GC Perspective: Deutsche Bank’s Tim Fitzgerald on the Growth of Hybrid Funds

Deutsche Bank GTB has launched a new integrated solution for processing hybrid funds. Combining its loan and fund administration platforms, Deutsche Bank will offer a seamless service for these increasingly popular and complex fund structures. Global Custodian speaks to Deutsche Bank’s Tim Fitzgerald, head of Alternative Investment Fund Services, GTB’s Institutional Cash and Securities Services (ICSS) unit, on the launch of the new solution.

GC: Why has Deutsche Bank decided to focus on hybrid funds?

TF: We see a big convergence in private equity and hedge fund strategies. This is a market trend, there is a lot of bank debt being taking off balance sheets and there are discounted assets available so this is a growth area for Alternative Investment Funds. We also see a lot of fund vehicles doing private debt or originated funds and replacing banks in that space. We are also seeing traditional private equity managers buying up hedge credit managers.

There is a convergence trend and we believe our platform is well suited to this. We have a well-established private equity/real estate business and a well-established hedge fund administration business, so we have integrated the technologies of those businesses so we can run close-ended private equity type funds that are investing in any type of assets. We have integrated our fund administration platform with our loan administration platform, so we are well placed here to offer a seamless offer for clients.

GC: Who is this solution aimed at? Can investors access it directly or is it for fund managers?

TF: Primarily aimed at fund managers establishing an alternative investment fund (AIF) that is investing in illiquid assets or bank debt or originated debt, whether you are a private equity fund or a hedge fund or sovereign wealth fund etc.

The solution could also be for institutional investors that are launching separately managed accounts or in some cases even competing with the funds in certain areas, but it’s mainly aimed at those client types in the alternative investment space.

GC: With this convergence, how are hybrid funds coping in the post-AIFMD environment?

TF: They (hybrid funds) invest mainly in illiquid assets so they are ‘other assets’ under the AIFMD, they are not financial instrument. Most of these managers are AIFM themselves. They will need to appoint a depository. We also act as the depository for these types of vehicles so there are some synergies of doing fund administration and depository because we have all the loan administration and custody portfolio data and information, so it adds efficiency to an AIFMD-type structure.

GC: How important will it be for fund administrators to service new fund strategies?

TF: The industry is becoming more complex. Because of the types of assets AIFs are now investing into, players need to have the ability the handle bank debt, originated debt, illiquid assets, real assets which have huge complexity. Only the administrators that have fully invested technology platforms and have flexible technology that integrates with the clients in a seamless way will survive. A manual process for assets of this complexity will be unprofitable and unprofitability is leading to some administrators leaving the space.