NES Financial Private Equity Advisory Board member Bill Salus discusses how shifting dynamics in the PE market are driving managers to seek a more rigorous — and strategic — fund administration model.
Since the Madoff and 2008 financial crises, there’s been a strong push toward transparency across alternative asset classes. This push has come from two directions simultaneously: from limited partners anxious about black-box investment models, and from regulators concerned about the overall security of financial markets.
While the drive toward transparency hasn’t gone away — and alternative funds will likely remain under the microscope for some time — investor priorities have shown signs of rebalancing toward performance. In addition, with the general expectation that the Trump administration will be more averse to financial regulation than its predecessors, many managers feel less impelled to prioritize operational transparency in their spending decisions.
Still, the overall level of industrial-strength fund management infrastructure has definitely risen; it is now expected by investors and drilled into during due diligence exercises. And so, these market-driven shifts do not mean that having an effective, data-driven fund administration solution is now less of a priority for private funds. In fact, the opposite is true — for several reasons:
Competition. With competition for capital stronger than ever, and the scale of operational risks such as cyber or AML/KYI matters larger than ever, funds require more rigorous administration (efficiencies, streamlining, compliance, security, etc.) than before — not less. These are the bedrock services that every manager needs in order to operate today, regardless of their size or aspirations.
Complexity. Competitive differentiation is driving many funds to devise unique, highly complex investment strategies, often involving illiquid assets such as real estate. Management of these strategies requires sophisticated infrastructure — the ability to simultaneously manage multiple databases and feeds, calculate valuations, apply advanced techniques such as data analytics, and employ augmented and artificial intelligence applications. Rather than attempting to build such technical competencies in house (a task that many fund managers see as beyond their core mission and/or capabilities), managers are finding strategic advantage in working with outside providers who have the required scale, technology and expertise.
Structuring. Performance is about more than rates of return. It’s also about tax efficiency, and the ability to handle and offer investors advantageous structures. Complex investment strategies require intricate structuring, and managers are constantly seeking to fashion tax advantages — for example, offshore or onshore fund structures using look-throughs or blocker corporations — that provide optimal tax and investment efficiency to investors. While an investment strategy may be straightforward, the fund structures are not.
Value-added features. Offering limited partners services associated with large-scale institutional investors — such as a sophisticated investor portal with real-time visibility into their funds, or even portfolio analytics — can also create significant competitive advantage, especially for smaller funds competing with larger players.
Holistic approach. Addressing infrastructure in toto — beyond the share of tasks traditionally outsourced to fund administrators — could enable significant efficiencies, higher quality, stronger compliance and better security for private equity funds. By its nature, a holistic, active-data architecture would not only drive down costs and tame the complexity of juggling multiple providers; it could begin to transform the back office into a strategic growth driver — enabling a kind of “operational alpha.”
Regardless of the ebbs and flows of the market, ultimately, what all fund managers need is the confidence and flexibility to run their businesses the way they see fit. The right mix of technology and client service can give them the solid foothold they need to maximize their strategic advantage at an especially complex time.
Bill Salus, NES Advisory Board, Founder & CEO Paddock Consulting
Named in Global Custodian’s Securities Services Hall of Fame, Bill has over 30 years of experience in sales, management, and consulting in the global investment and financial services industry. Most recently he served as Global Chief Executive Officer for Apex Fund Services, a leading fund services company. Bill has also held senior positions at BNY Mellon, PNC Global Investment Servicing, KeyCorp, and Bank of America.
In addition to his industry work, Bill serves on the Finance Committee for the Ronald McDonald House of Wilmington, DE and is a member of the 2017 Committee of Hearts, Hedge Fund Cares.