As private equity managers search for value, further emphasis is being placed on the operational and cost efficiencies outsourcing fund administration can provide, explains Christophe Gaul, Regional Head of Europe and Managing Director - Luxembourg in an interview with Paperjam magazine. *
* Watch Paperjam's interview with Christophe here.
Has there been a change in mindset towards outsourcing fund administration capabilities in recent years?
It has certainly changed. Managers were once reluctant to outsource core administrative functions but the trend to choose specialist third party providers continues to gain traction in the alternative investment space, with private equity firms evaluating the cost-benefit trade-off with increasing favour. The main reasons include: increased LP and investor pressure around transparency; the requirement for secure, institutional-grade technology; governance challenges; and the pace and complexity of regulatory change - think AIFMD, FATCA, CRS and BEPs and more.
Yet the decision to outsource essentially comes down to the manager - often the CFO or COO - recognising that keeping fund administration in-house is in many cases, an inefficient use of time and resources that can result in an expanded, cost-heavy back-office. This sentiment was evident in EY's 2020 Global Private Equity Survey, where 74% of PE CFOs wanted their teams to allocate more time to the core focus of portfolio analysis and less time to fund accounting.
Has the Covid-19 pandemic affected the growing trend of outsourcing?
Regardless of the industry, we have seen the pandemic exacerbate existing trends and catalyse change. The private equity space is no different. Many portfolio companies in vulnerable sectors such as hospitality, have seen valuations drop significantly over recent months. This has intensified pressure on managers to re-evaluate their operating models in search of cost efficiencies that can be passed back on to stakeholders. Therefore, for those managers having conversations about outsourcing fund administration, the pandemic may have expedited that process. Outsourcing is a natural step to make when looking to streamline operations as it removes the costs of recruiting, training and maintaining permanent administrative specialists and adopting the advanced technological systems required.
What do private equity managers often look for in a third-party fund administrator?
Clients now expect more value, a higher quality of work, and a faster delivery of solutions and services than ever before. Successful fund administrators will do this whilst demonstrating stability, consistency and operational resilience. LPs want full transparency and evidence of the fund administrator's operational excellence before committing, so having trust in their capabilities is paramount.
Experience is key - do they have the necessary skills and experience to effectively navigate all possible scenarios? Attracting, training and retaining people that understand the complex, changing regulatory landscape is incredibly hard and so outsourcing to an administrator with specialists across the compliance, regulatory and investment management functions is an attractive proposition.
At Ocorian, we have increased our capabilities with the acquisition of a Luxembourg-based third-party management company (ManCo). This enables us to act as an end-to-end service platform for our clients with AIF, RAIF, non-AIF and UCITS funds, handling the entire value chain from the fund management (AIFM, ManCo), through to the fund and SPV administration, as well as acting as depositary.
Having robust, institutional-level technological infrastructure is also a pre-requisite. Increasingly, investors want investment information on-demand and this can test a GP's operating model. Many large private asset managers can find themselves using multiple platforms and service providers to manage these processes and this often ends up becoming a time-consuming task. There are also cybersecurity, cost and implementation issues to consider.
At Ocorian, we invest heavily in cutting-edge processes, portals and tools to enable GPs to scale quickly and optimise their workflows. This offering can often be a deciding factor when choosing an administrator and we work closely with clients to customise the platforms so they fit their specific needs.
A fund administrator must offer more than just a saving of fees. As investment structures become more complex and international, comprehensive risk management and governance frameworks are critical in ensuring full visibility and compliance across all structures and locations throughout their life cycle.
Given the impending deadline of the UK leaving the European Union, do you expect to see an influx of UK private equity managers outsourcing AIFM functions to Luxembourg in order to access investors?
There are definitely opportunities with Brexit. Many smaller and medium sized managers will need to find a way to market their funds to the vast numbers of European onshore investors. For UK fund groups - especially the smaller to mid-sized private equity and real estate houses - they are likely to lack the resources necessary to create their own substance on the continent. In that case, it is much easier to engage with a company such as Ocorian - a local, third-party AIFM who already has the licenses and operational platform to efficiently market funds to EU institutions. With our service offering and our strong foothold in Luxembourg as well as the UK and the Channel Islands, we are well placed to help these managers.
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