We’re proudly sponsoring the 9th International Funds Summit & Expo in Cyprus on October 23 and 24.

The summit brings together investment fund professionals from around the world to discuss the evolving regulatory and increasingly competitive landscape in the global asset management sector and much more.

On Day 2, Evdokia will moderate the panel discussion “The Future of Funds Administration”, where experts will explore how the future of fund administration is posing unique regulatory challenges, especially in smaller jurisdictions.

Meet our team at our Alter Domus booth and discover how our solutions can meet your needs.

What are some of the key considerations when identifying the right service operating model for your company?

Your operating model and managed services provider need to be able to accommodate your future growth plans. If you are considering moving into new jurisdictions, asset classes or strategies, they need to be able to flex accordingly to support that next step for your company. Crucially in today’s data-driven environment, you also want to think about your data and technology needs. Investors are demanding real-time access to information and transparency. Do you want to take on the cost and responsibility of building and maintaining the capability to provide that in-house? Many asset managers are engaged in M&A activity, which is a logical moment for a fundamental rethink of your operating model.

How is traditional outsourcing changing?

The need to access data is driving change – for the better in our view. We’re moving away from a commoditized and transactional type of model towards operationally integrated partnerships, where there’s transparency and access to data in real-time. We’re also seeing some consolidation and rationalization of partnerships. Where perhaps a manager might have had multiple fund administrator partnerships in the past, now they might have one or two deeply embedded partnerships that can cover all the jurisdictional and sector specialisms they need globally.

Co-sourcing is a relatively new concept. What is it and why might firms consider it?

Essentially, co-sourcing is an operating model where the manager maintains an in-house data and technology stack that their administrator has access to and can create and modify primary data elements. It’s a hybrid model between fully outsourced and fully insourced. The benefit it offers managers is that it allows total control and ownership of their data and real-time access to it, while tapping into the asset class and systems specialists, and talent acquisition capabilities of a fund administrator, all while reducing manager level overheads.

Beyond co-sourcing, in what circumstances might a full lift-out be the right solution for a company?

That partly depends on whether, as a manger, you have the scale and appetite to reinvest in your own technology and in-house operations or not. There are considerable advantages to partnering with a provider who constantly upgrades their technology platforms and can provide a long-term career path to valuable internal resources. There are also the economies of scale and best practices that a global administrator can offer, without being distracted by the challenges of maintaining a back office. We’ve seen great success for both clients and personnel as we’ve created a playbook to successfully assist with these types of full lift-out transitions.

With this evolution in mind, what should a company be looking for when choosing a service provider?

Ultimately a good administrator is focused on white-glove levels of service and forming a deep partnership with their clients, which will include customizable solutions and specific asset-class expertise that meets specific needs. An administrator should be viewed as a critical member of the team, who when leveraged correctly delivers significant value-add to portfolio, risk management, and investor teams. Critically, you need to have confidence that they are technologically innovative, as well as culturally a good fit for your organization.

This article was originally published in Preqin's Service Provider Report.

How would you describe GP-led dealflow right now?

Tim Toska: Conversations with our clients around GP-led secondaries are becoming increasingly common. Sponsors are identifying high-performing companies where significant value-creation potential remains and are putting them in continuation vehicles. These deals have become a valid fourth option when it comes to exiting businesses.

Brian Mooney: Almost every major private equity firm has completed at least one continuation fund and many have completed several. We observe that firms that have yet to do so are working on one right now or considering their first. However, there is a massive supply/demand imbalance. While the demand side (buyside capital) is growing, it is not keeping pace with supply, particularly given that so many LPs are suffering from the denominator effect. That is impacting fundraising in all asset classes including secondaries.

As a result, GP-led deal volume is down on last year, but those transactions that are taking place involve the highest quality sponsors and the highest quality assets. I would also add that there has been a marked shift towards the mid-market. Very large single-asset or concentrated portfolio deals, meanwhile, are proving more challenging

What impact are those supply/demand dynamics having on pricing?

