Alter Domus, a leading provider of tech-enabled fund administration, private debt, and corporate services for the alternative investment industry, has appointed Michael Janiszewski as its new Chief Operating Officer.

In this role, Michael will report to Doug Hart, Alter Domus Chief Executive Officer, and will also join Alter Domus’ Group Executive Board.

Michael brings significant executive experience in leading the operations of global organizations. His successful 20+ year track record spans business & strategy development, business transformation, operational excellence, and digital innovation. Mike joins Alter Domus from BNY Mellon’s Securities Services and Digital business, where he served as Chief Operating Officer.

Alter Domus CEO Doug Hart said: “We’re excited to combine Michael’s expansive background with Alter Domus’ industry leading private markets services platform. Our aligned vision of the future of alternative investment operations will accelerate the Company’s client experience initiatives day-one.”

Following his appointment, Michael Janiszewski, Alter Domus Chief Operating Officer, said: “I am proud to join Alter Domus and am excited by the bright future ahead of our organization. I am looking forward to partnering with the talented and experienced group of executive leaders on our Group Executive Board, as well as the talented professionals across Alter Domus.”

Michael holds a BA in Electrical Engineering and a Certificate in Applications of Computing from Princeton University, and an MBA in Finance, Accounting, Strategy, and Entrepreneurship from the University of Chicago Booth School of Business.

What challenges are private equity managers currently facing around liquidity and funding?

The difficult dealmaking environment is really steering all the liquidity issues that managers are facing right now. The fact that dealmaking has significant­ly slowed down over the last 12 to 18 months – and the same is true for fund­raising in the last six to nine months – is creating a bit of a challenge.

We still see managers observing the availability of follow-on investments or quality assets; the economy hasn’t stopped and there are plenty of oppor­tunities. However, LPs have slowed down their commitments because of a lack of liquidity, and that has created constraints. Institutional investors still believe in private equity, but they have been impacted by both a slowdown in distributions and the denominator effect. As a consequence, their own liquidity has become more correlated with other asset classes – this creates challenges for them.

For a long time, constrained private equity managers relied on subscription line financing, but in the wake of the regional banking crisis in the US at the start of this year there are now fewer lenders and slightly higher rates in that space. LPs are questioning the use of those facilities, which were always a bit of a short-term solution.

What financing options are PE funds embracing?

We have seen a growing number of cli­ents looking to GP-led secondaries as an interesting solution to the current challenges. This is taking place at both ends of the spectrum: GP-leds are being used as a means of providing liquidity to LPs, as well as a route to new funding for some of the assets in their portfolios.

In most of these deals, we are talk­ing about high-quality assets that might have been in the portfolio for a while, have been performing well, and the GP believes there is more value to be ex­tracted. A GP-led secondaries deal of­fers an opportunity to release liquidity to LPs that have been in the fund for some time so that they can continue to invest and re-up into the next fund.

In terms of other financing options, we still see sub lines being used a lot, while NAV financing solutions are also picking up steam. Those tools have been out there for many years, but they are receiving increased attention in the current climate. However, they are not without complexity.

From a lender perspective, the NAV financing market has started to evolve, with a wave of key players leaving leg­acy banks to join asset managers that are creating dedicated NAV financing funds. Those individuals really under­stand the asset class and are able to increase that velocity of distributions back to LPs so they can re-up with ex­isting managers.

The other issue here is the slow­down in exits, with the tide having shifted significantly in the last three or four years. LPs have turned their focus from IRRs to distributions, and while they understand that it is not always in the manager’s control to decide when to sell, at least with NAV financing they can achieve some predictability of cashflow. What’s more, this is not nec­essarily just for right now: we don’t see NAV financing going away, but rath­er becoming a much more commonly used liquidity tool for managers.

How would you describe the current health of the PE secondaries space?

The PE secondaries space is very healthy, both for GP-led and LP-led deals. Last year, GP-leds considerably outpaced LP-led transactions. That had more to do with the exit markets as managers didn’t want to be forced to sell when rolling LPs could see more runway. A lot of LPs chose to go into those deals because they weren’t ex­periencing quite the same liquidity crunch as we saw going into 2023. To­day, GP-leds are still getting done for high-quality assets.

