Anticipation is high in the alternative assets space. But to understand why fund managers are so engaged with ELTIF 2.0 – which came into effect on January 10 2024 – you must first appreciate why the original ELTIF framework did not live up to expectations.

In the eight years that it was in place, the original ELTIF regime managed to raise fewer than 100 funds with total assets under management estimated at approximately €7 billion. Tellingly, most European Union member states did not establish any. In our view – and this is an opinion which appears to be almost universal across the industry – the take up was slow because the original ELTIF was, in some instances, too restrictive. This was particularly true in relation to eligible investments which required a minimum €10 million value threshold, and the ability to invest other funds was limited to other ELTIFs. Additionally, there were limitations to marketing rules for retail investors, all of which contributed to ELTIF 1.0 not being widely adopted.

Fortunately, Article 37 of ELTIF 1.0 mandated that the European Economic and Monetary Affairs Committee (ECON) had to start a review of the application of the regulation no later than June 9 2019. From this review, ELTIF 2.0 was born. In its November 2021 report to the European Parliament and Council, the Committee noted the key problems with the framework –on both the demand and supply sides.

So what has changed?

Demand side

On the demand side, with the ‘democratization’ of alternative assets, the enhanced regulatory regime promises to support managers in addressing the retail market, and to broaden investment opportunities. Under ELTIF 2.0, the entry barriers for individual investors have been removed, including the minimum investment threshold of €10,000 and net-worth requirements. 

One of the main components of ELTIF 2.0 – which we discussed in the opening article of this series looking at pre-marketing – is the ability to use the European marketing passport to distribute an ELTIF 2.0 product. This greatly simplifies the distribution setup and removes the retail barriers of ELTIF 1.0, although a suitability assessment, as required under MIFID II, still applies to retail investors.

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Supply side

On the supply, or product, side the changes in ELTIF 2.0 aim to remove the restrictions that hindered the success of ELTIF 1.0. The key changes as outlined in the table below, coupled with the relaxation in redemption limitations provide for the desired flexibility that was absent in the original regime.

Supply Side Changes

	ELTIF 1.0	ELTIF 2.0
Threshold for Eligible Assets	70%	55%
Maximum concentration limit	10%	20%
Borrowing limit (retail)	30%	50%
Max market cap of equity or debt issuers	EUR 500m	EUR 1.5bn
Minimum Investments in real Assets	EUR 10m	EUR 1.0m
Ability to invest in AIFs (Fund of Funds)	No	Yes
Ability to invest in underlying securitizations	No	Yes
Investment in non-EU assets	No	Yes

Ready for the new regulatory framework 

Even before launch, interest in ELTIF 2.0 was gathering momentum. As we mentioned in the second article of this series, some of the biggest players in the market, from Blackstone to KKR to Apollo, were already engaging with this new framework, looking to make the most of the regulations. But what should fund managers who are looking to raise capital in Europe be thinking about?

In the fourth and final article in this series, we will be taking a closer look at the expected impact of ELTIF 2.0 as well as the challenges and considerations for managers and service providers. Now that ELTIF 2.0 is live, what should you be considering, what are the challenges and how might you manage them?

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Learn more about Alter Domus’ AIFM Services and Private Equity Solutions.

What to watch out for 2024:

• 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
• GPs will explore all routes available to them to realise liquidity, including alternative GP-led secondaries and using NAV loans to make distributions
• LPs will use secondaries markets extensively too, exiting existing holdings to free up cash and make commitments to the new funds of top tier managers
• 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

The private equity industry goes into 2024 coming off the most challenging period for the asset class in more than a decade.

The combination of rising interest rates, higher acquisition finance costs and geopolitical dislocation have had a chilling effect on year-on-year buyout, exit and fundraising activity.

According to law firm White & Case, global buyout deal value has almost halved in 2023, falling to $442.2 billion over the first nine months of the year from $864.96 billion over the same period in 2022. The drop in year-on-on-year exit value has been similarly precipitous, contracting 51% to $240.75 billion over the same period.

Jammed up deal markets have had a direct impact on fundraising. As exits have dried up, managers have been unable to realize value and return cash to investors. According to Burgiss data quoted by Bloomberg, private equity limited partner (LP) cash flows have turned deeply negative, with the gap between capital calls and distributions widening to levels greater than the observed in the depths of the 2008 global financial crisis.

The lack of liquidity has left LPs with limited headroom to make allocations to the next vintage of funds, with private equity fundraising cooling to its slowest rate in years, according to Pitchbook figures cited by Bloomberg.

The exit imperative: liquidity the priority for 2024

Looking ahead to 2024, the number one priority for the general partner (GP) community will be unblocking the fundraising bottleneck by getting cash back into the hands of investors, and the best way to do that will be to fire up exit deal value again.

