The ever-changing regulatory landscape, increasing investor demands and rapidly evolving use of technology are driving a trend towards outsourcing in the fund administration industry.
Traditionally, many fund managers performed the administration of private equity and real estate funds in-house. However, as the reporting demands of both investors and regulators grow, so too does the need for specialist knowledge, processes and technology, which independent third party administrators are well placed to provide.
By outsourcing, fund managers are able to concentrate on their core competencies of investment analysis and selection, and generating returns for their investors. In addition, they can take advantage of the third party administrator’s expertise and economies of scale (the administrator will service multiple clients and fund structures), thereby gaining access to the latest fund analysis and reporting technology at a lower cost than if they were to implement it themselves.
In this article, I take a closer look at the key drivers behind the outsourcing trend as well as the different operational models available to ensure that, once a decision to outsource has been made, fund managers are able to retain the level of control they desire over the flow of information to their investors.
One key factor propelling alternative fund managers towards outsourcing is investor demand. Institutional investors are undertaking more detailed due diligence on a fund’s operating practices before committing capital. This due diligence goes beyond the traditional analysis of a fund manager’s track record and investment team and now incorporates analysis of all parties connected with the fund. Investors increasingly expect to see that an independent third party fund administrator has been appointed with the experience and technology in place to provide detailed reporting on their investment as well as process transparency.
Due to the introduction of reporting requirements such as the Basel III framework, many institutional investors increasingly want further information on their investment portfolio, such as a breakdown of exposure by geography, sector and fund types. This is particularly relevant for investors with a large diversified portfolio, typically including fund of funds investments, where the number of underlying investee companies is multiplied. The best fund administrators are able to track and store this information and have a team of technology savvy professionals on hand to build bespoke dashboards and deliver portfolio analysis reporting.
Over the last few years regulatory reporting requirements have become more and more complex with the introduction of global initiatives such as the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS). These regimes, combined with rising standards set by local regulators in areas such as Anti-Money Laundering (AML), are greatly escalating the reporting obligations on fund managers. In turn, fund managers are realising the significant resources required to keep on top of this evolution and recognizing that independent third party fund administrators with specialist staff are best placed to meet the mounting requirements.
The upcoming introduction of the EU’s General Data Protection Regulation (GDPR) on 25 May 2018 – i.e. the biggest overhaul of data protection legislation in years – will further intensify demands in this area. For more detail, check out the article from Jenny O’Riordan, our head of legal, on the impact of GDPR.
In line with the rising expectations of clients and investors alike, fund administrators are increasingly embracing technology in order to deliver the high level of service required.
Specialist fund administration platforms, such as eFront, allow data to be tracked at each level of a fund structure, from the investor’s commitments and fund level data through to the underlying portfolio companies.
Consolidation of this data into one system allows processes around data input and output to be tightly controlled, enhancing the integrity of the data and minimising the risk of error associated with manual Excel spreadsheets. This data is then used to produce the fund’s financial statements, investor notices and portfolio analysis reporting mentioned elsewhere in this article.
Outsourcing provides fund managers with the opportunity to reap the benefits of these systems, while avoiding the costly and time-consuming process of implementing and maintaining the technology in-house. These cost savings can ultimately be passed on to the fund manager’s investors through reduced overall fees.
Systems expert Robert Palazzini provides further insight on this topic in his article on the use of technology to enhance portfolio analysis and reporting.
Although there are clear benefits to outsourcing, lack of flexibility, loss of control, staff turnover and the ability to trust an external provider are genuine concerns for some fund managers. The third party administrator therefore has to demonstrate that they can be trusted and deliver client-focused solutions in order to allay these fears.
Central to outsourcing concerns is the fact that most fund managers will want to retain the primary relationship with their investors. The flow of information between fund manager, administrator and investor therefore needs to be carefully considered.
Below are three possible investor interface models for outsourced fund administration:
Traditionally, all administration tasks throughout the lifecycle of the fund are completed by the third party administrator and are circulated via email to the fund’s investors. While the fund manager may choose to review a calculation or call notice produced by the administrator prior to it being shared externally, the administrator is the interface for the investors.
Given its efficiency in terms of saving the fund manager’s time, this model is still commonly used. However, there are other options for fund managers wishing to retain a greater level of control.
An evolution of the traditional model, all investor communications are delivered via a secure, web-based portal. Each time the fund administrator produces a new document, it is loaded to the portal and a communication is generated to let the investor know that a new document is available to view. Investors can access all historical communications related to their fund investment at any time. The interface itself can be branded with the fund manager’s logo and the link to the portal can be via their own website.
3. No Contact
With this model, the fund administrator performs a 100% back office function, with little or no contact with the investor. Administrative tasks are completed by the third party administrator and the output of these tasks is sent to the fund manager for review. The fund manager then in turn issues the communication to their investors. While more time consuming, this allows the fund manager to retain control over the flow of information to their investors and ensures they retain the primary relationship.
This variety in possible outsourcing models highlights both the importance of placing the client’s individual requirements at the centre of service delivery and the need for fund administrators to be flexible in their approach. In order to build trust, administrators may need to prove their worth by taking on only specific elements of a fund manager’s operations to begin with, before further work is outsourced.
Aforementioned factors, such as growing investor demands for transparency and detailed reporting and the ever-evolving regulatory landscape, have served to make outsourcing a more complex and tailored delegation of operational expertise. With the industry trend towards outsourcing back-office functions set to continue, specialist fund administrators able to meet these demands through the application of innovative technologies and a flexible client-centric approach will be sure to do well.
Moore Management is a leading independent provider of offshore fund administration services, operating in strategic locations worldwide. Our skilled specialists have a long track record of working closely with fund managers and investors, utilising leading edge technology to meet each client’s specific needs and exceed their expectations.
For further information or to discuss your fund administration outsourcing requirements, please don’t hesitate to get in touch.
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