The administrative and sector specific expertise of fund administrators are the best answer for the challenges faced by funds. Paul Perris explains why.
A recent report by PwC produced this year suggests that alternative funds will find themselves increasingly pulled in different directions; the need for made-to-order products from sovereign wealth funds and the largest institutional investors, next-generation, multi-strategy offerings and liquid alternative strategies for both retail and institutions. These audience needs will drive the requirement for alternative funds to offer more and more custom-built solutions.
Custom built will become the new normal, as it will necessitate managers to spend more time building relationships with their clients and meeting their individual needs. The discussion around co-investing will likely evolve towards more involved partnerships with greater transparency and economic alignment. With all of this in mind, managers will need to ask themselves whether they can still achieve alpha for both portfolio performance and cost performance.
Funds seeking to attract more institutional investors are looking to become infrastructurally agile and scalable. Alternative funds have incredibly diverse portfolios which make it challenging to measure and compare profitability; as regulation evolves, it may become increasingly relevant for funds to report in more granular detail.
Many funds choose to outsource to avoid making their own investments in technology solutions, and the human expertise that are required to operate them."
The most efficient way to invest in long- term, strong robust infrastructure whilst retaining the ability to react to short- term shocks is to outsource. Fund administrators already have the expertise in place to scale as quickly as is necessary without the risk of investing in the extra ‘locked in' costs of building out internal, administrative business lines.
All of this comes at a time where businesses' cash flows have been thrust to the forefront; discussion and scrutiny on this is likely to intensify over the next few months as furlough schemes are cut back and it becomes clear which of the ‘zombie' businesses really have been swimming without costumes.
Funds that can demonstrate well thought out operating costs, and the ability to leverage these costs, will be more attractive to investors than ever. Additionally, there is the unassailable principle that outsourced costs are inherently more palatable for investors.
Processes and platforms
Historically, it was inefficient to use outsourced technology; as fund administrators did not have technology platforms that were setup to cater to sector specific requirements, this made them clunky and inflexible.
The past few years have seen a revolution on this front, with many fund administrators today having purpose-built technology platforms and sufficiently qualified personnel that are geared towards the client's sector as a focus. Technology solutions accounted for 43% of fund administration selection, according to a recent KPMG report on the issue. As such, many funds choose to outsource to avoid making their own investments in technology solutions, and the human expertise that are required to operate them.
When ‘best practice' solutions are examined, there arises the need to compare a plethora of solutions and case studies to find out what really works. This is difficult for funds to do. Fund administrators can easily marshal a library of highly relevant precedents to build on.
For these kinds of innovations, it is better to reimagine the wheel, not reinvent it. With purpose-built teams it is easy to combine sector expertise with a holistic and comprehensive understanding of fund administration processes. The most effective administrative solutions are only achievable by leveraging this blend of expertise.
Compliance and regulation
The future of looks to be technocentric. It will be advantageous for funds to be able to view positions and scenarios across their whole portfolio on one dashboard. Platforms that can collate information from various sources onto one user friendly hub will enable investors to make informed decisions much quicker and with less human interaction. Information readouts will be available in real time, eliminating the need for emails and calls to ascertain a static piece of information which in turn is easier to manage from a GDPR and cybersecurity point of view.
Additionally, time can be spent on more strategic decision making geared to boost overall fund performance. This trend will make LP's keen to have access to the strategic inputs of high-level professionals as they will be proportionally more necessary for delivering competitive performance.
In terms of compliance, the proverbial arms race is well underway. Regulators are pulling away from asset managers that are feeling the strain of the scrutiny. Compliance technology systems used by regulators are simply better than the systems used by asset managers. Reporting requirements will continue to become more demanding as the government frantically tries to manage the economic fallout from Covid-19. To get ahead of the regulatory curve, funds will need to invest or rely on the expertise, and already extant compliance technology offered by administrators.
Before the outbreak of covid-19 all the signs were pointing to more reporting around ESG, and the pandemic has only intensified investor interest in ESG. In the not-so-distant future, regulation is likely to evolve to ensure ESG investments are also socially responsible, and transparently so.
As things stand today, significant ESG reporting and compliance is already required, so for funds wanting to get ahead of future regulation it is important that they invest in these areas now by outsourcing to a dedicated, specialist firm.
In terms of ESG's role within underlying portfolios, a recent PwC report found that 71% of LPs would factor ESG considerations into their investment decision making process. Again, this demonstrates the need for clarity, transparency, and accuracy in ESG reporting, so that managers can base their decisions on the best information available, lest their returns and investment strategy should get compromised.
Paul Perris is CCO of Crestbridge.