BM: Only 25 percent of all GP-led deals were priced at a discount to NAV in the first half of 2021. By the first half of 2022, that had increased to 50 percent, and I think that is still true today. We are also seeing more transactions with some kind of structuring involved in the purchase price. It could be a simple deferral or in some cases a portion of the purchase price is based on a contingency such as hitting a certain level of EBITDA at a given date.

How should sponsors prepare their assets and processes to maximize the chance of a GP-led deal completing?

TT: Transparency is paramount, and I think the GP-led secondaries market has benefited from enhanced transparency more broadly in the wake of the pandemic. Historically, there was criticism levelled against the asset class with regards to a lack of readily available information and stale information.

During the pandemic investors began to demand frequent data points and communication around specific companies, which forced managers to put the necessary infrastructure in place to deliver on that. That means that when a GP raises the prospect of a continuation vehicle with a particular asset today, the LP base is already well versed on how that company is faring and why a continuation vehicle might make sense.

BM: Sponsors today are communicating with their investors early and are focused on transparency, both with buyers and the existing LP base. In terms of preparing companies, it is all about finding the ideal candidate and having the right motivations.

What are secondaries buyers looking for in a GP-led deal in terms of alignment?

BM: At an absolute minimum, a GP needs to roll at least half of its capital. For us, as a buyer, the GP must be a net buyer or else the transaction is of no interest to us. We tend to become really interested, however, if the GP is proposing to roll all its capital, meaning the original investment plus carry crystalised through the sale to the continuation vehicle. A GP-led transaction becomes even more interesting if the GP wants to write an additional cheque, which could mean a commitment from its new flagship fund.

Meanwhile, economic terms tend to be more favorable, with lower management fees and tiered carry, which serves to further enhance alignment.

What role can technology and data analytics play in supporting a GP-led process?

TT: With a GP-led process, as with so many areas of private equity, it is vital for sponsors to have a single source of truth in-house. Get your data systems in place and then you can overlay that with market insight to help identify the perfect candidate for a continuation vehicle. Investors are also relying on data analytics to evaluate manager performance. But I would add that data analytics is fundamentally about taking the robot out of the person. It takes away all the laborious legwork and enables teams to bring a new and more valuable set of skills to the table.

BM: Underwriting a continuation vehicle is a very intensive process. You need to underwrite the sector and the company, but you also need to underwrite the sponsor. You need to evaluate how that sponsor has added value to that business and whether that is consistent with the strategy being proposed for the continuation fund. All of that involves pattern recognition and, if you have the data and analytical tools to gain that insight, you can better assess the risk/return profile of the deal.

What other areas of private equity do you see as ripe for tech disruption in the future?

TT: I see the real value of technology as supporting due diligence at the front end of a transaction. I also believe that automation can help streamline processes, making data requests that might previously have taken days almost instantaneous. Meanwhile, the more standardised that data becomes, the more easily it can be integrated into investors’ systems as well.

BM: I think data analytics will play an increasingly important role in LP secondaries, where you are often building portfolios with hundreds of fund interests and thousands of underlying companies. Technology can help make that market much more efficient and support our ability, as buyers, to submit offers more quickly, while also informing our portfolio construction around underlying risk and return drivers.

I agree with Tim that technology in this asset class is about taking the robot out of the person. This is still a people business. As investors, we are betting on the teams that we believe are the smartest and best at what they do.

This article was originally published in PEI’s US Mid-Market Report.

What do you think are the factors driving the incredible growth in distressed debt and special opportunity funds?

First, there’s the legacy effects of a long-term zero interest rate environment, and the proliferation of dividend distributions from a lot of LBOs, especially from the sponsor finance community, or private credit funds. They were done when rates were low – one floor or two for reference rates – and now it’s ticking up to the five range.

And with these legacy spreads and the current reference rates, some of these companies can’t afford that debt service as part of their operating model. That’s starting to trigger a lot of the EBITDA covenants within their underlying credit and lending agreements.

