For emerging and mid-market firms, larger administrators are often not the best fit, argues Joshua Cherry-Seto, chief financial officer at Blue Wolf Capital.
Is fund administrator consolidation good for managers?
It’s important to segregate managers on this topic. For large buyout shops with a range of products in the alternatives space and significant activity across jurisdictions, I would expect that consolidation is a positive for them.
For smaller managers which are running pure private equity firms up to $1bn-$2bn in assets, niche strategic relationships with fund administrators are more helpful. As a small firm grows, the limited transactions don’t warrant hiring internally, so a niche administrator which can develop systems and scale of resources is required.
Are administrators improving their service offering for the mid-market?
Some administrators are trying to come up with solutions better suited to the smaller firms of the mid-market, but generally the large administration shops require getting on their platform. We wanted a firm that could augment our staff in our environment of QuickBooks and Excel, provide partial full-time coverage at multiple levels of seniority and provide continuity of support. If we hired internally, we would have to overhire for a full-time position – have a controller also do bank reconciliation work. That means we can’t win: if we hire a superstar, we lose them within two years to an opportunity we can’t offer; a poor hire is costly; and we are paying too much for mediocrity.
Requiring private equity firms to get on the administrator’s platform is problematic, it is overkill. We’re operating well with the simple systems we have. A concern is keeping control of your operations as you are growing, and third-party platforms add unnecessary complication. Many large shops require onboarding to their platform as their compliance controls require ownership of the system and they can’t be more flexible.
Do LPs demand a third-party administrator?
Investors have come to expect that hedge fund managers of any size leverage a third-party administrator as a best practice. We increasingly see investors carry that expectation into the real estate and private equity space. I think that if you survey emerging private equity managers, you would find that a large percent now launch on a platform with an administrator from day one, which means additional costs and co-ordination but is welcomed by investors as they have the comfort of that third-party touch.
How important is an administrator’s global presence?
Many mid-market firms may only do single geography investing, generally US buyout, so having a global presence is not essential. That’s of more importance for an audit firm and counsel, but we do have a need to work with an administrator who can send a mid-level person on site now and then. As an emerging manager to a growing group, administrators need to not just manage the books but to be a partner in building out and improving processes. A huge fund administration firm may not have that higher-touch, relationship-management mindset.
I do think [the large administrators] are trying to figure out how to on-board more small shops to secure relationships which grow into large shops, but I’m not sure they are there just yet.