THE FUND ADMINISTRATION MARKET CONTINUES TO GROW RAPIDLY ALONG WITH THE PRIVATE FUNDS INDUSTRY
The private fund administration outsourcing industry has experienced incredible growth in recent years. There are currently several hundred well-established fund administrators, with the largest firms having over one trillion in assets under administration. Hedge fund administrators experienced a major surge in growth after the Bernie Madoff scandal, as institutional investors mandated firms to hire a 3rd party administrator for fund accounting and certain operational processes.
Private equity (“PE”), real estate, infrastructure, credit, venture capital, and other closed-ended (or drawdown) firms followed the lead of the hedge fund industry to outsource accounting and operations functions. There was a slight lag due to various reasons, including lack of trading, lower volume of investor transactions, uniqueness of each firm, and lack of mandates by institutional investors (due to the perception of lower fraud risks).
SERVING PRIVATE EQUITY (AND OTHER CLOSED-ENDED STRUCTURES) IS A MAJOR GROWTH AREA FOR FUND ADMINISTRATORS
The tendency to insource accounting and operations by private capital firms has changed and serving closed-ended vehicles has been and continues to be a rapidly growing business across most fund administrators.
Anecdotally, closed-ended fund managers of newly launched funds almost exclusively hire 3rd party administrators, with some outliers that prefer to keep accounting and operations in-house. New managers have the luxury of a blank slate operating model, and many choose to outsource to mitigate internal overhead costs, improve time to market, and leverage the experience and tools of other firms.
Fund managers cannot outsource accountability, so they retain senior staff and shadow specific processes (i.e., management fee calculations, incentive fee / waterfall calculations, and review of capital call notices, distribution notices, and partners’ capital account statements). These are all highly sensitive client facing processes with zero room for error.
FUND ADMINISTRATORS ARE INVESTING IN THEIR OPERATIONS
According to fund services expert and founder of Paddock Capital Markets, Bill Salus, “With the growth in back-office outsourcing for private funds, many fund administrators have increased scale by expanding into new geographical markets, adding new products and services, purchasing smaller fund administrators, or taking on significant growth capital from private equity investors.”
Competition among fund services companies is fierce with each provider striving to differentiate themselves against their peers to capture share of the market. Technology is an area where fund administrators can differentiate themselves from a client-offering perspective while improving efficiencies and service quality, as well as expanding product offerings (and potentially data and insights) to sell to fund manager clients.
TECHNOLOGY IS A DIFFERENTIATOR FOR PE FUND ADMINISTRATORS
Fund managers seek “white glove treatment” where the fund administrator is an extension of their team for accounting and operations processes. Fund administrators need to be reliable, trustworthy, competent, and highly experienced to win and keep the business of their clients. To keep pace with competition for the closed-ended market and provide the highest level of service, fund administrators are investing in technology.
Spotlighted below are key technologies used as “differentiators” by fund administrators serving private equity, venture capital, real estate, infrastructure, credit, and other closed-ended firms.
- GP Analytics Portals
Fund managers can access “at your fingertips” data from a fund administrator’s accounting, security master, market data, and CRM systems. Clients of fund administrators are able to access investment and investor data from the administrator’s accounting system augmented with other data (i.e., portfolio company financials and KPIs, CRM details, ESG metrics, Cash Balances, etc.). Products such as PFA’s Performance Management module provide this interactive experience to quickly access data on investors and investments.
- Investor/LP Data Portals
Limited Partner (“LP”) Portals allow Investors (or LPs) and their contacts to access documents and analytics on the funds that they have invested in. Historically, this has been document focused with the rise of data and analytics being accessible by LPs. As institutional investors improve their data and analytics in-house operations, it will become more important for fund managers to provide data to LPs in a digital form for them to digest this data. At PFA, we have developed our GP portal to be data focused and the ability to extend out to LPs. We look forward to being a part of the digitization of GP and LP portals.
- Computation Engines
Tools such as waterfall calculators are used internally at fund administrators to compute realized carried interest and hypothetical carried interest. Forecasting incentive fees / carried interest gains–based on specific criteria–is emerging as an added utility offered by fund administrators.
- Fundraising Tools
Fundraising is a critical foundation for private funds to access the capital they need to run their businesses. Fund administrators that provide this tool relieve the need for fund managers to license this type of portal independently.
- Investor Onboarding
Digital subscription processing tools allow fund administrators to provide the added benefits of streamlining the investor onboarding process and reduce manual efforts, allowing investors to enter their subscription details directly in an online portal as well as supporting the AML/KYC process.
- Workflow Tools
Some fund administrators leverage workflow tools internally for improved task tracking and externally with their fund manager clients. Processes include period close steps, capital calls, distributions and investor onboarding; improving the transparency and auditability of processes between fund managers and service providers.
As the alternative investment industry grows, fund administrators will continue to mature and invest in client-facing technology to differentiate themselves and provide the best service possible for their clients. The industry cannot exist without talent, and since fund administrators are extensions of their clients, they must develop their organizational models in tandem with technology improvements. Soon, fund administrators will be expected to offer value-add tools for their clients and “at your fingertips” access to data and documents. At PFA, we are excited for the future of the industry and to continue to be a trusted partner with our fund administration and fund manager clients.