Private equity administration: assessing banks vs non-banks

In the build-up to Global Custodian’s Private Equity Issue this summer, we assess the two types of fund administration providers as PE firms are being forced to outsource.

By Charles Gubert

With record amounts of institutional capital sloshing around in private equity, more managers are looking to external providers to assist them with their administration. For many years, private equity has collectively sniffed at the idea of outsourcing administration, but this enmity appears to be subsiding in the face of investor pressure, growing regulation and increased reporting. The challenge for managers now is to make sure they select the right administrator. Global Custodian provides a quick-fire overview outlining some of the pros and cons of different types of private equity administrators.

The bank option

Banks’ robust balance sheets give them more flexibility to invest in resources, technology (including disruptors like AI and blockchain) and services to cater for private equity clients, at least more so than smaller outfits. Simultaneously, banks often provide multi-asset class coverage, an advantage which is particularly relevant to private equity as it transitions away from being purely LBO-centric and into other products like direct lending, private debt and hedge funds. Finally, banks can offer slew of services beyond just administration, including M&A advisory, depositary and cash management.

Conversely, banks have faced criticism for being un-wieldy, and providing commoditised services, something which does not bode well for private equity which is diverse and often requires customised solutions. One administrator said banks had repeatedly overegged their credentials when pitching their bundled offerings. “Banks have been saying to private equity for years that they can offer a bundled service proposition, but I have yet to see it.” A handful of bank providers have also spun off their low margin administration businesses to shore up balance sheets, something critics say causes disruption to clients.  

The non-bank option 

While banks regularly highlight their balance sheet strength as an enabler, some of the biggest private equity administrators globally are independents and have large treasure troves of cash to spend on technology, infrastructure and acquisitions. A handful of providers are supported by private equity cash themselves giving them ample resources to spend on expanding their businesses.  Many independent administrators also say they are far more flexible than banks in accommodating client requests, while smaller providers insist that their nimbleness serves as an advantage in delivering bespoke products to clients.

The risk of appointing smaller administrators is that some lack the capital of the major banks, and many managers feel this is a counterparty risk. After all, nobody ever got fired for appointing an IBM, and the same rings true in administration. If a small administrator goes out of business, porting to a secondary provider can be an operational headache. Large banks and established standalone administrators also have superior brand awareness, something their smaller compatriots lack. As institutional investors prefer their managers to utilise household names, going with a smaller administrator can be disadvantageous to capital raising.

Critics of the private equity-owned administration model are certainly in abundance. They point out that conflicts of interest between owner and administrator must be carefully managed, something which needs to be facilitated through Chinese Walls. Other experts point out such fears have largely been put to bed, and that private equity owned administrators will have robust Chinese Walls in place.  Even so, private equity-owned administrators also pose a continuity risk for clients as backers will typically want to sell the provider after several years, again causing potential disruption.