With 2024 looking set to be a more stable but still demanding year for private equity, effective fund administration will be more important than ever to ensure fund managers can focus on the vital task of creating opportunities and dealmaking.
Leveraging an efficient, outsourced approach to administration can help ensure you are best positioned for success over the coming year – for multiple reasons:
As funds scale, there is the need to recruit and retain staff with the necessary administrative and operational skills to support this growth.
EY’s 2023 Global Private Equity Survey found that 60% of smaller private equity firms emphasized hiring the right talent, while 76% of CFOs of large firms said retaining talent was critical to be competitive in the future1. However, finding people with the right specialist skills and the necessary depth of knowledge can be a challenge. The task is currently made doubly difficult by tight labor conditions creating what is essentially a sellers’ market for talent.
Quoted recently, Nat Schiffer, a Managing Partner at executive search firm The Christopher Group, highlighted the difficulty in finding candidates with the specific blend of financial acumen, operational experience, and industry knowledge private equity firms require. For the same reason, staff turnover is also an issue.
“The intense competition for top talent can make it challenging to attract and retain qualified candidates who may have multiple options,” he commented2.
However, attracting the right staff is only one aspect of the human resource conundrum. Having the right structure and processes in place to ensure a fund can be managed efficiently is also vital. Kicking the problem down the road by trying to manage with existing internal resources is not a realistic option as your fund increases in size. Similarly, outsourcing to a very low-cost third-party fund administrator that relies on low-cost, multi-jurisdictional talent without appropriate management is likely to result in problems down the line.
A quality fund administrator can offer a dedicated, local and highly skilled team who work together with an experienced management team, along with the ability to scale resource as your fund grows.
With the recent advancements in technology, including AI and machine learning, many firms are reaching an inflection point where they are outgrowing their existing technology stack (or that of their administrators) as they become larger. Growing demand from both investors and regulators for greater transparency and clearer, more structured and comprehensive reporting of funds’ investment activities creates a need for better integration of platforms and reporting tools.
Technology to automate fund administration processes is constantly evolving, and that process is set to accelerate rapidly. In a recent article for Private Funds CFO, George Sivulka of Hebbia – a Peter Thiel backed tech firm – claimed AI will “blaze a trail” in fund administration3.
However, cutting-edge technology is expensive, while integration with existing systems can be complex and challenging, making robust change management essential. Implementing this new technology effectively will therefore present significant challenges for all but the largest mega funds.
Because they can share the technology buildout cost across multiple clients, well-established third-party fund administrators benefit from both economies of scale and stronger relationships with tech providers.
For growing private equity funds, outsourcing fund administration can therefore provide access to substantial productivity gains while reducing both risk and cost.
Regulation is another area that is constantly evolving for private equity fund managers. The regulatory environment is constantly evolving meaning that GPs are either spending time adapting to operation changes required by incoming regulation or trying to anticipate inevitable future updates.
The Securities and Exchange Commission (SEC) adopted new rules in August 2023 that enhance the regulation of private fund advisers and update the existing compliance rule for all investment advisers. As well as creating rules for quarterly statements with information around fees, expenses and performance, the new rules create a requirement to distribute an annual financial statement audit to investors of each private fund it advises. Funds with over $1.5bn in AUM have only 12 months to comply (i.e., until August 2024), while smaller clients have until February 20254.
Given the additional reporting and level of minutiae required, this is a potential issue for GPs both in terms of resource and expertise, particularly if they self-administer funds. Employing a third-party fund administrator with a specialized in-house legal and compliance capability will remove much of the headache of preparing for these new requirements.
Three years ago, the retail market in the US barely existed in terms of alternative assets. However, since then the concept of targeting high net worth (HNW) clients for fundraising has become increasingly popular.
The Financial Planning Association’s 2023 Trends in Investing Survey found that 47% of advisers were either already actively investing in alternative assets for their clients or intended to do so in the next 12 to 24 months; private equity was the most popular alternative asset class among respondents5. Meanwhile, in a recent PitchBook article, private equity firm Pantheon, which closed a US$3.25 billion secondaries fund at the end of November 2023, attributed its fund’s success to “significant inflows” from private wealth clients6.
While almost every private equity firm has its eyes on accessing this market, possessing the necessary background, expertise, and connections is a significant barrier to entry. The operational requirements associated with this distribution method are also complex and require specialist systems and skillsets.
A fund administrator with the experience to onboard and maintain all investor records, under any distribution method, and process high transactional volumes will be a key factor in accessing this market successfully.