According to Bain & Co analysis, buyout funds alone are sitting on an all-time high $2.8 trillion of unexited assets in their portfolios – more than four times higher than the thresholds recorded during the global financial crisis. Finding buyers for these assets and returning cash to LPs will alleviate the pressure on investor cash flows and get fundraising moving again.

Of course, the challenge for GP vendors during the last 18 months has been to find buyers willing to meet valuation expectations for assets. As interest rates have climbed, establishing consensus on pricing has become increasingly difficult. No GP has wanted to offload a good asset at bargain valuation at the bottom of the cycle, while buyers have found it very difficult to structure deals when there is limited visibility on future earnings and financing costs. The result has been M&A stalemate.

Creativity required

GPs will be exploring all options available to them for realizing liquidity and returning cash to investors in 2024 if conventional exit routes (strategic sales, secondary buyouts and IPOs) remain becalmed.

The market has already observed and tested what some of the options could be. More GPs are now exploring GP-led secondaries deals when planning exit routes, and are expected to continue doing so in numbers in the year ahead.

These structures, which see selected assets placed into continuation funds, give LPs the option to take liquidity or rollover their stakes in the asset into the continuation fund. For GPs with good assets, but under growing pressure to make distributions to investors, a continuation fund can provide tidy solution that allows for LPs to receive cash without managers having to sell off prized portfolio companies at bargain prices in bear market.

According to Jefferies, these GP-led deals account for 42 percent of overall secondaries deal value in H1 2023, which although down on the share observed in. the bull market of 2021, is significantly higher than pre-pandemic levels. 

LP-led deals (where investors sell their stakes in funds to secondaries funds) will also be a key dynamic in the asset class in 2024. LPs have increasingly taken direct control of their cashflows by using secondaries deals to expedite routes to liquidity. LP-lead deals accounted for less than half of total secondaries deal value in 2021, but share has climbed to 58% in 2023, according to Jefferies. 

Secondaries sales will remain an important tool for investors in 2024, especially when elite managers come to market with new vintages. LPs who don’t have immediate access to liquidity to allocate to these blue-ribband GPs will turn to the secondaries market to exit existing holdings in order to make commitments to their preferred firms.

Another route to liquidity GPs are exploring are NAV loans, where managers take out debt secured against the assets in fund and use the proceeds to make distributions. These arrangements are still relatively novel (and not without controversy, as distributions can be recalled if GPs can’t repay the NAV debt), but some high-profile private equity brands have put NAV loans in place to make distributions and others may follow suit.

Traditional exit routes: reason for optimism

There is growing, but still cautious, optimism that conventional exit routes will also start to unfreeze in 2024.

The outlook for interest is underpinning this sanguinity. After enduring the steepest pace of rate hikes in more than four decades central banks around the world do appear to have hit peak rates.

GPs would prefer rates to be lower than they are, but even if rates do stay at current elevated levels, there is at least some clarity in the market on what interest rate assumptions to build into deal models. This will go a long way to recalibrating buyer and seller pricing expectations, narrow the bid-ask spread on valuations and hopefully get deal markets flowing again.

There are already early signs that a more stable outlook is opening up traditional IPO and M&A markets. In 2023, buyout firm GTCR went ahead with the largest deal in its history with the $18.5 billion carve-out of payments company Worldpay from Fidelity National Information Services, in transaction that enjoyed strong support from debt markets.

After challenging year, GPs will be hoping that more landmark transactions will come to market in 2024.

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What to watch out for in 2024:

• Private debt is ideally positioned for a golden vintage in 2024 as high interest rates drive up yields and capital structures become more conservative
• LP appetite for private debt exposure will remain strong as investors seek exposure to the asset class’s strong underlying fundamentals
• Distinctions between bank and debt fund capital will blur as investment banks and Private Credit Managers build out their direct lending offerings
• The resilience of portfolios will become a key differentiator in a market that will bifurcate

There haven’t been many asset classes that have benefitted from the current cycle of interest rate hikes. Private debt is one of them.

Despite volatile stock markets, a sharp contraction in M&A deal flow and stultified leveraged loan and high yield bond markets, private debt managers have continued to secure investor capital and find opportunities to deploy capital in a tough environment.

According to Pitchbook private debt delivered double-digit year-on-year fundraising growth in 2023, putting the market on track to deliver annual fundraising in excess of $200 billion for the fourth year in a row.

Steady distributions and attractive yields draw investors

The strong performance of the asset class in 2023 has positioned private debt to potentially deliver one of its best vintages ever in 2024.

As base rates are now sitting in the region of five percent, private debt managers can realistically expect to produce yields in the 10 percent to 12 percent range, according to analysis from Barings. The gap to equity returns is not very wide, and with private debt consistently delivering high, double-digit distribution rates, the risk-reward dynamics presented by the asset class w2ill be among the most compelling for investors in 2024.

