How fund service providers are staying a step ahead

Regulation, technology and shifting investor demands are changing what GPs require of fund service providers

Sweeping new regulations introduced by the US Securities and Exchange Commission are the latest reminder – should the industry require it – that private markets’ administrative requirements rarely stand still for long. A constantly shifting and expanding regulatory landscape is keeping managers and their service providers on their toes, not only in terms of compliance, but also when it comes to embracing new opportunities.

“The evolving regulatory landscape has impacted GP requirements in several distinct ways. From a growth and capital raising perspective, it continues to open up new pathways of investment, for example with ELTIF 2.0 [the revised European Long-Term Investment Fund regulation],” says James Jefski, global head of client solutions for private markets at State Street. “We’ve also seen regulations affecting reporting and this has created additional demands on accounting and investor relations teams, for example the SEC’s new Private Fund rules.”

It is the investor, of course, that sits at the heart of both sets of regulations. New fund regimes are being designed to open up private markets to individuals, while the regulators are simultaneously clamping down on any form of obfuscation that could put those investors at risk.

Indeed, LP demands are among the most powerful forces shaping managers’ service needs today. “LPs want standardized best practice reporting, assurances that their information and transactions are safe through robust controls and information security provisions,” says James Duffield, group head of business development at Aztec. “They also want an onboarding experience which is smooth and efficient, and secure and timely communications. All of this is within the realm, or at the mercy, of the fund administrator.”

According to Jefski, the push and pull between LPs and GPs continues to shape the market. “Increased demands for greater transparency, shortened cycle times, and solutions allowing for investment across asset classes within both public and private markets are some of the demands that LPs are placing on GPs,” Jefski says. “LPs are also seeking tax efficient structures and more liquidity, which we’ve seen lead to an increased usage of SMAs [separately managed accounts], heavily structured and evergreen products.”

A proliferation of fund structures, including those designed to entice the private wealth market with greater liquidity, is among the most significant evolutions that the industry is currently undergoing. It is one that service providers continue to grapple with.

“Flexibility on the liquidity side of the equation has been a key driver in fund structuring decisions for a number of years now. As funds with historically liquid portfolios have sought to invest in more illiquid assets, those funds have needed to incorporate mechanisms for monitoring liquidity needs in light of investor redemption requests,” explains Agnes Mazurek, global head of private markets innovation at Apex Group.

“This has given rise to the hybrid fund model, borrowing some features from the open-end space and some others from the closed-end space,” Mazurek continues. “This increased complexity in the fund structure needs to be adequately mirrored in fund administrators’ internal systems and software to track vehicles with multiple classes of investors granted varying degrees of liquidity and exposure to different tranches of assets. This has prompted administrators to invest into systems combining investment accounting and fund accounting in one single platform, thus making the financial reporting process more and more streamlined.”

Managers’ service requirements are also being impacted by their increasingly complex operations, and most notably the vast amounts of data that they are now attempting to harness. “It is the abundance of data, not its scarcity, that is the challenge today,” says Mazurek. “Integrating data from a variety of sources, then using advanced analytics to make sense of that data, is key. Machine learning and natural language processing are tools that allow us to generate actionable insights from data.”

Tech advances are undoubtedly integral to service providers’ ability to meet managers’ growing needs and expectations. “A significant source of our value-add to clients is the delivery of tech solutions that flow from the time of the investment, all the way through to reporting to the end investor, creating an end-to-end client experience,” Mazurek adds.

“GPs are increasingly recognizing the efficiency benefits of working with an external provider including for tasks that have historically been performed in-house. Specifically, we are seeing strong demand for that middle-office component whereby we become extensions of the GP team, whilst delivering tech solutions that are leverageable and scalable on a global stage.”

Mazurek says that differentiators in this area include access to customizable reporting platforms, data ingestion, augmentation and analytics capabilities, as well as workflow tools.

“Technology is a central component of fund services, and touches all aspects of a typical outsourcing relationship,” says Duffield.

“GPs quite rightly expect KYC, due diligence and payments to be largely automated; the ability to access correspondence and docs through secure portals; board packs they can annotate in real time; and reporting that’s as close to real time as possible. Technology is one of the main reasons why GPs outsource, and they expect us to embrace the latest tech advances and innovation and transfer and translate the benefits onto their operations.”

Meanwhile, tech advancements have also been key to facilitating the democratization of private markets that is impacting so many areas of managers’ administrative needs.

“Unlocking this scale has driven GPs to seek partners that have the ability to support hundreds, if not thousands, of investors for onboarding, capital events and reporting,” says Jefski. “This has cascaded into increased GP demands for greater transparency, near real-time access to data and a self-service tool from their service providers.

“Service providers like us are continuing to invest heavily in technology to be able to meet these requirements especially as we’ve noticed significant movement from physical documents to a digital environment. Leveraging modern technology such as robotics [and] AI for back-office throughput is becoming a key enabler to meet the demands for efficiency, process and data transparency.”

Provider partnerships

While the increased need for complex and costly tech solutions has continued to drive the trend toward outsourcing, it also has given rise to a new partnership model: co-sourcing.

“Fund service providers are no longer on the periphery of a fund manager’s back office, they are at its heart”

James Duffield
Aztec Group

“This is particularly prevalent in the US, where 50 percent of private markets assets are still managed internally,” says Alexander Traub, chief commercial officer at Alter Domus.

“As these firms begin to think about outsourcing, some are settling on a halfway house, whereby they retain the systems, but we provide the people and the expertise. Everything sits in the cloud so that both parties can access the data without any back and forth between manager and service provider. This allows the GP to benefit from cost efficiencies, whilst still retaining control over their data.”

Whatever the partnership model, it is clear service providers are playing an increasingly integral role in private markets managers’ operations.

“Fund service providers are no longer on the periphery of a fund manager’s back office, they are at its heart,” says Duffield. “CFOs and COOs see them as more than just service providers, but trusted partners – advising on everything from reporting best practice and regulatory challenges to even taking the lead on helping build an operational platform to meet their future growth aspirations.”