These days, technology is such an integral part of private markets funds administration that the line between technology provider and administrator has become blurred. Buzzwords like artificial intelligence, machine learning and robotic process automation (RPA) are fast becoming clichés in sales pitches to GPs that may once have held doubts about being first adopters but are now fearful of being left behind.
The good news is that the fund administration tech on hand today can work wonders in comparison to previous offerings. Fund managers are becoming more comfortable using software-as-a-service apps and with their administration being ‘in the cloud’.
Every routine task that can be automated is being subjected to it. Administrators are now able to use modern technologies to service hybrid funds that intersect private equity, real estate or private credit, and are speeding up the intake and organization of notoriously inconsistent loan documents in credit offerings.
However, a common theme has emerged in discussing even the most cutting-edge projects: there is still a ceiling to how big a role technology can play in fund administration, according to several industry players.
The nature of private markets – with their complex, unique fund structures and limited partnership agreements – still requires a human to be a part of the process, and without industry-wide standardization, fund administration will not go ‘driverless’ any time soon.
Even so, the industry’s rapid growth in size and complexity, combined with calls for greater transparency within the private funds system, has made fund managers and their administrators eager to leverage technology whenever and wherever they see an opportunity.
“Technology has never played a bigger part in fund administration than it does today, whereas 10 years ago, the systems and solutions simply worked the way they did,” says Bhagesh Malde, global head of private markets at SS&C Technologies. “Since then, the industry’s technology capabilities have only grown more sophisticated and reliable.”
Luddites no more
Such a digital revolution could only take place if GPs were willing participants. Growing pressures from LPs and regulators for greater transparency left them with little choice but to find better ways to manage the mountains of data a modern firm produces.
Those pressures are being further amplified as ESG becomes a key priority for the private markets, adding yet another category of information for firms to manage.
“Technology has never played a bigger part in fund administration than it does today”
“For any GP reporting ESG information, they need to collect data from multiple sources, especially if they want to substantiate their claims,” says Malde. “And with no international standard for ESG reporting, such reports need to be tailored to the various regulatory requirements. Even if they don’t have us handle ESG reporting, they still need us to gather, normalize and classify all that data.”
Another driver for GPs’ increasing goodwill toward technology is security enhancement, according to Albert Bauer, managing director at Citco Fund Services. “Five or six years ago, if we told our hedge fund clients we’d be working from the cloud, they would have balked at that. But once we could demonstrate that their data would never leave their ecosystem, and they’d have unique encryption keys to access that data, they got comfortable with the solution.”
Even beyond security concerns, fund administrators have educated their clients on the potential and power of their technological breakthroughs. “[Microsoft] Excel is still the standard, in part because it’s a perfect tool for the individual operator to be in full control. The new technologies don’t have that same kind of flexibility and that intimidates people,” says Malde. “They can feel like black boxes, when actually these new solutions offer more control over their data, more transparency and greater collaboration opportunities.”
This latest wave of tech breakthroughs is not just being driven by client needs. For fund administrators that have struggled to recruit and retain talent capable of servicing the modern private market fund, technology is helping them to cope with the sheer volume and complexity of the work.
The talent war
“The war for talent has prompted capital investment in automation,” says Steven Millner, CEO and co-founder of Gen II Fund Services. “Firms like ours are accelerating investments in AI, machine learning and robotic process automation.”
One of the most cherished maxims of sales managers in this space is that by automating routine tasks, staff are being freed up to focus on higher-level work. But this adage does not tell the whole story.
“The labor pool is shrinking and technology can help supplement the workforce,” says Millner. “Technology will not reduce headcount, but it will uplift our current staff to do more, faster and more accurately.”
“The war for talent has prompted capital investment in automation”
Gen II Fund Services
Some administrators are making significant investments to automate their work with best-in-class solutions. SS&C Technologies’ Malde says that, as part of the firm’s acquisition in 2021 of RPA software developer Blue Prism, it was found that core technologies could “also help automate the duties of a significant piece of our fund servicing operations.”
“The industry has experienced high staff turnover fueled by high demand, tight supply and elements of the ‘Great Resignation’, and with Blue Prism we can automate up to 20 percent of the routine processing that fund accountants do, giving them more interesting work to do, all while delivering more value to our clients, making their roles more rewarding intellectually and financially,” Malde says.
While these market forces may be driving the current hunt for tech solutions, the breakthroughs that look set to change the game in the years to come are myriad.
Accelerating the cloud
Administrators point to the widespread adoption of cloud technologies and SaaS as a driver behind the speed at which new solutions can be tested and eventually put to use.
“Before the cloud, there were limits to our ability to test and perfect a given solution,” says Citco’s Bauer. “What used to involve months to onboard a new server for that new piece of software now takes nine minutes to load into the cloud, and test its efficacy and refine it from there.”