So we’ve seen a lot of our traditional private credit lenders and opportunistic managers launching special situations and credit opportunity funds, where they can step in, restructure the debt, and maybe put it on non-accrual or non-cash pay for a period of time to work these deals out. There was a bump in these funds being formed at the beginning of covid, with the assumption the pandemic would create a boom in distressed situations for the then pending economic distress.

However, due to all the government stimulus, that boom was delayed. But with the prolonged increase in rates, even with the continued economic performance, a lot of these managers are expecting that boom to commence. There are also situations like the collapse of Silicon Valley Bank that suggests there will be interesting portfolios coming to market, priced to be offloaded quickly and able to be worked out at significant returns to investors.

Do you think that same environment is fueling a rise in asset-based lending funds?

Traditional asset-based lending is typically lending where there’s a lag time between when corporate borrowers need to finance their commercial operations and bridge the period of time that their customers are paying them for the product that’s been delivered.

Up until recently, that’s been the world of a money center bank, or a super-regional money center bank that have these facilities where they will make those loans, monitor those loans and pledged collateral, and keep that relationship with a borrower. But given the ultra-sensitivity of those super-regional bank market events, those are really good loans to shed because they have high market value, without the bank to reserve against them.

So we’ve seen a number of those portfolios come to market where it’s private capital that will take on those ABL facilities on behalf of the borrowers at a pretty good rate from the original bank lender.

And then there’s the role of the traditional investment bank on providing portfolio leverage, which we now see large insurers and actual funds coming in to replace them, despite all the compliance issues and strict rules around what’s applicable, what’s admissible, and substitution rights if a particular asset goes wrong. This is now becoming the realm of large insurers, since they have a more permanent capital base, one that isn’t based on deposits.

We’ve had a few clients entering into lending or refinancing arrangements, and they really liked the term loan and the borrower. The borrower then brings up the fact that they also have this ABL and would like to have the same provider for both.

So the manager decided to meet that market need, and as a result, we ended up exploring what we could do to service them, and licensed a product dedicated to the ABL space that provides transparency to the lender, the borrower and us though the operating infrastructure.

For managers looking to launch their first credit fund to take advantage of this environment, how should they think about the operational infrastructure to administer it?

When I speak with PE managers that are used to underwriting and investing in a portfolio company and valuing their portfolio once every quarter, they’re in for a very different level of activity in the credit space. The same underwriting process and the ongoing valuations occur, but additionally the bank debt pays at a minimum quarterly, and the rate resets typically quarterly. There are amortisation payments. Loans are typically originating below par. So they’ve got non-cash income that they need to recognise.

These deals get amended constantly, so there could be different compliance rules under the credit agreements. Furthermore, the maturities get extended, the size of the deal could move up and down, and all this requires a great deal of monitoring of the underlying borrower. And they need a system that will address and support all those things.

They have to decide who will be the administrative agent on the credit, whether it’s done internally, or outsourced completely.

Then there’s SEC oversight around the custody of investor assets. How are they going to build an infrastructure where they’re not co-mingling investor monies across multiple funds or different borrowers and everything else required to withstand the scrutiny of the SEC? And that’s just on the legal and operational side of things.

As a result, our clients invest a lot of resources on attorneys, compliance experts and our services because we have the appropriate systems for the agent components, the loan administration, which is tracking and ticking and tying all the cashflows, positions, rate resets, amortisation schedules, and then ultimately the fund accounting and investor reporting. Because a direct result of this growth in private credit is there is a dearth of people that know how to do credit accounting because it is very different than PE, or fund-of-funds accounting.

This ends up producing a massive amount of data to monitor and manage. The front office wants credit monitoring. The middle office needs to monitor the compliance with the credit agreements. And then the back office needs the data to produce the reports and everything else. There are big ticket systems available that cost millions to implement or off-the-shelf systems that support various functions for credit managers.

There are much lower cost solutions for data warehouses where they can build report writing software on top of the warehouse – these become a kind of integral hub for the spokes that go out to address reporting requirements. And then there are other inexpensive add-ons that can offer portfolio view technology as well.