On the other side of the equation, LP-led deals have picked up in 2023. Those deals are not trading at major discounts – they are right around NAV, or maybe at 80 or 90 percent – and there is a healthy volume of activity.

Immediately after the global finan­cial crisis, we saw LP-leds trading at 20 or 30 cents to the dollar, and at that point we started to see the use of defer­rals. Then portfolios started to mark to par, and sub lines came back into use.

Today, we are seeing another pick up in the use of deferrals, where a seller and buyer agree a price and then agree to defer some of that purchase price out a few years. Maybe a buyer is willing to pay closer to par on the valuation of the portfolio in that instance and the sell­er is willing to wait in exchange for a higher purchase price. For some selling LPs, the result is enough liquidity to bridge the gap they are facing thanks to a lack of distributions. It doesn’t work for everyone, however, with some sell­ers preferring to accept a purchase price at 80 percent of NAV for cash upfront.

What challenges do managers face when tapping the GP-led market?

One of the biggest challenges is under­standing and meeting the expectations of LPs. Most GPs are rolling more carry into a continuation vehicle and taking a bigger stake, because there is much more focus on alignment in these deals. LPs want to see managers put­ting more skin in the game.

Another issue is the SEC is putting a lot more regulatory focus on these deals, introducing a regulatory process around third-party valuations, for ex­ample. And, of course, the economics will be a little more friendly to the LP base in a continuation vehicle, which managers can find challenging.

Finally, there are the issues asso­ciated with convincing LPs that this is the right decision, which requires managers to be ready with the data on the portfolio company and with a plan of where they see things going. The transparency is something that most managers have caught up with, but the volume and frequency of data required from the portfolio is nevertheless a challenge.

The good news is that there is cap­ital available for these transactions and there are LPs that want to cash out, which means there is appetite on both sides.

What new trends do you expect to feature in the debt finance market over the next year or two?

We are seeing growing sophistication in the NAV financing market, shifting from a focus on lending from banks towards other funders with more li­quidity. No doubt over time we will see more use cases, and an industry that started out as pretty vanilla will attract more expert professionals.

We are also seeing a lot of clients struggling to achieve anything mean­ingful with capital call facilities because the banks are hesitant. Over time, we expect less reliance among PE man­agers on traditional bank lenders and more use of the tools being created by a new wave of asset managers who are combining private equity and credit market expertise.

This article was originally published in PEI’s Debt Finance Report.

How can firms leverage the advantages of virtual and in-person meetings for better client outcomes? Find out on 9 November during the Financial Times webinar: Optimising Client Interactions in the Finance Sector.

The event is focused on the virtual and in-person interactions within the financial sector, and aims to highlight the respective pros and cons of digital engagement in client relationships and workplace productivity. Alter Domus’ Danilo McGarry, with his deep expertise in digital transformation and data, will be sharing his insights on how digitalization is changing how the industry interacts with its clients and stakeholders. Don’t miss it!

From 8-9 November, our very own Angela Summonte will be attending ALFI’s Roadshow to Switzerland, taking place in both Zurich and Geneva. The event will cover key subjects concerning both the Luxembourg and Swiss fund communities, including hot topics like AIFMD and UCITSD. Be sure to contact Angela in advance if you’ll also be attending!

Here are some key areas of the Final Rules that each private fund advisor will be responsible for, regardless of whether they are registered with the SEC or not:

• Quarterly Statement Rule 211(h)(1)-2
• Audit Rule 206(4)-10
• Compliance Rule 206(4)-7(b)
• Adviser-Led Secondaries Rule 211(h)(2)-1
• Preferential Treatment Rule 211(h)(2)-2
• Restricted Activities Rule 211(h)(2)-3 

With these rules in mind, here are five key things private fund advisors should be considering and preparing for now:

1. Become familiar with the required updates needed for private fund quarterly and annual audit reporting including required issuance dates, governing documents, policies, and procedures.
2. Consider any grandfathering clauses that may affect your requirements under the Restricted Activities Rule and Preferential Treatment Rule with respect to already existing agreements.
3. Start to work through how to incorporate additional transparency around private fund fees and expenses, including calculations and cross-reference to organizational documents, performance, and potential conflicts of interest.
4. Review preferential treatments currently in place for certain investors in a private fund or a similar pool of assets and become familiar with the disclosure requirements, or cessation, of the same, for current and prospective investors.
5. Assess the adoption dates for the new rules.

