Platform and Industry updates

Plenty of Dry Powder Available for Real Estate, Venture Capital Deals if You Know Where To Look

Much of the news media coverage of the real estate market in the United States focuses on the challenges in the commercial space, as office block owners in non-prime locations face the double-whammy of higher interest rates impacting their ability to refinance, and falling rental incomes due to the persistence of the work from home culture that was borne out of the Covid-19 pandemic-induced lockdowns, increasing vacancy rates . It’s something that some industry commentators say will continue, even to the extent of clearing out the regional banks.

The same can’t be said for the residential market, however. Supply issues plague the space almost nationwide, and the average house price in the country is at a record high of $342,685, according to the Zillow Home Values Index, at the time of writing.

That represents a good opportunity for local and/or opportunistic real estate developers to build houses or multifamily buildings and turn a tidy profit. But finding sources of funding is often difficult – you have to know someone who knows someone in order to get access to financing, as local and regional banks aren’t as willing lenders as they once were.

But it doesn’t have to be difficult for entrepreneurs to find capital. According to data from 9at, there were 92 completely new Form D filings in the ‘real estate’ category in 2023, representing $6.74bn of capital. And many of these pooled investment vehicles that file form Ds have not yet made a first sale, so they are out raising money from investors, and when they do raise, that’s more money seeking deals.

Obviously, many of these funds are looking to do larger deals. But still, there’s plenty of investment dollars available for smaller developers looking to finance their project.
It’s a similar story for start-ups. In 2023, the venture capital industry took, in some ways, a worse hit than the commercial real estate market, with fundraising hitting a 6-year low. The troubles with Silicon Valley Bank in March last year added short term woes to more fundamental challenges faced by the private markets in terms of fundraising, as investors pivoted out of illiquid assets like venture capital and private equity to more liquid credit investments, buoyed by the comparatively higher yield and lower risk offered by these securities. But there’s another reality facing startups – the ‘new normal’ in the market is that venture capitalists are now being much tougher on due diligence and less flippant in terms of just throwing money at the next great idea.

Add to that, the fact that the capital raising environment is currently as friendly to the venture capitalists than any point since 2010, means that start-ups will need to cast a wider net than ever before in order to secure funding.

But that funding is out there. According to 9at data, there were 13,788 new form D venture capital funds filed last year, that had raised $246bn from their investors. That money will need to find a home at some point, unless the VCs decide to return uncommitted capital back to their LPs.

The reality facing start-ups is that they will need to contact many more potential investors than they did previously in order to secure an investment. And the reality facing real estate developers is that they will also need to be more pro-active when it comes to sourcing capital. But, as the Form D data shows, the money is out there.

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Hedge Fund / Prime Broker Relationship Set for an Interesting 2024

According to Nasdaq eVestment, in 2023, investors pulled a total of $75bn from hedge funds  through the end of November. And, according to HFR, the average hedge fund returned just +4.82% year-to-date through the end of November. In comparison, the S&P 500 returned approximately 24%.

Despite the overall redemptions, the back end of the year tends to be heavy in new Form D filings for hedge funds as the fund managers look to begin raising capital and trading at the start of the new year.

Time will tell whether a more stable macroeconomic and geopolitical climate will help or hinder hedge fund performance – and in turn, asset flows - this year, but one thing we’re interested to see is if and how the hedge fund / prime broker market will change this year.

A few developments could impact the space. The switch to T+1 settlement in the US will be flipped in May, which could lead to something of a shake-out in PB hedge fund customer rosters. Manual trade reconciliation processes, which worked fine in a T+2 regime, won’t in a T+1 world. and so hedge funds that don’t get their middle and back-office up-to-speed to help their PBs, may find themselves looking for a new prime. Additionally, the SEC has put the onus for compliance on the sell side, so a prime won’t hesitate to move on from a client that it thinks poses a potential risk.

But where one side of the hedge fund/PB coin sees the primes concerned about their hedge fund clients, the other side sees hedge funds concerned about the primes. An interesting report published by Acuiti at the end of October last year says that smaller hedge fund firms are concerned about consolidation in the FX prime brokerage market, with 43% of survey respondents saying that they were either quite or very unsatisfied with their FX PB options.

