Blog

Platform and Industry updates

  • 12/06/2023

    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.

     

    Editor's picks

    Read more

  • 11/07/2023

    US Private Funds Industry’s Regulatory Environment Set To Upend Not Only Managers and Allocators

    In terms of private funds regulation, 2023 has been one of the more remarkable years that we have seen. The headline development is, of course, the changes announced on August 23rd which, on paper, could have far-reaching implications.

    The trade media has been focusing mostly on the ‘preferential rule’ issue, which now states, “the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors.” The noise around this development is understandable because, all of a sudden, terms for all investors will be clear for all to see. The counter argument to the uncertainty is that, in the case of seeding arrangements, many investors will – should? – expect that the initial capital of the fund(s) would have better terms, and serious investors won’t mind. What will be interesting to see is the extent to which this impacts fundraising. While the SEC has enacted a legacy status provision for existing funds, it’ll be interesting to see whether open-ended funds in particular could see some short-term asset flows out of their products from investors that want to ‘shop around’ for better terms in potential new funds.

    The private funds rules have other impacts, most of which are more administrative. The requirement for quarterly statements detailing ‘certain information regarding fund fees, expenses, and performance’, for example. So, there will be generally more time – and cost – going to the compliance effort in future (unless the lawsuit brought by numerous industry bodies is successful).

    And there’s more, of course. Just since Labor Day, there have been updates to securities lending rules, short selling disclosures, and even tightened requirements around fund names (does this mean that all the investment firms that are named after trees now have to invest in forestry assets?)

    But one that – at the time of publishing – hasn’t been finalised is the cybersecurity rule. We’re interested in that one because of the potential impact on the service provider community, which is our primary customer base. The proposed rule – announced 18 months ago, in February 2022 – says that: 

    “The proposed cybersecurity risk management rules would require advisers and funds, when conducting this risk assessment, to…Identify their service providers that receive, maintain or process adviser or fund information, or that are permitted to access their information systems, including the information residing therein, and identify the cybersecurity risks associated with the use of these service providers.”

    Service provider due diligence is nothing new in the private fund adviser industry, but when this rule gets finalised, it will be interesting to see the impact here on the fund administration market in particular. Fund administrators are not regulated entities in the United States – but they now will be, by association. Private funds and their advisers will now have to dedicate ongoing time and effort into not only the selection of fund admins and shadow admins, but in terms of ongoing due diligence on these firms. But the flip side of this is that fund administrators that are ahead of the game in terms of having their own cybersecurity program and process will be in pole position to secure new clients. Those admins that go the extra mile – because the SEC’s rules will only set a floor, not a ceiling – may be able leverage this into something of a competitive advantage.

    The SEC has enacted an aggressive program of reforms since Gary Gensler became Chair in April 2021. The spate of activity just in the past few months would seem to have covered many of the sub-topics that affect the private funds world, either directly or indirectly. But it wouldn’t surprise us if that continued into 2024 at least. How the private funds industry reacts and adapts to the changes will be fascinating to see.

     

    Editor's Picks:

    Read more
Previous