Private debt managers will also continue to benefit from supply-demand dislocation in wider lending markets. Syndicated loan and high yield markets have been stung by higher interest rates and all but shuttered, with banks reluctant to take on syndication risk at such an unpredictable period in the credit cycle.

According to White & Case figures, leveraged loan and high yield bond issuance across North America and Western and Southern Europe over the first nine months of 2023 declined by almost a fifth year-on-year from $1.13 trillion in 2022 to $920.54 billion this year.

Tightening loan and bond markets and cautious banks have allowed private debt managers to cherry pick deals and issue debt not only at higher interest rates, but also with lower leverage and lender-friendly capital structures.

Reshaping an asset class

The strength of the $1.5 trillion private credit space will drive ongoing and significant evolution of the asset class, with 2024 shaping to be a groundbreaking year.

In the second half of 2023 a growing cohort of banks made strategic moves into private debt, either as cornerstone investors in private lending firms, as seen in Rabobank’s investment in sustainable private lender Colesco; through partnering with private markets platforms, as seen with Societe Generale planning to raise a €10 billion credit fund with Brookfield; or launching dedicated private credit managers inhouse, as Deutsche Bank has done.

More banks, nervous about losing lucrative streams of leveraged loan and high yield fee income to competition from private debt, are expected to make similar strategic moves and step into private credit in some shape or form in 2024. This will blur the lines between the two types of providers and reconfigure the way borrowers look at their financing options in the future.

Default risk looms

The one cloud that will hang over private debt in 2024, however, will be looming default risk.

Private debt as an asset class only really came onto the radar as a credible alternative to conventional bank-led lending after the 2008 financial crisis, when banks retrenched from the market to rebuild balance sheets and manage legacy portfolios.

Since then, private debt assets under management have expanded at pace, as managers seized the opportunity to fill the gap in the market left by the banks. The asset class, however, has never been truly tested through a downcycle and borrowers and investors will be watching closely to see how managers behave when portfolios do become stressed.

Bank of America estimates that the private debt default rate could reach 5% by early 2024, exceeding default rates for syndicated loans. From 2024 onwards, roughly a third of deals in debt fund portfolios will be maturing within 30 months, according to Bloomberg.

Many of these maturing credits would have been issued in bull credit markets and characterized by high levels of leverage and loose terms. Some managers, who were eager to gain market share and took on more marginal transactions with aggressive capital structures, will be particularly exposed.

Bigger platforms didn’t have to chase the market in 2021 and 2022 and are likely to have more resilient portfolios, as well as the resource to manage out any credits that may fall into stress. Newer managers with smaller teams will come under much more pressure if portfolios do become stressed.

This is likely to drive a bifurcation of the market in 2024, as top tier private debt funds take up a growing share of private debt deal flow and fundraising, while smaller firms find that their teams stretched as they try to shepherd current portfolios through distress at the same time as trying to originate new deals.

Evidence of this bifurcation has already started to emerge, with Pitchbook reporting that the number of funds new private debt funds closing has contracted by more than 25 percent, even though year-on-year private debt fundraising value has climbed. This signals that LPs have already begun to focus on relationships with fewer, bigger private debt funds, which are becoming increasingly dominant forces in the market.

Great opportunity lies ahead for private debt managers in 2024 – but there may be fewer managers around to take advantage of it.

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What to watch out for in 2024:

• Interest rate stability will help revive real asset fundraising and deal activity after a difficult 2023
• Bid-ask spreads on real assets should level off although the market will bifurcate according to asset quality and subsector
• Fundraising will pivot decisively to established managers with larger platforms
• Energy transition will be a key driver of long-term real assets growth

Real assets managers will be hoping that cooling inflation and interest rate stability improve conditions for fundraising and investment in 2024 after a difficult 12 months.

Real assets have felt the full force of geopolitical and macro-economic volatility. According to PERE, real estate fundraising contracted to $92.8 billion during the first nine months of 2023, a 38 percent decline on the $150.4 billion secured over the same period last year. The current run rate could see real estate fundraising come in at the lowest annual level observed since 2012. Infrastructure fundraising has slowed significantly too, with CBRE analysis of Infralogic data showing a decline to the lowest levels in more than a decade.

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Hopes for stability

The headwinds that real assets investors have faced through the course of 2023 will persist into 2024.

In the real estate space higher capital costs and conservative underwriting will a remain a feature of the market according to JLL analysis, as companies reassess post-pandemic office requirements; logistics operators reconfigure warehouse portfolios amidst pressures on consumer spending; and investors take longer to make decisions when deploying capital.

