It’s only natural that fund administrators would grow and evolve with their clients, into new geographies, asset classes and areas of expertise. And given the increased regulatory demands and complexity of today’s limited partnership agreements, GPs are happy to migrate their workload to third-party administrators. But it’s also natural that as the fund administrators swell in size and complexity, their service offerings change as well.
The fund administration industry has been in flux of late, with many new boutique firms and a wave of consolidation. These new larger players may have increased capabilities, but some CFOs feel the quality of service has declined, with multiple points of contact and long response times. Selecting the right administrator these days often involves investigating less obvious areas like technology, staff retention and client mix. GPs may be surprised to find today’s small to mid-sized firms can offer a range of services for big funds, or that larger firms may have a senior account manager that’s as fully engaged and quick to respond as any boutique provider.
No matter who they end up choosing, GPs seem to be moving toward outsourcing fund administration. According to a recent survey by eVestment, private equity, real estate and funds of funds “assets under administration” grew by 37 percent in 2015, with administrators most bullish on continued growth from their private equity business. Last year, the fund administration space also saw a series of consolidations, including the acquisition of Kaufman Rossin by ALPS, Pinnacle by Apex Fund Services and, most significantly, SS&C’s acquisition of Citi’s alternative investor services business.
While the transaction expanded SS&C’s geographic footprint and client base, there was another rationale for the deal. “Expertise is key in our business today,” says Joe Patellaro, a managing director at SS&C. “And the acquisition complements our organic growth strategy by helping us acquire talent.”
Another rationale for these consolidations may be the reality of the fund administration business, where the cost of technology and the workload involved in meeting the demands of LPs and regulators are squeezing margins. One administrator pointed out that since they sign contracts for the life of a fund, they have to wait for the next fundraising to increase prices, which could be years away. As a result, some larger players are shifting to a lower cost model, which often means moving operations overseas where there can be a decline in service.
One CFO using a recently consolidated fund administrator admitted they were looking for another provider given how service has declined, citing long wait times for answers. While another CFO complained of multiple points of contact, which left them feeling as if they were managing an internal staff, just in another office. Back in 2014, a survey from PwC found that 70 percent of managers were satisfied with the level of service, but that was before the recent consolidations.
Small firms face those same shrinking margins, with their own limitations. Many cannot invest in the talent or technology to service hedge funds or real estate for GPs looking to diversify into other asset classes. However, geography might be less of a barrier for small and mid-sized shops. The consensus is that so long as the administrator can offer access to a GP’s data any time day or night, they can work with firms anywhere. “We serve 8,000 LPs on behalf of our clients from around the globe,” says Jeff Gendel of Gen II Fund Services. “No matter where the GP sits, they can work on our platform.”
Yet even if administrators have offices around the world, and a full suite of services for every asset class imaginable, how can any GP be sure that they will have a partner that is responsive and competent over the life of a fund? A recent survey from EY & PEI Media reports that beyond track record, 45 percent of LPs cited “operational excellence” as a major concern. So the stakes for effectively administering a fund are as high as ever.
Price will always play a factor in choosing an administrator, but there are less obvious elements that may be more indicative of service quality. Technology plays a huge part to the service offering, but the most comprehensive system may not inherently be the best.
“Technology can’t compensate for a lack of understanding of fund accounting, private equity and the complexity of the practice,” says Krista McCoy, EVP of fund administrator Leverpoint. A great tech offering can’t make up for a firm new to servicing the asset class.
Furthermore, technology is only as good as its ability to adapt to the fund at hand. Which is why SS&C has been acquisitive on the technology front as well. “SS&C is as much a technology company as an alternatives fund administration business, and we continue to develop and acquire technology assets, which allows us to be nimble in designing solutions for our clients,” says Patellaro.
But a GP may not need the most muscular tech offering. One fund administrator admitted their clients rarely use more than a fraction of what their system can do. So several administrators stress that the best way to vet technology is about ease of use for the GP and its LPs, rather than the longest list of capabilities.
What might matter even more is staff retention, since losing a primary contact at an administrator means starting over with a new face with all the risks of a new hire. “Turnover is an Achilles heel of the industry,” says Gendel. “Administrators need to make sure their senior team and the personnel that interact with clients are there for the long term.”
GPs would do well to enquire about compensation, including if equity is part of the package.
“We have a succession plan that includes granting equity interests to senior employees,” says Robert Aufenanger, a partner at Broadscope Fund Administrators.
But beyond compensation, pure retention rates still matter, as a culture that churns through staff won’t show up in what they promise staff in money or upward mobility.
CFOs may value a long-term relationship with a single account manager, but there are reasons to want a team on hand. “We feel being part of a larger organisation helps mitigate key-man risk. With a deeper bench of talent and a business wide process, there’s a better chance someone can step right in for a smoother transition [than hiring someone new for the role],” says Patellaro.
That said, there is always a risk the CFO will not have the same rapport with that new account manager.
THE VIP DILEMMA
However, smaller firms can find themselves skimping on service quality as well, especially if their client mix is out of balance. Administrators warn that if one client is a majority of that boutique administrator’s business, it can lead to a situation where the major client’s needs are addressed before a newer, smaller client if they both need help at the same time. So it’s important to inquire where additional resources might come from in that scenario.
There may be an inclination for GPs to choose an administrator that mirrors their own size and complexity, but that’s not as relevant as it once was.
“We work with funds that range from a $60 million VC vehicle to a $3.2 billion middle market fund,” says McCoy.
Part of that is due to efficiencies from technology, but smaller shops are also focused on a single asset class, which has its own benefits.
“We are laser-focused on private equity administration,” says Gendel. “We have top-tier, experienced talent, institutional grade infrastructure, cybersecurity compliance and full transparency. That experience and market focus allows us to cater to funds of all sizes, from start-ups to the largest in the business.”
And smaller funds may find the right home in the hands of a firm as large as SS&C, who have built a dedicated team for mid-market clients. So GPs shouldn’t rule out an administrator as one too large, or too “boutique” for their needs.
More often than not, the right provider will emerge only after a rigorous period of due diligence into a variety of providers. There may be no shortcuts these days, but the growth and competition in the market might increase the chances the perfect match is out there.
ARE YOU A MATCH?
Price and experience are always vital, but how well does that new service provider answer inquiries into the following?
How flexible is the offering? How easy is data to access by both GPs and LPs? How often will internal staff actually use that bell or whistle?
How often do senior managers leave? How well are they compensated? Is there a track to earn equity in the business?
What portion of the business does any one client have? Can additional staff be tapped to meet competing deadlines among clients?