Fund Administrator penetration of the Hedge fund market is above 80%, and having a Fund Administrator has become a requirement for Hedge funds of any size.
Private Equity assets have risen from $30 billion in 1995 to $4 trillion in 2015. All indications are that growth will continue to be steep, as 64% of LPs plan to increase their allocation to Private Equity funds, which increased from 26% just 5 years ago.
Despite this dynamic in Hedge funds, Fund Administrators have not penetrated Private Equity and Real Estate funds in the same way. Estimates are that penetration by Fund Administrators of Private Equity & Real Estate funds AUM is only 30% today, and projected to increase to 45% by 2018.
I think this growth projection is understated, however, because many of the reasons that compelled Hedge funds to begin using Fund Administrators also apply to Private Equity and Real Estate funds.
Here are 3 key reasons why Hedge funds had to begin working with Fund Administrators and why these also apply to Private Equity & Real Estate funds:
1. Investor demands for greater transparency
I think that this is going to be the biggest driver that will force Private Equity and Real Estate funds to use Fund Administrators. Investors are increasingly demanding third party validation of AUM and Net Asset Values, as well as greater transparency in reporting.
Particularly when institutional investors are factored in, operational due diligence of a fund is occurring earlier in the RFP process. Institutional investors want to have confidence in the middle & back office capabilities of the fund, which generally means a strong accounting and reporting practice.
If these investors don’t have confidence in the management company, then they will increasingly pass on the opportunity. One recent Private Equity study shows that 65% of LPs are increasing the level of operational due diligence that they are performing on GPs.
2. Increasing Regulatory & Compliance pressures
This started to materialize in the aftermath of the Bernie Madoff scandal, with acronyms like KYC/AML, FATCA and others fast becoming part of the lexicon.
The conventional wisdom that I’ve heard is that Regulatory & Compliance pressures aren’t the same for Private Equity and Real Estate funds because the level of activity is less frequent. I find this argument to be short-sighted, because some of these regulations already apply to fund types beyond just Hedge funds.
3. Technology as a requirement
Technology is already a means of differentiation among progressive Private Equity and Real Estate Fund Managers. My feeling is that technology should be a requirement for all of these fund managers.
Technology can provide an effective means to address points #1 & 2 above, but how technology is best employed can be tricky.
When it comes to technology, there are two typical approaches that are taken. The first approach is often for the management company to try handling it on their own, including attempting to build out technology themselves. The second approach (often after having been unsuccessful in the first step) is for the management company to handle an external technology vendor on their own. Either way, the experience often ends up with the same result: handling technology on their own takes more time, personnel, and money than they expect.
Private Equity and Real Estate fund managers should instead look to Fund Administrators to implement and manage technology that they need. Fund Administrators are better suited to adopt and manage technology given that it is required by all of their fund manager clients. This is also a more cost effective solution for fund managers, because Fund Administrators are better suited to spread the cost of technology across their clients.
Fund Administrators as the answer
Private Equity and Real Estate Fund Managers that still think they can go it alone without the help of Fund Administrators are going to quickly fall behind, and lose out on opportunities.
Beyond the points made in this article, Private Equity & Real Estate Fund Managers should listen to Kevin O’Neill, managing member and co-founder at Broadscope: “If you have a strong back office, it won’t necessarily win an investor, but if the back office is weak, it’s very likely that you won’t get the job.”
- McKinsey. “The $64 trillion question: Convergence in Asset Management”, February 2015
- Hedge Fund: Tiburon CEO summit materials. Private Equity: 2015 Preqin Global Private Equity & Venture - 2020E AUM. PWC Asset Management 2020 - A Brave New World
- Pensions & Investments: “Private equity firms embrace outsourcing. More managers go with outside administrators, driven by sophisticated strategies, client needs”, March 2014
- HedgeWeek: “Convergence drives strategic operational partnerships”, October 2016
- SEI “The Future of Private Equity”, October 2016
- Linedata “2016 Global Asset Management & Administration Survey”, October 2016
- Longitude Research “From Coal to Diamonds: 2020 Vision – The Future for Fund Administrators”, 2016
About Chris Andraca & BaseVenture Chris Andraca is a Director at BaseVenture, with responsibility over Sales, Marketing and Client Services. BaseVenture is an award-winning software company that is helping the alternative investment industry simplify & modernize how private funds are managed and administered. Learn more about BaseVenture at www.baseventure.com.