No one-size-fits-all approach

The nature and complexity of these reforms mean that firms need to take a proactive and individual approach to their compliance – there is no cookie-cutter solution.

With that in mind, here at Alter Domus, we are cognizant of the amount time and collaboration our clients will require across their own organization and across third party service providers, like ourselves.

The new requirements will have significant impacts on the timing and level of detail and disclosures required for quarterly and annual financial reporting, and as such, please get in touch with us to discuss our plans for preparation. Contact us below.

We are proudly sponsoring Private Funds CFO Network’s Europe Forum in London from November 14th to 15^th. Andy Clark and Catherine Kavanagh from our team will be there, so please make sure to say hello. And don’t miss Patrick McCullagh moderating a debate discussing the pros and cons of outsourcing on November 14th at 4:30pm. The panel will delve into the aspects of operations, reporting, and workflows.

Get in touch today to connect with the team at the forum.

We are proudly sponsoring PERE America Conference in New York taking place on November 15 and 16. Come visit us at our booth and meet Lizzie Heil, Ned Siegel, and Stephanie Golden.

Reach out today to connect with our team!

The challenge

Getting a clear picture of your net asset value, or “NAV” as it’s known, is a crucial calculation for every investment company. Essentially, a company’s NAV is its total assets minus its total liabilities, and as the number of funds and assets accumulate, the task of calculating this becomes ever more arduous – especially when using legacy tools such as Excel.  We were approached by one of our key clients to see if we could create a solution to this labor-intensive task.

Their team faced the challenge of having to manually consolidate up to 11 Excel files to create one final NAV dashboard for each of their funds. What is of course crucial is that as the volume of data and manual work increases, the greater the possibility for data inaccuracies and calculation errors. On average, this entire process took days for their team to complete.

The solution

To address this challenge, the team proposed and designed a solution that involves the user uploading the 11 Excel files, including trial balances, bank balances, and FX rates, into a tool that consolidates them into a single NAV dashboard. Once the consolidation is complete, the user receives an email containing the new dashboard.

How the process and AI bot works (per each fund)

STEP 1:

• Alter Domus team logs into the Web Apps Portal and runs our NAV tool

STEP 2:

Alter Domus team uploads the 11 Excel sheets received from client, including:

• Trail balance, bank balance, collateral abacus & eFront
• FX rates, loan & credit facilities, accruals listing
• Loan request, ICAS previous & current period, hedging

STEP 3:

• Bot opens each Excel sheet. It copies and pastes, and completes lookups from the column data in the various spreadsheets
• Bot cleans data where required

STEP 4:

• Significant reduction of the time and effort required by client’s team to complete this task: what once took days now takes minutes
• Enhanced data and calculation accuracy
• Client’s team is freed up to focus on less manually intensive, more strategic tasks
• The bot is able to handle increasing volumes of this work, eliminating the need for the client to hire additional staff or reallocate internal resources 

Implementation time

• 2 months to develop the bot
• 1 month in UAT
• 1 month in control production

Contact us today to find out how you, too, could benefit from our use of artificial intelligence in delivering impactful technology solutions.

Secondaries in the spotlight

Fundraising for the secondaries market – where investors purchase securities or assets from other investors rather than directly themselves – has finally bounced back after steep falls from the highs experienced during covid-stricken 2020, with H1 2023 showing a 28% year on year jump. Indeed, the broadsheet financial media has been awash with reports of large players raising billions specifically for allocation to secondaries, with the pervading sense from market players that it’s been both undercapitalized and, to a degree, an undervalued part the alternatives eco-system.