Most clients want that data in-house, but it’s a daunting task to build internally. This is why we’re confident that outsourcing will continue to offer a compelling value proposition for the GPs looking to make the most of this particular moment in the credit markets.

This article was originally published in PDI's US Report.

Join Enkela Kosturi, Bruno Bagnouls and Antonis Anastasiou at the LPEA Insights Conference in Luxembourg on 19 October to learn more about Luxembourg’s investment landscape for private equity. Connect with them at the conference as they meet leading GPs and LPs to discuss the best practices for fundraising, creating investor relations teams, and the unique opportunities Luxembourg holds for private equity.

Schedule a meeting with them ahead of the conference using their contact details below to learn more about Alter Domus’ comprehensive solutions for private equity managers.

Angela Summonte is attending Pension & Investment’s World Pension Summit in The Hague from 10-12 October. She will join a range of pension fund executives and other industry experts to discuss the best practices and key strategies driving growth for pension funds around the world. Meet her at the conference to learn more about how changes across technology, financial markets, the environment, and society are transforming opportunities, and how Alter Domus is supporting the evolution of the sector.

Get in touch with Angela ahead of the summit to find out how Alter Domus’ Asset Owner Solutions can support your ambitions.

Patrick McCullagh along with Tim Trott will share their perspectives on some of the most pressing topics impacting today’s private equity landscape at the SuperReturn CFO/COO conference in Amsterdam from 2-4 October. Join Patrick and Tim at the three-day conference to gain the latest insights on the regulatory, fundraising, technology, and ESG trends shaping global private equity markets.

Tim Trott will take the stage at the conference to navigate through the intricacies, challenges, and opportunities tied to the QAHC regime during the “The QAHC Regime: A Closer Look at the UK” group discussion on 2 October.

Patrick will explore how firms can optimize operations simply by using technology and how this is impacting the private equity landscape while moderating the “Let’s talk about tech” panel on 3 October at 10:10am CET.

Learn more about Alter Domus’ award-winning private equity solutions and how they can support your business by contacting Patrick and Tim ahead of the conference.

What facilities of data collection do you believe will become prevalent in a more stringent market?

While navigating the extreme volatility in the current market, data collection facilities will be geared toward traversing three key mega trends. The first is the emerging convergent industry model. The financial, administrative, and advisory sectors are morphing together to create a new business model that will require a more integration-based approach to data collection.

Secondly, sovereign wealth funds (SWFs) are looking to shift more in private equity investment. This transition will demand greater due diligence around compliance and guidelines.

Finally, ESG conditions are becoming an important facet of SWF investing. As such, many firms have set out to eliminate their carbon emissions by 2050. All these trends require an evolved level of data analysis that will set the course for data collection in the future.

How can clients utilize and incorporate data to navigate market turbulence, particularly vehicles with lower-risk tolerances like SWFs?

Future data collection will need to introduce a new tool kit, ensuring data is not only collected, but organized in a way that can be assessed efficiently and offers investment insights. New technologies will play a big part, helping to deliver a deeper form of data retention. The industry demands data-driver models that incorporate traditional and non-traditional research sources. For example, social media can now serve as an insightful resource. Moreover, the industry must look for ways to blend machine learning, such as AI, and human efforts. These practices work best when automation is performed with AI to optimize data gathering, and then humans weigh in on analysis.

Can sustainability extend to data collection? If so, how do these changes vary for funds with more robust regulations?

Sustainability initiatives are challenging for more regulated clients, such as SWFs. Now, information linking ESG resources and financial performance lacks consistency and transparency. We see many initiatives around regulations to establish more transparency and even create a potential benchmark.

One initiative is ESG data convergence, which would demand both GPs and LPs agree to report and collect the same ESG metrics, from board diversity to carbon emissions. Ultimately, it is a matter of defining the data points that can be collected and monitored in the same way, then normalizing them. It isn’t easy, but there is a lot of attention around the topic.

