With a focus on fund technology and the rise of alternative assets, Directors Rory Blazeby and Richard Hansford examine how outsourcing to a specialist fund administrator can help alternative assets Chief Financial Officers (CFOs) with the scale and growth of their business.
Best-in-class: alternative assets
Over the past decade, alternative assets have witnessed unprecedented success. Investors have looked to diversify their portfolios away from public markets in search of the attractive longer-term returns that private equity, venture capital, private debt, infrastructure and real estate have all delivered in recent years. Their significance is set to rise further, too; Preqin's Alternatives in 2019 report expects the industry to reach $14 trillion in assets by 2023 - which would mark a growth of 59% from 2017.
However, headwinds such as geopolitical trade issues, volatile capital markets, record valuations and unrelenting regulatory change all pose threats to the industry's trajectory. As a result, investment management firms need CFOs who can calibrate their operations with resilience, efficiency, competitiveness and scale - all while managing operating costs in response to investor demands.
Reliable administration is a vital component of an efficiently operating fund. Yet there is a mixed approach to how it is carried out from General Partners (GPs) across continents. Some opt to outsource all fund administration and accounting tasks, while others prefer to keep the responsibilities in-house or opt for a 'hybrid' solution.
In Europe, we continue to see GPs re-evaluating their operating models and seeking out a fully outsourced solution. By lifting the administrative burden, we believe CFOs are more likely to achieve a robust and efficient operating model. It can also complement their firm's investment activity across pivotal functions such as portfolio analytics and investor relations and enable them to compete for both talent and capital while reducing costs.
So the CFO must make a decision; develop an inhouse solution by building a fund administration team and implementing associated systems, or outsource to a dedicated specialist?
Outsource or insource? Technology in fund administration
When it comes to utilising technology to manage data, the real alternatives industry is playing catch up. Even though the industry has seen significant platform developments over the last 10 to 15 years, investors now want more information on demand. This can test a GP's operating model as they need to have access to specialist technology to fulfil these requirements. Many large private asset managers can find themselves using multiple platforms and service providers to manage these processes and this often ends up becoming an onerous and time-consuming task. There are also security, cost and implementation issues to consider.
83% of CFOs surveyed in EY's 2018 Global Private Equity Survey stated that the most difficult technology to implement related to fund accounting
In an extremely competitive marketplace, inefficiencies mean less time is spent on core strategic and value‐adding activities such as fundraising, deal execution, performance analytics and developing investor relations. This issue was echoed in Funds Europe's 2019 survey Digital Transformation in Fund Administration, which revealed that digital transformation was the top priority in asset-manager operations. However, legacy technology remains a barrier to digital transformation, with just over a half of respondents citing it as a major problem.
Specialist administrators with the requisite software, scalable operating models and appropriate controls in place offer the most compelling proposition to CFOs striving for operational efficiency. This creates a standardised operating model that drives down both costs and operational risk - key elements in GP and LP decision making.
In part two, we examine how rapidly evolving regulation can strain CFOs' efforts to attain operational efficiency and how outsourcing fund administration to a specialist administrator can ease that burden.
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