds. Firstly, monetary tightening is resulting in institutional money pulling back from the market. Private asset AUM continues to grow, however traditional LPs are reducing new commitments with global fundraising declining by c. 10% in 2022, followed by further declines so far in 2023 – GPs have been forced to pursue alternative sources of capital to support fundraising.

At the same time, a new demographic of investor is seeking to gain access to such markets. While private asset funds have long been used by institutional investors, due to regulatory restrictions, private individuals have been limited in their ability to allocate funds to the asset class. As this portion of the market is becoming more sophisticated and educated, individuals’ appetite for private asset funds is growing as they recognize that gives them more options to build a more diversified portfolio. While allocations by this investor group accounted for 9% of Alternative AUM in 2017, that climbed to 16% in 2022, a 165% increase in AUM.

Hybrid funds have the traditional alternative fund strategies, while also incorporating open-end fund features and accepting individual investors, with the goal of bridging the gap between individual investors and private assets. Within the industry, that’s often described as the ‘democratization’ of alternative funds, with Bain forecasting that individual wealth allocated to alternative investments will increase 12% annually over the next decade while institutional capital will grow by 8% annually over the same period. We have seen how large managers are directing their funds towards retail clients, with Blackstone expanding retail capital from $200 billion to $500 billion, while KKR are looking to raise up to 50 per cent of their new capital from private wealth and Apollo are looking to raise $50 billion in retail capital from 2022-26.

New regulations pulling in the same direction as the market 

Regulation is at the forefront of the market’s needs and is allowing the market to deliver these types of products to individual investors at the very time it’s looking to do so. 

In the UK, the Financial Conduct Authority has developed the open-ended Long-Term Asset Funds, or LTAFs, while in the US the term ‘accredited investors’ has been defined, enabling sophisticated investors who have a reduced need for protection to invest in alternative products. In Europe, welcomed enhancements to the European Long-Term Investment Fund, or ELTIF, came into effect in January this year, replacing the existing ELTIF regime. We will be exploring ELTIF 2.0 in greater detail in the next two articles in the series.  

Now is the time to take advantage 

This new regulatory landscape is providing a toolbox for managers, enabling them to develop products and expertise for the retail network. At Alter Domus, we are already working with managers to capitalize on these developments while overcoming the challenges that come with it, which we will be looking at in the fourth and final article.

Read part one of this four-part series here.