What impact do you envision this form of sustainability practice having on the private sector as a whole, or the data collection industry specifically?

Data collection around ESG will influence other sectors by providing comparable information to the private sector and establishing a coherent marketing approach. These sustainability practices will also need to be specific to the client. The same data points won’t be relevant across all strategies in the private sector. It will be about identifying which data points are relevant to the specific underlying assets.

This article was originally published in Preqin’s Sovereign Wealth Funds Report.

We are delighted to announce that Alter Domus has won the award for Fund Administration: ManCo Services at The Drawdown Awards 2023. Held in London on June 7th, the awards were judged by a highly experienced panel of leading industry experts and we faced strong competition in our category.

The award was accepted by Matthew Molton— Country Executive UK— on the night, with Andy Clark, Tim Trott and Sam Wade also present to celebrate our achievement. We are particularly proud that this award was given by a panel of leading GP and LP judges.

We are delighted to win this prestigious award, which reflects the quality of the services we provide and the trust our clients have in Alter Domus as their chosen ManCo provider.

Matthew Molton, Country Executive UK

This is the second consecutive year that Alter Domus has won the award for ManCo Services at The Drawdown Awards, following our previous win in 2022.

This news follows hot on the heels of Alter Domus being ranked one of the top-5 third-party AIFMs, and a top-10 third-party ManCo in PwC’s 2023 Observatory for Management Companies Barometer.

What are the key drivers for private markets to embrace artificial intelligence and other advanced tech?

The rapid growth and large size of the alternatives market has been matched by a growing amount of data that needs to be managed. As managers and funds get bigger, we are heading towards a point where that data becomes too much to handle, and we need more thoughtful discussions about how all of this information gets put to good use.

Secondly, the amount of data that is being demanded and delivered to GPs – even without that market growth – has broadened immensely. There are ever more reporting demands, whether they be ESG-related or linked to a greater need for transparency in certain aspects of the business, as well as in financial metrics.

Thirdly, the ultimate investors in the alternatives space are also demanding more information and transparency from their GPs.

All of this is happening against the backdrop of technology having rapidly evolved over the last five to 10 years. A lot of these demands to process more data – to use that data and to communicate that data more quickly – are happening just as the possibilities offered by technology are profoundly more expansive than they used to be.

A lot of tools that one needs to process this data are now available off the shelf from technology providers – especially from the cloud providers. Those providers have become a lot better at providing more than just software or hardware, and are instead offering enhanced computational capabilities, with AI falling into that camp.

So, demands have grown exponentially, and at the same time capabilities have come along significantly, which makes this a good time for private markets to embrace advanced tech. For a lot of participants, it is important to think about how to adopts me of this modern technology while preserving the investments made previously. We don’t have perfect information about how technology will continue to evolve, but anyone thinking about what to build today needs to consider their ability to pivot down the road as new technologies continue to emerge.

Is it now essential that private markets participants get on board with these tools?

Yes, it is, but the specifics will vary on a case-by-case basis. The more expansive and demanding the operation, the greater the need will be for investment and adoption of these tools and technologies, including big data warehouse platforms, modular application architecture, high speed computation and AI. More investors will be demanding more information, and portfolios will be larger and products more complex, and this means adoption needs to be more involved.

The extent to which managers get on board with these tools depends on what they really need in terms of modern tech and modern capabilities. A lot of firms could fall into the trap of overshooting and investing a lot more than they need to. Many will also fail to invest enough, and of course investment from the organisation is a lot more than just money, but also people, infrastructure, time and culture.

For a large expansive fund, it will be a big investment to adopt the tools to address complex problems, but a smaller operation may want to be a little more surgical in how much they adopt. Even so, the technology challenge does need to be addressed with modern tech, whether your fund is €300 million or €3 billion. Even a smaller fund, if they don’t think about this properly, could be building a trap around technology for the future, by making decisions now that in three years’ time will leave them with an archaic and unscalable infrastructure. It is expected that any technology transformation will embed some tech debt due to the nature of trade-offs that will need to be made, but it is also important to understand the extent of the tech debt that is being built into the system as part of the planning process.