The relative ease of cloud sharing also allows for administrators to extend their best solutions to clients. “Three years ago, we built an intelligence automation group and one of the things they’ve developed is an RPA platform,” says Bauer. “This team would look at the manual touch points of a process and look at automating them. This platform was built in the cloud, making it easier for the teams to implement the processes themselves.”
The cloud has also meant a shift away from single-platform solutions. Sebastien Sacre, chief operating officer of private capital administration at Northern Trust, says: “Some years ago, a GP may only have Investran [a PE fund accounting software and reporting solution] and, in some cases, a portal to disseminate information to their investors, and now they’re using a host of apps, most of them inside the cloud.
“Some of them are very specific to a strategy, like real estate or private debt, while others are for workflow oversight, digitalization, or information delivery, and even cash management.”
Despite such technological progress, the fund administration industry would likely not have the luxury of the cloud if they could not assure clients that their uploaded data would be secure.
Cybersecurity has had its own challenges and breakthroughs of late, but fund managers understand it is an arena best left to the experts and simply want the assurances that they’ll avoid a breach on the scale of that seen at companies like Sony or Yahoo in recent years.
Still, some administrators are looking at more aggressive solutions to further lock down clients’ data and avoid phishing attacks.
“We’re working to eliminate emails for information delivery even though we currently have TLS [transport layer security] encryption,” says Sacre. “Instead, we want to use secure file-sharing apps to better protect the flow of information.”
The seamless stack
When private fund managers started a trend of managing multiple asset classes, administrators recognized that they needed to innovate to keep step with the market.
While plenty of fund administrators are choosing to stay in one lane, many others are looking to serve clients no matter what kind of vehicle they launch.
Given the complexities of such demands, technology is being deployed to better sift through the vast sums of data necessary to invest in PE, real estate and credit all at once. To date, administrators have largely met this challenge, but now focus has shifted to making the flow of information between various strategies even smoother.
“Clients are asking us to manage a mix of private assets, real estate, loans, PE and sometimes we even see some liquid assets in that mix as well,” says Malde. “Traditional PE tech might be able to tackle the master fund, but it would struggle to do more than that given the complexity. What SS&C does is connect the various software solutions we have for each specific asset class or instrument, using an application programming interface, so there’s a seamless flow of information across the complete technology architecture.
“Things like NLP [natural language processing] might have been used for hedge funds before, but we’re now able to apply them to things like private credit and private equity to great effect, allowing us to supplant proprietary PE tech with something more flexible and more powerful.”
Digitization gets savvier
Private market managers may struggle to manage all the relevant data they need, but even uploading information can be a terrible chore.
Information can still arrive in the medieval form of hard copy and may be formatted in wildly different ways. Luckily, the next wave of digitization tools is looking to simplify this process, making use of machine learning and NLP technologies to get smarter at reviewing documents that don’t look alike. This could be a game changer for private credit, where loan servicing documents are notoriously inconsistent in formats and, sometimes, language.
“Our tech uses natural language processing to read agent loan notices,” says Malde. “By looking at the context, it can extract the relevant info and numbers. The software has the ability to improve its accuracy, with a self-learning capacity.”
Bauer explains: “If it looks and smells like a trade date, maturity date or end date, our NLP tool will grab it properly for downstream processing. Then the operational teams review and correct it when it picks the wrong data. Ultimately, it becomes exception processing that also trains the NLP models to get better.”
One indispensable element
While all these technological advancements seek to raise the quality of administration, a recurring theme in discussing these tools is that they still only cover a fraction of the labor involved in the servicing of a fund.
Such a labor gap, fund administrators say, will necessitate a human touch.
“We can offer a truly ‘touchless’ NAV for our hedge fund clients, but we can’t do that for private markets,” explains Malde. “Highly qualified accountants are needed to understand and interpret the various structures and complexities, so there’s going to be a limit on how much we automate. It might [get to] 50 percent, but not likely past that level.”
Jeffrey Dorigan, senior vice-president for alternative fund services at Brown Brothers Harriman, says: “The tech is available to do, say, automated waterfall calculations, but I’d be surprised if it’s being used for more than 10 percent of private market funds.
“That’s because managers still need experts to read, understand and decode the LPA and translate that language into complex waterfall calculations that reflect what’s written in the documents,” he adds.
“We’re looking for a balance when investing in technology,” says Millner, who sees “areas where we can scale and improve cycle times and quality, but maintain the capabilities to administer and manage these complex structures. There is alpha embedded in those structures, and we need to support them.
“After all, that tech breakthrough isn’t progress if it jeopardizes a firm’s bottom line.”