Last March, we welcomed industry veteran Bill Salus to our Private Equity Advisory Board. With over 30 years of experience under his belt, Bill has held senior positions with some of the biggest names in the global investment and financial services industries, as well as influential boutique institutions.
We sat down with Salus recently to discuss some of the most critical trends driving the private equity industry — and to hear his thoughts on the future of fund administration.
What does it mean for you to be appointed to NES Financial’s Private Equity Advisory Board?
Having been in the investment servicing business for virtually my entire career, I was looking for an opportunity to leverage that experience into a long-term career situation. A way to use my experience to support and help firms in the businesses that I know best.
Private equity is the fastest-growing segment of one of today’s most popular asset classes: alternative investments. It’s also the segment with the most potential in terms of outsourcing strategy, products and services. And yet, despite the growth of this asset class, and a clearly demonstrated need for outsourcing, I found that the market doesn’t appear to be providing comprehensive outsourcing solutions.
When I looked at NES Financial, I was very interested in their fresh approach to this problem, in their focus on a more holistic service plus technology solution — and in particular on how that solution could lead to across-the-board efficiencies for managers.
What specifically attracted you to the NES Financial model? What does it offer that others don’t?
Let me back up for a minute to put this in context. After compensation, infrastructure is a manager’s largest expense, to the tune of some $35 billion market wide. Yet fund administrators are only addressing around 65% of that cost — leaving the investment manager to try to find and fuse together a patchwork of other service providers, point-to-point technologies, offline spreadsheets and such, to organize and operationally coordinate its total infrastructure.
That’s not what managers want to be spending their time doing. What they want (and, frankly, need) to be focusing on is hiring talent, raising funds, creating new investment strategies, making themselves competitive and distinctive.
So the market has been saying, “Where’s Silicon Valley in this space? They’re doing everything now, across seemingly every conceivable space — even for example, Amazon and Whole Foods! Why are they not specifically in investment manager infrastructure, one of the largest businesses on the planet?” To be sure, there are some elements of Silicon Valley in infrastructure — but there’s not a comprehensive, integrated plan of attack against these mounting costs and complexities which managers are dealing with.
What drew me to NES Financial specifically was its bottom-up approach to this problem. Instead of trying to plug holes, or offer only partial solutions, they’ve built a single, integrated technology environment. At its core is a powerful data warehouse protected by top-grade security, wrapped around an industry-standard general ledger along with enterprise resource planning capabilities.
This holistic database view can be stretched across a fund manager’s infrastructure, middle and back office, enabling them to encapsulate any business process, make it much more efficient, and deliver it consistently. All of this at a scale that drives increased margin. To me those are significant advantages.
You mention the mounting costs and complexities facing managers. Can you elaborate a little on that?
First of all, PE funds are basically investment funds. Managers are putting their name and reputation on the line dealing with both institutional and retail investors. They have to service the base that supplies their capital. And that means delivering these investment strategies, accurately, reliably and responsively — and as cost-effectively as possible. That’s particularly true when you’re talking about an asset class that is selected specifically because of its non-correlated returns.
Another complexity facing managers is a significant regulatory burden that seems to grow daily. Ever since 9/11 — and even before, in fact, since the Madoff scandal — the scrutiny of capital sourcing, due diligence on investors, cyber-readiness responsibility, and the constant monitoring of the investor base have mounted.
And the due diligence works both ways. The scrutiny that a fund manager undergoes from potential investors nowadays is tenfold what it used to be. If a manager doesn’t have its operations together — if its infrastructure is not tight, if it’s not wrapped in bullet-proof security, compliance and operational processes, and if it can’t deliver transparency to its investors — then the manager may not raise the capital it needs.
You could sum it up this way: investors in this asset class are looking for a specific type of return for a certain type of risk. But that risk should be investment risk — not operational risk.
So what do you see as the future of fund administration?
In a nutshell, the modern “fund administration” model is one that would stretch beyond that traditional 65% I referred to earlier — and address the infrastructure needs across the manager’s entire operation.
It begins with managing data — from the very trades that the manager is making, through the life cycle of the investment, the way it touches investors, to the way it needs to be reported to regulators and compliance authorities. This kind of data-driven infrastructure not only enables a single-purpose accounting and transaction flow environment, it also allows the manager to continually expand the data upon which the business is run — data such as valuation, asset-level transparency, compliance and regulation, market data, peer-group data, tax information — all stemming from the same core information the manager is using to manage both its investing and its investors.
Once you have that kind of environment, you’ve got the potential to create efficiencies in workflow, efficiencies in data delivery, efficiencies in analytics — and make the environment more secure and straight-through.
From those efficiencies, of course, come the cost efficiencies that managers are demanding — all while providing their investors the faster and more complete information they require to manage, invest and validate their investments.
And, for the sake of the fund managers, invest more capital!
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