While the actual volume of transaction for secondaries didn’t meet expectations in H1, market commentators seem to believe an incredibly robust H2 will make up for any shortfall. What’s clear is that the market has matured and grown in terms of sophistication with players on both sides of the equation using ever more sophisticated asset performance and sectoral data to guide their investment strategies.

Liquidity and economic uncertainty are the key drivers

As the saying goes, not all heroes wear capes, and in a period where liquidity has been increasingly scarce, the secondaries market has been a lever that both GPs and LPs can turn to and pull. If capital is the lifeblood of a financial system, then secondaries can be seen as an essential safety valve that allows that capital to keep flowing through the arteries, meeting investors need for liquidity.

What’s also helping secondaries seize the moment is the ongoing sense of uncertainty still gripping major economic markets. Investors seem either cautiously optimistic or cautious with regards to optimism as they wait to see whether interest rates and inflation will begin to properly descend. On the private equity front, this ever-present uncertainty – the bête noir of deals – has kept the under-performance of 2022 rolling deep into 2023: reigned in investments, blocked exists, and stymied fundraising for many traditional PE transactions abound. The safety valve of secondaries therefore becomes ever more appealing.

The LP advantages

For limited partners, there are two clear ways to take advantage of turning to secondaries; firstly, if there’s a need to re-up for the next investment cycle and reshape their portfolio, then offloading that asset at the right pricing floor becomes an attractive prospect. Secondly, for limited partners on the buy side looking to find quality businesses or assets at a sometimes heavily discounted price on the dollar, there are great deals to be had. Of course, there’s a tango that takes place between buyer and seller and there were times post-2020 where there was no great alignment on price or valuation of assets, hence the slowdown in-deal activity. As things stand in H2 2023, deal flows are good, discounts deep and buyers and sellers are making matches.

On the private equity front, the last 12 months has seen the expansion of secondaries funds aimed squarely at the middle market, with an ever more diverse sectoral selection of well-positioned companies becoming available. Of course, middle market companies have a lot more room to grow both operationally and in terms of scale, and often benefit hugely from PE firms’ capital injections and M&A expertise. The feeling among many investors is that there are bargains to be had in this space, and sellers seem more willing in this illiquid moment in time to adjust their valuations to get deals over the line.

GP-led secondaries have changed market dynamics

Looking at the history of secondaries, there is another key development it would be remiss not to highlight. If first period of the market was defined by limited partners led deals, then the second (let’s call it ‘post-Covid’) has been defined by the rise of GP-led transactions. Historically many GPs have often found themselves facing what you could term a ‘capital conundrum’ – on the one hand the need get a return on an asset as the clock ticks down on a fund, on the other often knowing they may be selling that asset before its value has been maximized.

Enter, stage left: GP-led secondaries

The asset – often held in a vintage fund nearing expiration – is sold into a continuation fund which enables GPs to keep control of their asset, attract investment from new limited partners, and pay out their original fund investors. Holding on to high quality assets for an extended period can help GP’s ensure they extract every bit of value created by their work and effort. It also offers the original investor optionality; an escape hatch if the investor is looking for distributions in order to re-invest or re-allocate their capital due to internal or external economic factors, or the opportunity to roll their capital into the continuation fund and share on the potential upside, often at more enticing economic terms than the original fund vehicle.

The outlook

With momentum building in the secondaries space and greater supply coming on-line, it’ll be fascinating to see where both fundraising and transaction volumes finish in 2023. It’s worth remembering that these are complex financial vehicles; having the right support for the operational process of administering a secondaries fund and the right tools in terms of data capture, delivery and monitoring is essential.

Looking at the horizon there are three factors that might have both short and long-term effects on Secondaries.

1. The potential impact in the US of the SEC’s Private Fund Reform Rule around Adviser-led secondaries and the requirement to obtain a fairness or valuation opinion from an independent party
2. The speed at which private equity players embrace AI and Automation to enhance the deal making decisions
3. To what extent the rise of NAV / Borrowing Base loans will eat into secondaries allocations

We’ll of course be opining on these factors in the months ahead, but, for now, in the ongoing race of financial performance, coming secondary seem to have its advantages.