Fund administration for the alternatives industry is approaching a tipping point, with mounting industry headwinds leading many fund managers to outsource middle-and-back office processes to achieve greater operational efficiency and scalability.
That’s according to Citco’s Spring Industry Spotlight, which identifies the most significant issues and trends within the asset services industry for the year ahead in the following sectors: private equity, tax, real estate, hedge funds and private debt.
Private Equity: The greatest growth over the past several years has been in real assets – primarily from private equity and real estate funds. While investor allocations to these asset classes are increasing, only about 25-35 per cent of these asset managers use a third-party administrator. Similarly, loan funds, which have historically managed their administration function in house, are now looking at outsourcing.
New Tax Framework: A unified framework for tax reform could have far-ranging and complex effects on both private equity (PE) funds and their portfolio companies (interest deductions, lower tax rates, territorial taxation, tax on business income, and capital expense,).
Real Estate: With over USD3 trillion under management, the real estate sector has experienced significant growth throughout the Americas (40 per cent), Europe (35 per cent) and Asia Pacific (25 per cent). As a result of this trend, real estate fund managers are choosing to outsource operations to build scale, enhance efficiency and gain access to best-in-class technology. We predict that over the next three to five years, real estate fund servicing will mature.
Hedge Funds: Rising costs, increasingly complex investment strategies, changing regulatory environments and the rapid pace of technological innovation are among the key drivers leading managers to outsource a greater portion of their administrative functions. We anticipate that the hedge fund industry will experience greater diversification across asset classes, move into hybrid strategies and launch a wide range of investment vehicles (including Cayman-domiciled funds and regulated on-shore funds). This trend will lead to a greater number of fund administrators offering bespoke solutions to fund managers, rather than a traditional standard model.
Private Debt: Debt funds have enjoyed success due to the advantages they offer to both borrowers and investors, making the closed-end private debt fund an important market participant. Emerging alongside managers are specialist administrators expanding product and service offerings to meet the differentiated needs of today’s market participants. Capabilities and products that include dedicated bank debt teams, monitoring capabilities and portfolio management software allow managers to automate asset monitoring and accounting in a centralised system.
As of 1 January, 2018, Citco reported assets under administration across all product lines totalling USD950 billion. Growth was largely fuelled by strong performance from existing clients across emerging markets, private equity and real estate as well as equity investment strategies. In addition, new private equity and real estate mandates in the United States, Europe and APAC regions, offset negative flows in global macro and multi-strategy fund managers.
“Large changes taking place within the industry and the need to meet changing client demands has enabled Citco to reach a milestone of USD900 billion assets under administration,” says Jay Peller (pictured), Head of Citco Fund Services. “We anticipate the key drivers of fee compression, changing regulations and increased investment complexity will continue to shape the industry and lead to expanded product offerings across asset classes. Our team will remain steadfast in delivering the highest quality service and we are excited by the industry’s evolution.”
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