Conducting operational due diligence to investigate the business model of a target and ensure it is a good fit for a fund is a vital but time-consuming ingredient for success in private equity. As target companies’ business models become more complex, private equity firms need to access the right technical knowledge to effectively assess the risks and opportunities involved in a purchase. As a result, outsourcing operational due diligence is a growing trend.
A report by Bain & Company highlighted the example of a large private equity firm preparing to bid on a target that controlled nearly half its addressable market, boasted 15% annual growth, and had net margins of around 17%. However, tech diligence found leaky security protocols had resulted in a recent ransomware attack and breach of customer contracts, while the target was leasing outdated tech infrastructure due to be discontinued within a year7.
Given the cost of making a mistake, fund managers may benefit from seeking external resources for operational due diligence. A quality administrator will be able to offer support for reviewing all aspects of a target company’s operations, from supply chain logistics and procurement to in-house processes – giving you peace of mind that your due diligence is being carried thoroughly and by a trusted partner.
Aside from the domestic retail market, another appealing means of accessing new capital is to expand into new geographical markets. Europe has been a particular focus for many looking to grow their footprint internationally, looking to maximize the abundance of wealth in the region.
Breaking into new markets is challenging, however, working with a fund administrator that already has a presence and relevant connections in multiple global locations can be invaluable. For example, access to support in obtaining a pre-marketing license at a low cost is a big positive for fund firms who want to test the waters in a new market, such as Ireland.
As part of their operations, fund firms must hold highly sensitive information about their clients, including personal and company level financial data. Firms have a legal responsibility to keep this information secure.
Regulators are clearly demonstrating their intention to make businesses more responsible for security breaches and with cybercrime constantly on the rise and cybercriminals becoming ever more sophisticated, it is essential for fund firms to have effective measures in place to avoid the risk of liability. Fund managers are increasingly needing to familiarize themselves with the rules in anticipation of potential further regulation and prepare and monitor their operations to a comparable standard.
Working with a high-quality fund administrator that understands the cybercrime threat will outsource this risk and ensures the necessary levels of operational cybersecurity are in place.
With investors becoming more and more data hungry, many firms are struggling to keep up with the ever-growing demands. From customized reports, additional data sets to demands for up-to-date information available on demand, firms are needing to consider either additional resourcing or exploring advanced and expensive technology solutions.
Partnering with a third-party administrator can help you to meet these additional demands, allowing you to focus on fostering relationships, raising funds and seizing opportunities.
Faced with a challenging business environment, increasing complexity and a growing list of administrative responsibilities, many private equity firms are turning to outside expertise for support.
The outsourcing of fund administration in private equity has experienced a dramatic upward trend in recent years. In fact, according to the SEC, over three-quarters of private funds in the US now use at least one third-party administrator.
Partnering with the right fund administrator has many advantages, including:
Outsourcing fund administration to a trusted pair of hands allows you to focus on what you do best: generating wealth for your clients. As a leading company in institutional and private client services, JTC can provide a wide range of highly effective administrative and strategic solutions for your fund.
To find out how we can help your business, get in touch with Michael Richards directly.
You may also be interested in reading our Outsourcing Fund Administration white paper which you can download via the below form.
12023 EY Global Private Equity Survey, Chapter 2 ‘CFOs see talent management as key to private equity growth strategy’. Published by EY, 18 January 2023. https://www.ey.com/en_uk/private-equity/global-private-equity-survey
2“Opportunities and Challenges in Private Equity Recruiting”. Published by Hunt Scanlon Media Leadership Intelligence, 5 June 2023. https://huntscanlon.com/opportunities-and-challenges-in-private-equity-recruiting/
3“Explainable AI will blaze a trail in fund administration”. Published by Private Funds CFO, 2 October 2023. https://www.privatefundscfo.com/explainable-ai-will-blaze-a-trail-in-fund-administration/
4“SEC Enhance the Regulation of Private Fund Advisers”. Press release published by the US Securities and Exchange Commission, 23 August 2023. https://www.sec.gov/news/press-release/2023-155
5‘The 2023 Trends in Investing Survey’. Published by the Financial Planning Association in the Journal of Financial Planning: June 2023. https://www.financialplanningassociation.org/learning/publications/journal/JUN23-2023-trends-investing-survey-OPEN
6“Creativity will be key to private equity’s success in 2024”. Published by PitchBook, 5 January 2024. https://pitchbook.com/news/articles/private-equity-needs-creativity-2024-success
7“Is Your Tech Due Diligence Good Enough?” Published by Bain & Company, 07 March 2022. https://www.bain.com/insights/tech-due-diligence-global-private-equity-report-2022/
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