Given ongoing fundraising challenges in private markets, how do you see funds addressing liquidity issues?
Managers are getting creative; continuation funds are on the rise and secondaries activity has stepped up significantly in the last 18 months as GPs have sought to provide liquidity to LPs to allow them to re-up into their next funds. Those solutions all work, but we will potentially see private equity hold periods getting longer than the three to four-year turnarounds that have been typical. Extended periods of high interest rates will lead to returns coming not from leverage, but from longer hold periods, creating efficiencies and driving value creation.
Meanwhile, we feel the markets are starting to rebound, and macro trends in the US are now going in the right direction. The IPO markets should follow, and we would expect Europe to follow and liquidity to gradually return.
There are also opportunities for managers to raise open-end funds from retail-type investors. Those managers with larger platforms have big ambitions to expand and diversify their LP bases and there is a significant amount of capital there to be raised. Broadly, the opportunity for fundraising starts to look better going forward, whether tapping existing LPs or a new LP base.
What has been the impact of recent regulatory developments for managers?
Most of the regulatory developments related to the US Securities and Exchange Commission’s Private Funds Rule are a 2025 problem, with nothing new required until then. Right now, managers are trying to understand what they need to do, and we are looking at how we can be part of the solution.
A lot of the data that will be required by regulators is already there, so this is about being able to pull that out and put it into a digestible format. This regulation is a significant shift for the market that justifies us putting the resources into creating a new service to assist clients on the reporting demands these regulations have created, and we have a product almost ready to go before next year’s compliance deadline.
Bar any significant political change, we see the SEC becoming more involved in oversight, which creates a further opportunity for administrators that have data and regulatory reporting capabilities. In the US, managers have not been subject to the same level of disclosures and regulatory reporting, but in Europe this is very much part of our product offering.
What themes are you seeing in the evolution of operating models for private funds?
One of the big themes we are looking at is the opening up of the private funds market and the way that is driving how the back office is run. We have seen the market move from a partnership approach with minimal reporting to managers now having to comply with Institutional Limited Partners Association standards and regulatory requirements around reporting to LPs, and those requirements continue to increase.
Even if the US decides against further rulemaking, Europe is a regulatory hotbed, and it is not going to get any easier for managers to navigate that. That is driving more outsourcing around core functions, as well as funds looking to outsource more ancillary functions. The outsourcing pie continues to grow because there is much more that managers need to report on. We are also seeing more co-sourcing as a middle ground, where we provide the expertise and the people, but the data and systems remain with the client.
Meanwhile, since the pandemic, hiring challenges and increasing costs have given managers cause to reflect on their operating models and cost bases. With quieter dealflow, CFOs and COOs have been able to step back and review approaches, so we see a lot of larger managers engaging with us as a result.
Finally, consolidation in the industry and the M&A going both ways as alternatives seek to acquire traditional asset managers and vice versa is shifting the approach to the back office. Traditional asset managers come to alternatives from a very different margin environment, which drives more focus on the right cost models and making use of technology and workflow tools to gain efficiencies. Likewise, as alternatives platforms diversify into new sectors and strategies and become larger and more complex, more firms are investigating outsourcing options.
How is consolidation impacting the service models of fund administrators?
For fund administrators, we need to take on the challenge of building up the people, processes, sector expertise and geographical reach that our clients need access to. That is core business for us and inevitably if we are scaling up for one client, we are doing it for 10 or 20 others. That is a challenge we need to keep ahead of.
The arrival of open-end funds in alternatives was a big evolution that we had to create solutions for and address, which we were able to do. Now, as managers get bigger and more institutionalized, and as private markets merge with traditional asset management and the investor base includes more private wealth, the reporting requirements are elevated, and operating models need to reflect that. There will be a point where the line between traditional and private fund administration services becomes blurred, so we need to continue to look carefully at what is coming and what we need to solve for.
How is the industry embracing artificial intelligence and automation?
Internally, we are now using AI in various parts of the business. For clients, automating the subscription process is now relatively well advanced, but there is still a lot of manual process. That is definitely a focus for managers and something they are expecting administrators to be able to solve. We have taken steps to build on the existing digital subscription process we have, in direct response to manager demands.
From an analytics perspective, for managers that are maybe partially outsourced or those with multiple administrators using multiple systems alongside inhouse systems, there is a need to consolidate data in one place. Having a single data lake that you can manage, secure and be able to use efficiently for maximum impact is critical, whether in relation to deal sourcing, transaction management or valuations. That is something managers are looking to administrators to help with, so funds don’t need to build that infrastructure in-house.
Clearly in private markets there is more and more data, firms are getting bigger and deploying more strategies, so pulling all the data together in one place is becoming more important. AI and automation are still relatively new, and firms are at different stages of the journey with different priorities. Those with leaner middle- and back-office teams can see the benefits and are now looking to embrace AI and automation to a greater degree.
This article was originally published in Private Funds CFO’s Future of Fund Services Report.