Emerging hedge funds already face an uphill battle in terms of building a sustainable business. The regulatory environment continues to get ever more burdensome, and it’s generally understood that assets continue to flow to the larger managers and funds more generally, making asset raising more difficult over time. Now, they face additional hurdles with their PB relationships.

The optimist, however, will say that all this creates opportunity for ‘challenger’ brands in the PB space. Some PBs with a lower risk appetite will likely be more aggressive in shedding clients, with others waiting in the wings to add these hedge fund firms to their client list. It also wouldn’t be a surprise to see more M&A in the space this year, consolidating the middle of the pack (in terms of size). Smaller hedge funds that still trade frequently will be coveted by challenger PBs, and this article that discusses the merits of a high-touch customer service offering by PBs may be a factor into which of the primes either moves up or cements its place in the upper end of the mid-tier bracket.

2024 is set to be as interesting a year as we’ve seen in a while for the hedge fund/prime broker market.

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Headwinds and Tailwinds Set To Impact Fund Administration Market in the Short Term but Overall Outlook Solid

The Future of Alternatives 2028, a recent report from alternative investment data and analytics provider, Preqin, forecasts assets under management (AUM) for the alternative investment industry to hit $24.5trn by 2028, up $8trn, or around 50%, from the estimated figure for the end of this year ($16.3trn).

Good news for fund administrators, who tend to charge based on a fee structure of basis points on AUM. The higher the AUM, the more money they make. But they also often charge per fund, so it’s not only the AUM that matters, but the number of funds they administrate. So, more fund launches, as well as higher AUM, is good for the space.

But the journey towards these extra dollars for fund admins over the next few years will be perhaps as challenging as it has ever been. 

Many eyes in the market are on the proposed SEC cybersecurity regulations for RIAs and funds. Specifically, the new rules call for funds to ‘Adopt and implement written policies and procedures reasonably designed to prevent violations of the Federal securities laws by the fund, including policies and procedures that provide for the oversight of compliance by each investment adviser, principal underwriter, administrator, and transfer agent of the fund (“named service providers”).’

Assuming that these rules are passed and become law in the United States (which won’t necessarily happen in 2024, but they likely will eventually), fund administrators will be exposed to the SEC for the first time (it is not a regulated industry at present). That’s a risk that brings with it a potential for negative column inches; any significant cybersecurity breach at a fund / fund manager will have to call out the administrator publicly, so there is an increased burden being placed on the admin to implement tighter cybersecurity controls.

These extra costs come at a time when margins are being squeezed by increasing competition from new entrants, and fund managers generally trying to cut costs in the face of an ever-larger regulatory headwind. Furthermore, fund administrators are increasingly investing in new technologies such as artificial intelligence, robotic process automation, and cloud computing to automate tasks, improve data management, and enhance investor services. These technologies are expected to play an even greater role in the industry in 2024, increasing costs again.

Despite the challenges, plenty of structural tailwinds exist to support those of a bullish disposition in the fund admin space. While the hedge fund space has a high degree of penetration of fund administrators, that degree is lesser for private equity and venture capital funds, as they tend to need to provide NAV calculations less frequently than their liquid fund cousins, making the spend less justifiable. But LPs in the private markets are increasingly requiring their GPs to have an external administrator. There is also increasing interest from the independent sponsor cohort in hiring a fund administrator, as they look to not only professionalize their offering to current and potential investors, but to accelerate their journey to ‘institutional readiness’ as they look to launch a pooled investment vehicle. And the growth and emergence of hybrid funds, both liquid and illiquid, means that external admins are preferred to those in-house as the task becomes more time consuming and complicated.

Middle and back-office functions of a fund management company, like fund administrators, receive less attention in the media than the investment strategy– a hedge fund making (or losing) millions on a stock, or a venture capital firm doing the same thing with the next great start-up gets the media coverage. But for those in the space, the journey to securing some of that extra $8trn in assets under advisory is set to be as eventful as it has ever been.


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