Future focus: Fund formation

Fund formation is a key component of a fund administrator’s role, encompassing investor onboarding and KYC; regulatory compliance; bank account and service agreement management; and Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) classification.

Missteps can cause punitive delays in an already challenging fundraising market. “A smooth and knowledgeable onboarding process should be a given,” says Agnes Mazurek, global head of private markets innovation at Apex Group. “We have seen lead times to launch stretch out on the back of the current fundraising environment. This means that GPs expect their service providers to do everything they can to make the areas that they are able to influence, such as KYC and AML, the back and forth on documentation and the subscription process, as smooth as possible.”

Technology is, of course, playing an increasingly important role in ensuring this seamless delivery. “The ability to automate these processes is a significant market differentiator in our view,” adds Mazurek.

“More and more digital platforms are starting to emerge to facilitate onboarding, AML and KYC,” agrees Serge Weyland, director general at the Association of the Luxembourg Fund Industry. “We are also seeing solutions that can assist even earlier in the fundraising process. For example, there are platforms that allow you to upload fund documentation before an LP has even signed a commitment letter and platforms that automate the digital signatures of LPs. Some also cover AIFM’s [Alternative Investment Fund Manager] oversight requirements for pre-marketing agreements.”

Fund formation requirements are also being influenced by managers’ increasingly global and cross-asset class profiles. “GPs are looking for partners who are subject matter experts across a breadth of different areas, and who have the global footprint and local know-how needed to successfully service global funds,” says David Sarfas, co-head of fund solutions at CSC. “Managers want access to legal counsel and teams which are at the very forefront of the regulatory environment, able to provide jurisdictional arbitrage. Global fund administrators bring experience and practicality in these matters.”

“GPs expect their providers to be nimble with regards to supporting rapid fund launches. Providers also need to be multi-jurisdictional and to offer associated services in a time-zone appropriate manner,” agrees James Jefski, global head of client solutions for private markets at State Street.

But it is the proliferation of non-traditional fund structures that is having the most profound effect on managers’ fund formation needs. “As market conditions and new products evolve, such as access funds and rated feeders, GPs require service providers that have the ability to support accordingly,” Jefski says. “So-called hybrid products, and the mixing and matching of investment strategies, can put stress on traditional processes. Meanwhile, we are also seeing the increased usage of evergreen vehicles and SMAs [separately managed accounts] to offer liquidity to the investor base. All of this can lead to extremely complex workflows and reporting requirements which service providers are being asked to solve for.”

Welcoming private wealth

The propagation of non-traditional fund structures has been driven, in part, by a desire to target a vast pool of untapped private wealth. As institutional private equity allocations have begun to plateau, there has been a surge in open-end vehicles, offering semi-liquid options to a global private wealth market that hit $454.4 trillion in 2022, according to UBS. While private wealth represents an immense opportunity for alternative asset managers, it brings with it an array of administrative burdens.

“We are seeing more and more fund managers seeking capital from retail investors, such as family offices and high-net-worth individuals,” says James Duffield, group head of business development at Aztec. “As a result, funds will need to be adaptable enough to manage multiple investor types, beyond just traditional pension funds.”

“Administrators like ourselves have historically focused on traditional 10-plus-one-plus-one closed-end products,” says Alexander Traub, chief commercial officer at Alter Domus. “We are now having to put systems, processes, people and technology in place to solve for open-end funds, as well. This is something that is new to the industry, at least at the scale that we are now seeing it, and will require significant investment from service providers in order to meet the needs of clients going forward.”