This article is sponsored by Apex Group
Apex Group’s Elaine Chim, head of private equity for the Americas and APAC, Kartik Shah, EU head of private equity product innovation and technology, and Gareth Smith, head of private equity for Europe, outline how technology is revolutionising fund administration. They consider the increasing demands of general and limited partners, the need for ever more rapid and automated services, and increasingly important trends like blockchain and environmental, social and governance reporting.
How important is it for fund administrators to invest in technology?
Elaine Chim: As an administrator, we rely on technology to capture, consolidate and analyse the mass of data to satisfy the reporting requirements of limited partners. Moreover, by using the best technology available, private equity managers can stay competitive and ahead of the curve. Ultimately, technology empowers fund administrators to do more for clients and at lower cost – to work more efficiently and with greater transparency to satisfy the increasing sophistication of the LPs.
Kartik Shah: Fund administrators have traditionally provided core accounting services, but the quality of that service is no longer enough to win and retain clients. This is partly because of consolidation within fund administration: as administrators grow bigger, they can provide a wider range of sophisticated services.
Administrators, therefore, need to find new ways to differentiate themselves from competitors, so they are looking at technology from a strategic viewpoint, rather than seeing it as just a back-office IT cost. It has become an integral component for any service provider to help deliver the often non-core and value-add services being demanded by managers and investors. Moreover, general partners are now facing increased scrutiny from their own LPs as many expect more operational processes to be automated. There is a requirement for tasks such as capital calls and investor reporting to be generated directly from the accounting platform.
Has this made technology more of a differentiator in whether fund administrators win or lose business?
Gareth Smith: There is a clear advantage for the administrator to being able to offer clients a range of solutions when the opportunity presents itself.
There is a tendency in the sector currently that individual reporting is becoming increasingly more bespoke based on investor requests, allocation arrangements and various guidelines. The administrator’s technology needs to be dynamic and flexible to react to client information requests.
Are there particular aspects of digitisation that are becoming more important in fund administration?
EC: Digital technology is playing a key part in minimising the need for manual, paper-based processes. Leveraging new technologies like blockchain to improve efficiency, security and transparency is a key trend. If done manually, investor records and other static data are time consuming to collect and maintain. This is particularly burdensome during the subscription process, when a mass of investors come into a fund and GPs have to co-ordinate with their fund administrator on all the data points that need gathering.
Using blockchain technology can streamline the overall investor experience by driving transparency and enabling the key stakeholders in the process to collaborate over a shared platform. We partnered with a cutting-edge fintech platform last year, which uses blockchain to provide clients with digital capabilities across the entire investor life cycle. That starts with onboarding investors and continues all the way through to the end of the fund’s life, including late-stage requirements such as secondary liquidity and financing needs. All of that can be captured in a single point of access, integrated with our internal systems.
Another increasingly crucial area is data analytics: the ability to collate and aggregate all the fund data including industry data, ESG key indicators and financial information.
How do you choose who you partner with?
EC: The role of the fund administrator is linked with technology through necessity. In order to deliver our services and provide for the increasing sophistication of our clients’ investor base, the partnership between the fund administrator and the technology provider is imperative. We choose partners that are collaborative, strategic and flexible in responding to the changing needs of our clients. This is often key because there is a reduced time lag between when a manager discovers they may need something and when they want that technology solution deployed.
We communicate with our partners weekly to discuss technology innovations and are constantly evaluating new technology vendors and solutions against market trends and best practices.
How important is it to make onboarding more efficient?
EC: At the end of last year, the level of capital raising got to the point where our clients were expecting an influx of investors, illustrating how PE’s resilience enables it to rebound from a slowdown and resume acquisitions with quick turnarounds. In addition, the trend of marketing to retail investors means that GPs have to deal with smaller tickets but higher volumes. It then becomes imperative to streamline the onboarding process. Last year we were speaking to a particular prospect about this. They said: “This is happening in the next 3-6 months. Is it something that you can work with us on to help find a solution?” Working with our new partner, we were able to digitise their entire subscription process.
How has the covid-19 crisis changed GPs’ views of fund administration?
KS: The pandemic has highlighted the advantages of outsourcing as fund administrators have continued to operate with robust business continuity plans in place. CFOs, in particular, came to recognise the risk and increased pressure facing their small in-house teams. CFOs and COOs used the time to reflect on their internal teams and strategies.
Last year, we received many calls about what middle-office outsourcing involved, from managers that had never previously considered it. They did not have a full understanding of what an administrator’s full capability was and were interested to hear what we could do for them. One area that caught their interest was portfolio management systems – while they often do not have the technical skillset to implement and maintain a reporting platform, they were interested to see how we could support them in selecting, setting up and running them.
What kind of PE firms are now considering outsourcing for the first time?
KS: We have seen mid-sized firms with decent-sized finance teams, which understand that they cannot grow as fast as they wish without increasing headcount significantly. We have also had conversations with very large firms that want us to take over not just the administration services but also the technology platform. They have legacy systems that require significant support and are looking at ways of reducing costs off their balance sheets.
What are the issues for PE firms with relatively primitive technology to consider?
KS: A number of firms still operate systems that were built years ago and do not necessarily have good connectivity with third-party providers. These firms now face a challenge: do they improve the systems or is it better to work with a service provider that has a best-in-class solution, so that they can concentrate on what they can do best, such as, investing?
Apex recently launched a digital banking platform. How will digital banking provide efficiencies for fund administration clients?
GS: The digital banking platform provides a faster onboarding process compared to traditional banks. Promoters are regularly still waiting for bank account openings to be finalised once regulatory approvals and licensing are received for fund setup. Even with intermediary or introducer arrangements between bank and administrator, delays are still prevalent. This is a potential inhibitor for closings and timely initiation of investment activity. The digital banking platform is intended to mitigate these challenges. It is proposed that bulk payments, as well as multi-currency payments, will be more easily expedited due to the proximity of administrator and bank.
What are the challenges of setting up digital banking?
GS: Maintaining turnaround time and adequate cybersecurity standards. It is also important to provide a truly seamless integration to the wider Apex suite of services and offerings. There are also various legal and regulatory aspects to be considered in all relevant jurisdictions.
Looking to the future, in three years’ time, which digital areas will be much more important for fund administrators?
EC: Aligning ESG-related goals with investments and returns requires PE firms to develop and apply new criteria to determine whether they are achieving their targets. They will also need to upgrade internal processes and streamline functions such as compliance and regulatory reporting. Investors will continue to push for certain ESG targets to be achieved and this has heightened the scrutiny on fund managers. So, ESG reporting has become essential for PE funds and an additional service that managers are now expected to provide. This information requires expertise to collate, review, track and report on, which is another area where third-party administrators can help.
KS: In three years’ time periodic reporting will be redundant. GPs will require real-time access to more granular data to help drive their operational decisions. The tokenisation of funds, where tokens are issued to represent shares in the fund, will also be a big trend, as managers look for access to a greater investor base. The ability to trade these tokens will also enhance liquidity options for investors. Distributed ledger technology, such as blockchain, will help transform the life cycle of the industry, providing a more efficient and paperless digital investor onboarding experience and enhanced capital and cash management process across capital calls and investment payments.