Building a function for the future often involves wider discussion in the business to include key decision-makers. Unless you have a technology strategy in place that is consistent with the demands and expectations of your key stakeholders, you are going to encounter many challenges.

In my experience, almost every manager I speak to understands there is an organisational challenge around the technology capabilities of their institution. Even those at the beginning of the journey understand it is a complicated problem and a huge investment decision that should not be taken lightly. This journey is as much an organisational challenge as it is a technology challenge.

How can firms mitigate the risks associated with implementation?

The first risk is the risk of doing nothing. That is fairly significant, because it leaves you saddled with whatever you are doing now in a world where your competitors are surpassing you. The key question here is whether others around you are moving rapidly with advanced technology and whether you feel you are going to be at a disadvantage in terms of raising money, delivering performance, providing investor transparency and executing on decision-making if you fail to keep up.

The other extreme is the risk of diving into this with an old-school mentality, making a huge investment and simply laying out your requirements and asking someone to build you a solution. The concern there is that you expend a lot of resources to get something built and then find it is not really what you needed. Unfortunately, buyer’s remorse is not uncommon.

Another risk is building something good but not being able to maintain it. If you outsource the work and don’t really understand how it all operates, you may find out later that the total cost of ownership is exorbitant and the cost of changes is unacceptable. You want a solution that is manageable and nimble rather than unwieldy.

At Alter Domus, we work with our clients to approach tech transformations in stages, with discrete deliverables along the way. Success is users starting to see practical and usable solutions relatively quickly and often that they can begin using in their everyday work, which reinforces the project as stakeholders become more engaged.

A third mitigant is that solutions need to not be so intricately connected that the system is a monolith. It is preferable for the system to operate as a series of cogs that can be enhanced, replaced, or removed without impacting other parts of the solution. A lot of pieces need to be independent of each other but architected in a way that creates one elegant experience for the customer. Today’s technologies afford this possibility.

We are firm believers in building solutions for clients that can be maintained in a low-cost way. We don’t want our clients burdened with a system that will slow them down and prove costly to change and update.

What kind of shift in mindset is required to embed modern tech capabilities?

Going about this journey requires a cultural transformation, which needs careful change management that starts during the planning process. The possibilities and the limitations of the technology need to be understood. It begins with the leadership team to ensure that the organisation understands what is possible with technology alongside a focus on what the business really needs.

The change management aspect is also significant. The shift in mindset has to be around change being a good thing: we are going to be more efficient, and your job is going to be focused on more high-value activities. The organisation needs to communicate extremely well, manage expectations, and be ready for consistent enhancement and improvement.

What challenges with legacy systems might firms encounter and how can those be overcome?

A lot of legacy providers are on their own modernisation journeys, so it is important to understand how those systems themselves are going to be transformed, with some taking a more proactive approach than others. You may find that your legacy provider is not aligned with your technology journey. It’s wise to think about ways to adopt your modern technology and embrace it, without taking it for granted that all your requirements need to go through the legacy system. Maybe you can bypass your legacy system and find a new way to solve a problem. This would be a classic case of disintermediation for some legacy systems providers. If you think your legacy system is going to impair your ability to make decisions, it may be better to just start afresh.

But you definitely want the provider of your legacy systems, whether internally built or not, to be thinking about how they are going to modernise. If they are not, that may be a worrying sign.

What are the key elements to get right for a smooth transition to modern tech?

The key elements are communication, managing expectations and identifying early wins that will spur you on to the next phase. Breaking a problem into smaller chunks, with wins along the way, is really important. This is not a ‘one and done’; this never ends. You need to be always thinking about your total cost of ownership and what it is going to cost to not just build a new system, but also maintain it. Ask yourself all the time whether you are getting what you really want, which means being careful on your requirements, involving all your stakeholders, and being sure to build something that is really fit for purpose.

This article was originally published in PEI’s Fund Services Report.