This article is sponsored by TMF Group
How has the pandemic impacted the demand for tech-enabled solutions among fund managers and investors?
Howard Eisen: It has certainly accelerated interest among private equity sponsors in outsourcing, broadly. In March last year, when firms had to figure out in an instant how they were going to conduct their business with all their employees working from home, managers were asking themselves why they were dealing with that operational headache and not someone else.
There was a lot of focus then on how to keep track of what was going on and how to efficiently raise issues that needed to be remediated and addressed and ensure they weren’t missed. Email wasn’t really sufficient. We’ve been rolling out a new tool, TMF KRAIOS, that addresses some of these challenges; clients with funds and entities all over the world can keep track of what TMF Group are doing, what is happening with each entity, where they are with workflow and, if things go askew, get the right person focused on solving the problem.
Donovin Pombo: The pandemic caused our clients to look internally and focus on workflows, aligning their technology with their fund administrators to ensure the correct dataflows internally and to investors and service providers.
What are the challenges – and innovations – in the private equity industry around automated waterfall, carry and allocations?
HE: One of the holy grails for this industry is for some of the more widely used general ledger accounting engines to be able to do full waterfall, carry and allocation calculations within the system, as opposed to going outside to Excel. New companies are now popping up that complement the accounting systems and fund administrators to provide that front-to-back solution for these high-level calculations. Those technologies are evolving and there is a lot of innovation. This may become a niche sub-industry of technology companies doing it, or the general ledger companies may yet expedite their own solutions or acquire those businesses.
DP: Historically, these solutions have required some level of manual input into the calculation engine. As the technology comes to fruition, there is a lot of trust in these providers that they know what they are doing, understand the needs of the clients and can provide the systems that capture all the requirements. There will be a shift in the private equity industry to a more automated way of working, and managers will look to further leverage the use of fund administrators who have entire teams that are always evaluating new technologies. With the growing complexity of the technology, there is a recognition that you either need to build your own technology team or make greater use of outsourcing.
Extracting consistent ESG data is a hot topic. How is technology helping?
HE: Technology is not yet helping much with that, though it will. The hardest thing to solve with respect to ESG is that there is no consistent metrics for what is good and what is bad, what is valued and what isn’t. Different people have different views on what’s important, so it’s hard to come up with a single value set. That doesn’t actually matter: as a manager or investor, you simply need to have your idea of what’s important, make it defensible and then have the technology to extract that data consistently across your investments, funds and investors. You can’t take a different view from fund two to fund three.
You need to create the infrastructure that can go in and apply whatever metrics that you as a management decide are important, and then you have a track record of ESG compliance that you can talk to. One particular investor or regulator may not agree, but you can’t please everybody any more than you can please everybody with your strategy.
DP: For fund managers, it is going to be so important to be able to report on this as a regulatory requirement. They are going to be asking their fund administrators to report, so it will become an issue for us, too. But it’s a moving target as things come to fruition in different jurisdictions, and there is going to be some leveraging of best practices, and new requirements that are not yet set in stone.
The last 12 months have seen a shift to flexible working, driving demand for transparent workflow and collaboration tools. What are fund managers looking for and how is the market responding?
DP: The shift to a flexible remote working environment introduced operational constraints, as well as additional complexity with fund administration and with other third parties. Our clients want timely access to data, almost real time, to be able to do reconciliations and provide schedules of payments and receivables. It is no longer about being able to make operational decisions in the office. They want data immediately.
HE: If a client is working on a deal and they need to set up a new holdco in Amsterdam to facilitate that acquisition, when they contact you to create that, you don’t have much time. For them to be able to see in real time how the process is unfolding is tremendously valuable. Many fund administrators are using a global delivery model now, so if you can harness that follow-the-sun footprint to expand capacity and speed, and give clients a window into the process, everybody wins. KRAIOS is solving for that, providing transparency for clients.
Looking ahead, what do you expect to see when it comes to technology adoption in fund services?
HE: A lot of people are working on a front-to-back solution for the subscription and know-your-client process, so that will be in place three to five years from now. That’s the foundation that allows you to go into a portal, complete subscription documents, upload identification, and – without picking up a pen – subscribe to a fund. But then, if you want to access liquidity from that investment, the data is readily available to either access the secondary market or ask a creditor to lend money against the investment. With all that in one place, you have a secondary market where borrowers and lenders, buyers and sellers can easily transact.
DP: There’s a consistent view that the need for technical operational staff is on the horizon, to leverage technology and develop proprietary solutions. There will be a steady flow of start-up companies looking at those added value items like automated waterfall, carry and allocations. So, there is a growing need for fund managers and fund admins to upskill and hire IT or software skills in-house. At the moment, the number of individuals with those skills alongside an understanding of fund management is small. The industry is going to have to address that and find ways to compete for that talent.
Howard Eisen is head of fund services business development North America and Donovin Pombo is director of fund services global solutions at TMF Group