Self-administered funds have been declining for 14 consecutive quarters. We took a look into why.
“Doing it yourself” (affably known as DIY) has been trending over the past few years, but not just in home-improvement and Pinterest projects. For a while, funds saw advantages in doing their own administration. There are perceived cost savings by doing the back-end work in-house, as well as complete control over the NAV process.
Self-administration for all types of funds may have been the popular choice at one point, but there’s been a consistent shift in the opposite direction for nearly four years straight.
According to Convergence, a leading provider of global alternative investment manager data and analytics, this trend will likely prove to be the norm for the foreseeable future. While the market segment is growing, self-administration is losing out in terms of market share. In an alternative funds industry reporting USD 16 trillion in Regulatory Assets Under Management (RAUM), the share of self-administered funds declined 2% over the past year (YOY June 2019) from 42.4% to 40.4%.
Hedge funds were first, now private funds are leaning in too
Hedge funds were first to ditch the self-admin in favour of reputable, independent service providers and now private equity, real estate, and venture capital fund managers are following suit. Outsourced fund administration providers offerings focus on accuracy, automation, efficiency and customised reporting. With illiquid asset class expertise and clear SLAs, service providers are now delivering beyond expectations. The burden of retaining in-house staff and investing in best of breed technology (particularly portfolio reconciliation, treasury management, fund accounting and investor accounting which are increasingly being driven by robotics, predictive analytics and autonomous processing) are becoming more and more evident.
The rise and influence of Institutional Investors
We know investors, particularly in institutional capital, are largely contributing to the notable growth in the alternative funds market. Not only are they driving the industry, they’re demanding more transparency and setting new precedents for good, independent governance. With more emphasis on understanding the composition and returns of portfolios, clarity on fund expenses, and environmental, social and governance criteria, investors and C-suite managers are being swayed in their choice to outsource fund administration and shadow accounting.
Interestingly enough, the outright value of self-administered funds is up almost 5% as some of the largest industry players are holding out on switching to a third-party administrator, leveraging their in-house talent to continue without outside pressure, while raising huge pools of investment money. However, as we see strong growth in private equity (YOY 16%), venture capital, (19%) and real estate (9%), far outpacing a sluggish hedge fund (YOY 4%) RAUM, these fund types are now jumping on the admin outsourcing bandwagon too. Even the largest players holding onto self-administration hasn’t been enough to keep the trend pacing upwards with the growth of the market.
Intertrust is a global leader in fund administration, accounting and reporting.
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