By Ian Kelly, Chief Executive Officer, Augentius
There was a time in the early days of the fund administration industry when it simply did what its name said. As the global funds industry grew in size and complexity, the outsourcing of day-to-day back-office detail was a natural step in terms of cost efficiency. Reliability, expertise, and reputation have always been important factors in how funds select administrators, but the benefit provided was essentially a “negative” one: its primary purpose was to remove a problem from the fund manager’s plate. To adapt the Victorian phrase, a good fund administrator would be “neither seen nor heard,” toiling in the background so that the fund could focus on generating returns.
Much has changed since. The clients of fund administrators are operating in a landscape that would have been unrecognizable just five years ago. The immediate post-crisis climate triggered a deluge of new regulation that continues to roll around the globe. From FATCA to Dodd-Frank to AIFMD and beyond, the volume and complexity of data that funds are expected to capture and report to regulators and investors alike has ballooned. Regulation aside, funds are also facing a more complex landscape as ongoing globalization opens up a variety of new markets, all with their own idiosyncrasies. And all the while, competition for capital has become ever more intense.
This changing environment has also had a transformative effect on fund administrators themselves. The step change in the volume of reporting means that the best administrators are now a central hub for a vast array of important information from multiple sources—information waiting to be turned into value. And the increase in complexity combined with the rising importance of technology and automation has meant that leading administrators saw the value in investing heavily in higher intellectual capital. In many cases fund administrators are no longer the bean counters of old.
The upshot of all this has been the rise of a new breed of fund administrator. While accurate, quality outsourced administration remains at the heart of the business model, some administrators are taking advantage of their newfound position to take on a greatly expanded role. Unlike the role of third-party administrator (taking a bothersome task off a fund manager’s plate), these new roles involve actively adding value to the client’s proposition.
One area where fund administrators are starting to actively add value is in the area of investor communications. Given the trove of data administrators sit on, the best administrators are perfectly placed to help a fund ensure that its investors receive the information they need. This means providing it in the relevant format and allowing the investor to access in-depth information about their investments on a far more regular basis, tailored to their own particular requirements.
The fact that modern fund administrators now need to be absolutely on top of the precise, technical details involved in the new regulatory environment—details that are ever shifting thanks to the ebb and flow of global regulation—also puts these providers in a perfect position to offer wider compliance services. Given that regulatory reporting now forms such a crucial and large part of the wider administrative workload, administration and compliance practices have never been closer.
More broadly, the steady accumulation of expertise and data within the fund administration sector means that the best firms are able to take an increasingly advice-based, consultative role—helping managers to improve their businesses and tackle any challenges that may arise for funds with unusual needs. The ideal relationship between a fund and its administrator is now an active partnership. It is not an unthinkable leap from this expanded role to the wider provision of back-office consultancy.
And as the role of fund administrators expands, specialist knowledge of the private equity and real estate industries becomes ever more important. The services described above will, as always with the asset class, have to be modified to suit the idiosyncrasies of the sector. Regulation presents a good example: AIFMD places very different demands on private equity and real estate funds than it does on other alternative asset classes.
Given the distinct challenges that are now being faced, managers are increasingly looking for administrative partners that understand the particularities of their business model inside out.
The industry will continue to evolve in this direction. The expertise and experience of the best fund administrators mean that they are well placed to transcend the limitations of pure administration, and instead offer funds a wide range of services. As the market environment continues to become more complex, demand for these additional services will only increase.
So we are fast reaching a point where the name “fund administrator” no longer paints the full picture. No longer a simple facilitator of back-office processes, the new breed of specialized fund administrator will come to fill an indispensable niche within the private equity and real estate industry.