Alternative funds are switching third-party administrators more than ever. Why is that, and how can you avoid having to make an unexpected change?
The alternative funds industry is vast and varied, and it can be difficult to grasp where the sector is headed. One useful tool is Convergence, which collects data on thousands of funds in order to spot trends across different fund types and sizes.
In the past, we’ve used data from Convergence to help us see how Private Equity funds, though growing in terms of the number of funds and assets under management, were lagging behind other alternatives when it came to outsourcing fund administration.
This type of data can also help us understand whether industry predictions are holding true or if there have been unexpected shake-ups in the market. We’ve discussed previously how 2022 was a down year for Private Equity fundraising. Is 2023 looking to be more of the same?
What new data tells us about the state of Private Equity and other alternative funds in 2023
According to new data from Convergence, the alternative industry “experienced decline through Q1 2023 Year to Date (YTD) compared to Q1 2022 and could not sustain the historical peak growth experienced during Q1 2022.” The number of new funds was down in all sectors, though Private Equity had the smallest decrease of 28%. This suggests predictions of an increase in new niche funds may have been overstated, though it’s still too early to say what the rest of 2023 will bring.
It’s important to look at the capital raised by new funds, not just the number of new funds. While all sectors were also down in terms of new fund capital, the rate of decline varied by sector. Venture Capital new fund capital was down 82%, while Private Equity new fund capital was down just 7%. While it’s true that there have been fewer new funds created in the past year, the new funds that have been actively fundraising have been able to raise capital.
Capital raised by existing funds across the entire alternatives industry was down 7% from the same period in 2022, but varied greatly by sector. Hedge Funds and Hybrid Funds were both down more than 20%, while Venture Capital stayed largely neutral with a 3% increase. But existing PE funds raised 50% more capital, a significant increase. What’s the reason for this?
The overall data shows Private Equity faring better than other fund types, so it’s expected that this would also manifest in existing fund capital. But the size of the increase for established funds suggests that in a difficult market, investors are sticking with names they know and trust. That can make things difficult for emerging managers who don’t have a history to fall back on.
What can those emerging managers do in order to compete with more established firms? And how have managers reacted to the fundraising downturns of the past year? The answer to both questions can be found in data on fund administration.
Alternative funds are switching administrators more than ever
Thanks to Convergence, we have several years of data to look at when it comes to how often alternative funds outsource fund administration and how often they switch administrators. Between 2019 and 2021, third-party fund administrators won 37,760 funds, with Private Equity accounting for 14,447 of those, or 38%.
Another 2022 report showed that while PE had the largest share of new funds and an increase in existing fund capital, it also had the second-lowest percentage of outsourcing. This demonstrated that Private Equity funds needed to find ways to be more efficient, with outsourcing one way to do that.
But what about when a fund already works with a third-party administrator, and decides to switch? Between 2019 and 2021, 3,775 alternative funds switched administrators across a three-year period.
Now compare that to just a single year, Q1 2022 to Q1 2023, in which alternative managers changed fund administrators for 2,477 funds. This one year matched 66% of the total of the previous three years, signaling that alternative managers are switching administrators more than before. Why is this happening?
Why fund managers switch administrators
To understand why so many funds are switching administrators, it’s helpful to divide them into categories: small funds/emerging managers and large funds/established managers. Previous data has shown that in Private Equity, “80% of advisers who switch administrators oversee funds of less than $100 million,” meaning it’s the smaller funds that change fund administrators most often.
As we’ve discussed in the past, this isn’t surprising. Emerging managers often choose smaller administrators for newer funds in order to keep costs down and receive the attention required to establish their infrastructure. As Convergence put it in 2021, “Advisers continue giving more new funds and assets to smaller administrators.”
As those funds grow, their needs become more complex, and they look to an administrator with greater capabilities in order to keep up with their growth. But once they make that switch and continue to grow, the difficulty isn’t over.
Larger funds and more established managers, especially those that have experienced rapid growth, may need to quickly cut costs when fundraising is sluggish as it was in 2022. They suddenly find themselves with a costly fund administrator and wish to downscale to more limited service. The result is yet another switch that can be time-consuming, mistake-ridden, and needlessly expensive.
This can lead to a perpetual cycle of switching administrators based on fluctuations in the industry, which can be costly and burdensome because of difficulties in finding the right administrator and the changeover process. But for JTC’s clients, that hasn’t been the case, and it’s thanks to our flexible offerings and ability to serve funds of all sizes.
How JTC continues to gain market share
Despite an uncertain year in the alternative space, the latest data had good news for JTC, as the company expanded its reach in key areas. While the amount of private fund assets in the overall market decreased, JTC-administered assets increased significantly. Similarly, JTC’s market share of funds and assets increased over the past year.
As fund managers select a new fund administrator, many are going with JTC, and those that do are sticking around. We attribute this to JTC’s flexibility and customizable solutions, in addition to our industry-leading technology.
When funds are just starting out, it’s important to keep costs down, which is why so many emerging managers go with smaller fund administrators. But investors want to work with names they trust, as evidenced by how established PE funds continued to dominate the space in a down year. To compete with established firms, working with a trusted name like JTC can help inspire investor confidence and ultimately attract more capital.
But what happens as you grow and need more services? If you work with a small fund administrator to start out, you may have to switch down the line. And if you choose to work with a larger company from the beginning, you may be neglected or forced to pay for services you don’t need.
That’s why JTC offers customizable fund administration solutions. Emerging funds can get the services they require without having to pay for those they don’t, and always have the option to add more services in the future, so they don’t have to choose between scalability and specialized knowledge. By choosing a fund administrator that can grow with you, you’ll get what you need now while also setting yourself up for stability in the future.
