Real estate fund managers are reviewing their business models to respond to increased investor requirements and burgeoning regulation such as AIFMD, EMIR and Solvency II, research from State Street has found. As real estate allocations continue to grow, fund managers are increasingly outsourcing to third party service providers to concentrate on their core investment skills.
The Real Estate: A New Model for Fund Managers study, which received more than 50 responses from real estate fund managers across Europe, representing 14 European countries, found that despite the resurgence in real estate investment, institutional investors are looking for more information and are seeking a greater understanding of the investment strategies of their fund managers. In turn, investors want increased control over their investments, greater flexibility over entry and exit from funds, and more transparency and granularity in reporting.
As a result of the global financial crisis, fund managers increasingly want to outsource the risk management services to third parties. State Streets research found that managers have either already outsourced, or are considering outsourcing, a number of back-and middle-office processes. The areas expected to grow the fastest are fund accounting and administration services, performance analytics and look-through reporting services. The latter being driven by increasing awareness of the investment required to maintain cutting edge technology platforms.
The research also found that where managers have established core in-house administrative functions, more than a third (37%) are prepared to consider a lift-out of these operations to third party providers. The interest in outsourcing these functions is being largely driven by new regulatory demands, with 55% of respondents stating that regulation is an important driver of outsourcing.
Of those managers that currently outsource, the characteristics they demand from their service providers are flexibility and adaptability, with 82% naming these a priority, and technological excellence which was viewed as very important by 47% of respondents. However, the factors that can prevent managers from outsourcing include a perception of variable quality and service levels. 27% of fund managers currently outsource their fund accounting / administration while 22% would consider it. 16% of fund managers currently outsource their performance analytics and look-through reporting.
In terms of regulation, fund managers expect the biggest negative impact of AIFMD. While the precise shape of the directive is being refined, its broad impact on real estate investment funds is already clear. State Street suggests that AIFMDs requirement for alternative funds such as joint ventures and unit trusts to ensure independent valuation or at the very least ring-fence the valuation function is likely to drive the trend toward outsourcing.
Simon Burgess, vice president, real estate fund services for State Streets Global Services business in Europe Middle East and Africa, commented on the research findings, We are on the cusp of significant change in the way that real estate fund managers structure and operate their funds. The sector is opening up in a way never before contemplated by the industry and offering rich, diversified returns for investors. However, real estate fund manages face conflicting factors that are likely to have sustained, far-reaching and fundamental implications for their business models. Real estate fund managers are becoming acutely aware of the investment required to maintain cutting-edge technology platforms, to support capabilities such as analytics and reporting, and in response they are increasingly turning to service providers to access this expertise.
In response to regulatory pressures and related market focus on oversight functions, fund administration technology provider Milestone Group has published a white paper examining the challenges of ensuring effective oversight of outsourced relationships. The research addresses the operational, regulatory and reputational risks faced by financial institutions when outsourcing key operational functions, such as fund accounting or middle office activities.
Regulators globally have expressed concerns over how financial institutions that outsource business-critical functions operate their relationships with third-party service providers, states Nathan Travell, product manager at Milestone Group and author of the new white paper. Asset managers, asset owners and administrators that are party to these arrangements are struggling to maintain effective oversight as the value chain expands and becomes more complex. Very often, this function was not anticipated in the original outsourced operating model design, and has continued to be resourced as necessity demands.
Milestone draws comparisons with the automotive industry in its research and finds that supplier quality management protects against the risk of quality issues arising from outsourced functions. Rigor and transparency in the oversight process is the key ingredient to guarantee that the accelerator pedal does not get stuck, as one major car manufacturer found out to its cost, said Milestone.