What roles are LPs playing in outsourcing decisions?
What roles are LPs playing in outsourcing decisions?
The question of outsourcing fund administration ultimately rests with fund managers, but increased pressure from their limited partners (LPs) to reduce operating costs and increase transparency is catalysing the switch to professional administrators says Mary Bruen, Regional Head of Fund Services - Jersey, Guernsey & Isle of Man.
Regardless of asset class, the bottom line for limited partner investors (LPs) is having the ability to analyse their investments with as much precision as possible. This is not just to monitor investment performance. Investors want transparency from their GPs on the amount of leverage being used in the fund, and how fees and expenses are being calculated.
The Global Financial Crisis (GFC) was a major force of change for LPs’ strategies. They found they couldn’t analyse their exposure across their entire portfolio. LPs learned the hard way, that they had exposure to the same investments across different funds managed by multiple GPs. This led to amplified losses across their portfolios instead of providing greater diversification.
Since the GFC there has been a marked push for greater transparency throughout the investment management industry. This has been expedited by several factors including changes in the relationship between LPs and GPs; the maturing of the industry; increasing sophistication of asset aggregators; and rising scrutiny of the private equity market by global regulators.
Meanwhile, high profile incidents will continue to push claims for enhanced transparency: in 2015 KKR incurred nearly $30m to settle charges that it failed to properly disclose fees charged to investors for unsuccessful buyout bids for a period of six years.
It seems transparency has risen to the fore and LPs are now conducting more detailed operational due diligence at the pre-investment stage. It is a key factor in how and where LPs allocate capital, especially as the search for yield, even within real estate markets, becomes more challenging.
What managers are looking for in a fund administrator
If you look at the market the average size of funds raised is growing. That means more investments being undertaken and more investors making commitments. All that brings with it added complexity which requires a sophisticated administrative response, including both human capital expertise and technology. Why outsource your fund administration?
Therefore, fund managers’ starting point when appointing an administrator must be analysing the provider’s depth of understanding of the underlying asset. We employ a lot of accountants and lawyers that sit as directors on our clients’ boards, providing the substance, management and control that a jurisdiction may require. They also bring the ability to interpret the deals being presented to them for approval.
A good fund administrator will also have a track record of running a fund and will understand how fund operations work. Having a robust fund administration system is, of course, also vital.
Finally, there is the important compliance and regulation component. Fund managers are extremely focused on ensuring things are done in the right way. For example, investors need to be onboarded efficiently, but also meet the regulatory hurdles that a given jurisdiction has around know-your-customer checks.
Managing that process can be hard work and getting it wrong can have serious adverse consequences. It is critical to work with a fund administrator that has a strong compliance function.
How new fund managers can leverage fund administrators
It is unsurprising there is a clear trend towards investors committing capital to fund managers that have a strong track record. Those managers typically find it easier to raise their next fund. However, there are also new teams that may be spinning out of well-regarded houses that do not have that readily attributable track record or mature operating model.
There are real advantages for those types of firms to partner with a fund administrator, so that they present potential investors with a robust operating model, rather than just relying on their own expertise.
The future of fund administration
The investment management industry is constantly evolving and service providers look set to play an even bigger role as managers focus on creating value and leave the administrative tasks to experienced providers.
There is potential for more outsourcing to third parties across multiple functions, including compliance, fundraising, investor services and corporate governance. These services can be provided by a single administrator in their entirety, or they can be broken up into their composite parts.
I believe we will see an increase in a bespoke approach, where the administrator sits down with the client and works out exactly what is required of them, which can then be provided from an ever-expanding service catalogue.
Fund managers themselves are increasingly developing bespoke operating models and administrators need to recognise that it is not a case of one size fits all. We pride ourselves on the ability to provide the flexibility of a boutique house whilst leveraging a platform that provides economies of scale.
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With specialist teams in key international jurisdictions, we provide a full range of fund administration and associated fund services to give our clients clear visibility and confidence in the performance of their investments.
Find out more about how we can support your fund operations here or by contacting our team below.