Key trends in private equity fund administration

From accelerated tech adoption to an upswing in outsourcing, here are the fund administration themes making a mark in 2020.

1. Outsourcing demand is on the up

Demand for outsourcing had already been on the rise before the private equity industry had to adjust to new ways of working following the covid-19 outbreak. A survey by sister title Private Funds CFO found a greater interest for outsourcing fund accounting, technology, tax and compliance functions in 2019 than in 2018, with between 24 and 34 percent of respondents planning to increase outsourcing in these areas. The move to remote working and the wider fallout from the pandemic have since accelerated this trend. A surge in demand is not only expected for fund administration, but also areas such as HR and IT.

Outsourcing such functions can enable firms to focus on fundraising and supporting portfolio companies – activities that may prove particularly challenging given the current situation. Even in less unusual times, there are efficiencies to be gained, especially for smaller firms with limited in-house resources.

“Investors increasingly want to work with GPs that are able to focus all of their time on investment decisions and leave the back-office operations to a team of experts,” says James Duffield, head of business development at Aztec Group.

2. It’s technology’s time to shine

With physical distancing measures still in place in many countries around the world, we are all relying on technology more than ever. The crisis has highlighted the role that advanced technologies can play both within portfolio companies and in private equity firms themselves as they navigate this new landscape. As Amit Vij, managing director, private equity at global technology research and advisory firm ISG, says: “Senior executives are looking at ways to leverage automation technology to minimise the human touch and improve business resilience.”

Meanwhile, online tools such as e-signatures and cloud-based services are increasingly being embedded into daily workflows. Combined with the already growing demand for data among LPs and GPs, this more widespread adoption of online systems also brings with it a greater need to focus on cybersecurity and data protection.

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If private equity firms and their portfolio companies fail to manage cybersecurity risk then they could be exposed to a severe “techlash”, point out Ian Bagshaw and Tim Hickman, partners at law firm White & Case. This could come in the form of regulatory sanctions, reputational damage or liabilities to third parties, for example, all of which could potentially impact the value of an investment.

Cybersecurity is a hot topic for LPs – 30 percent always ask about cyberattack readiness policies during due diligence and 58 percent sometimes do, according to Private Funds CFO data. And although EY’s 2020 Global Private Equity Survey found most managers feel well prepared to prevent a cybersecurity breach, a worrying 61 percent of investors are not confident that alternative fund managers have adequate cybersecurity policies in place.

“The ability to collaborate online has been pushed to the top of most people’s agenda in these difficult times” Nikolaos Perros, Citco

3. Collaboration is going digital

Perhaps the most ubiquitous use of technology in recent weeks has been for communication. Virtual messaging and document sharing tools are helping GPs, LPs, fund administrators and other service providers to collaborate internally and with each other.

“The ability to collaborate online has been pushed to the top of most people’s agenda in these difficult times. Across the board, GPs are looking to do things digitally,” says Nikolaos Perros, head of private equity services at Citco. “Hosting investor presentations via video, a critical need to sign everything digitally, a huge growth in the use of online communication platforms, a reliance on cloud-based document sharing tools. These changes were happening slowly in the industry but, if there is a silver lining to the current situation, it is that we have been forced to move forward to a new digital age.”

This may continue for some time to come. According to a survey by Private Equity International, 50 percent of GPs intend to hold more online LP meetings once ‘normal’ business life returns.

4. There’s a new ‘business as usual’

The crisis could result in longer-term changes to the way the private equity industry and its service providers operate, especially as remote working and the prevalence of digitally enabled solutions become normalised.

Aided by technology and robust business continuity plans, fund administrators’ transitions to the new environment have gone fairly smoothly and they are adapting to meet clients’ needs. “BCP has turned very quickly into BAU – business as usual,” says Ian Lynch, chief commercial officer at Intertrust. “We are definitely in BAU mode now.”

GPs are also demanding more of their service providers, particularly around challenging areas such as liquidity and valuations. While this could open up opportunities for fund administrators, new ways of working during the crisis could also have a longer-lasting effect on service provider and fund relationships.

“I think we’ll see greater fungibility between clients and service providers,” says Lynch. “There may be specific services where we might, for example, lend our teams to clients.”