In infrastructure, meanwhile, leveraged plays in sub-sectors such as telecoms towers and utilities will remain challenging. According to State Street, rising interest rates have made investments in competing, higher income asset classes more attractive than infrastructure plays, while climbing energy costs and falling global exports weigh on bottom line profitability. According to CBRE these dynamics have seen investors demur from committing to long-term, capital-intensive projects at a high point in the interest rate cycle.

There is nevertheless a degree of cautious optimism that the market backdrop for real assets investment strategies will improve in 2024, albeit below the levels achieved in the bull market of 2021 and early 2022. Interest rates will be the key barometer for a recovery in activity, with JLL expecting a steadier market to emerge should inflation continue its downward trajectory and interest rates stabilize. This could help to bring buyer and seller pricing expectations closer together following a period of volatile pricing shifts and limited deal flow on which to establish consensus on valuations.

Big platforms to dominate

In a trend that mirrors developments in other alternative asset classes, investors will commit the capital they do have available to bigger managers with large investment platforms in an effort to mitigate downside risk in a still choppy deal market.

Blackstone, for example, has raised at least €4 billion towards its seventh flagship European real estate fund since launching in April 2023, securing more than $3 billion of commitments in Q3 2023 alone. Copenhagen Infrastructure Partners (CIP), meanwhile, has raised €5.6 billion towards the €12 billion targeted for its fifth flagship, while Artemis Real Estate Partners closed its Artemis Fund IV on $2.2 billion, beating its $1.5 billion target.

Large real assets managers have also had the scale and resources to ramp up new strategies where they see opportunity and secure investor support. Real estate debt is one area that has seen a significant uptick in activity. Bain Capital and TPG are among the firms to launch new dedicated real estate debt strategies, while PIMCO closed its sophomore Commercial Real Estate Debt Fund on $3 billion to beat its $1 billion target.

Prolonged fundraising and reduced capital inflows in a slow exit market will also see managers across the board rethink their own operational models and running costs. Outsourcing back-office and middle office infrastructure will move firmly into the frame as firms prioritize reducing staff costs and other overheads.

Energy transition to drive long-term growth

One subsector that will animate real assets fundraising and deal activity for managers of all size is energy transition.

Delivering net zero emissions will require substantial investment, with McKinsey forecasting that $9.2 trillion of annual capital spending will be required between 2021 and 2050 to meet decarbonization targets.

Government and corporate commitments to securing the required investment to meet net zero target have insulated renewable energy and decarbonization projects from market volatility, with capital continuing to flow into these areas despite dislocation in other segments of the real assets space. The US Inflation Reduction Act and Europe’s Green Deal and REPowerEU initiative are among the global initiatives that have encouraged private sector investment into decarbonization.

For real assets managers these dynamics has driven substantial investor appetite for decarbonization and renewables investment strategies.

According to the Long-term Infrastructure Investors Association (LTIA), funds dedicated or partly dedicated to renewable energy have accounted for more than 90% of overall infrastructure fundraising since 2019. This secular pivot towards strategies with an energy transition theme has fed a swelling pipeline of renewable energy deal opportunities, with CBRE analysis of Infralogic data putting global live deal pipelines for renewables at around $3.6 trillion.

Real assets deal activity and valuations wills also become increasingly shaped by broader environmental, social and governance (ESG) concerns that extend beyond energy transition in wider areas of sustainability and energy and water conservation.

In infrastructure and real estate ESG has shifted from a “nice to have” to an essential part of a license to operate. Through the course of 2024 we expect ESG to become an important element of asset valuations, with widening valuation gaps between assets where ESG is embedded into operations and assets where ESG hasn’t been prioritized.

As market conditions improve through 2024 other areas of the market will rally, but energy transition and ESG will remain a key long-term driver for real assets fundraising and deal activity.

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Alter Domus is excited to sponsor the 2024 Fondsfrauen Gipfel in Mannheim on January 23rd.
Our very own Angela Summonte will be joining a panel of experts from Hauck Aufhäuser, KENFO, and Golding Capital Partners to discuss the role of AI in asset management.

The future of finance is evolving rapidly, and AI is playing a crucial role in this transformation. How will it impact research, sales, and investment decisions?
Get in touch with Angela and our Head of Digital Transformation, Danilo to learn more about how Alter Domus is leveraging AI to drive success in the finance industry.

Sam Wade and Tom Miller will be attending the Space UK Conference, UK’s leading property event, in London from 24-25 January.
This conference will focus on new business models and the future of work in the property sector. Sam and Tom are excited to share their insights and learn from other experts in the field.

Don’t miss the opportunity to schedule a meeting with Sam or Tom to learn more about why 80% of the world’s largest real estate houses trust Alter Domus to service their portfolios.

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.

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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.

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

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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.

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Read part one of this four-part series here.