Navigating the private capital fund lifecycle

In partnership with CSC, Global Custodian hosted a webinar alongside industry experts to discuss how funds can prepare for growth by considering their vendor ecosystem across the fund lifecycle; and how fund service providers can support their long-term views on growth plans and help them navigate global jurisdictional and regulatory landscapes.
By Jon Watkins

A seismic change has occurred in the private capital markets over recent years and the ripple effects are still reverberating through. Against a backdrop of growth with expansion spanning multiple products, asset classes and strategies, fund managers are recognising that day-to-day fund operations are not incidental, but central to the way their firm is perceived in the market. Fund services, as a result, have become less of a cost centre, and more of a differentiator.

“We’re moving now towards a model which is more multi-product and multi-vintage, where the GPs are launching more frequently – with more specialised funds to an extent – so they would have to do more product management, where before they were just managing one or two products,” said Alain Guérard, Mont Blanc Consult.

“Groups have five, 10 or 15 different funds at the same time and that is applying a lot of pressure because the launch cycles are becoming shorter, and the product activity is a lot more active. This is putting a lot of pressure on the ecosystem itself, on the back-office and the requirement for a new launch if a new product is in a new jurisdiction or a new strategy. So, it’s a lot more diverse than just copying and pasting the same product year-after-year. This evolution looks similar to the liquid world.”

According to Preqin, global investment in alternative assets is expected to grow from $12.5 trillion AUM to over $20 trillion AUM by the end of 2025. Meanwhile approximately 60% of private fund CFOs surveyed in 2021 – in a survey by Private Funds CFO – said they were launching a new fund or would do so later in the year, and 73% expected their firm’s next fund to be larger.

For fund managers, certain challenges occur with this growth, and it is crucial that additional risk or opacity isn’t introduced into operations across the fund life cycle as a result.

Whether a fund manager chooses to launch a larger fund or expand into new strategies or jurisdictions, they need to lean heavily on fund service partners who can support best practices on structure, investor onboarding, compliance, depositary, custodial, and liquidation to ensure the most advantageous and orderly progression for the fund.

“Being able to service multiple strategies in various jurisdictions obviously is very important, and the LPs – the investors – are starting to perform an increased level of due diligence on service providers that they have done on fund managers,” said Liam McHugh, managing director of CSC Fund Administration Europe.

“To be able to service your clients to a consistently high standard, you may require larger teams with a global footprint, which does lend itself more so towards the global service providers.”

The Panelists suggested that the need for scale, and a large footprint and value chain is critical considering these growth realities the industry faces, along with the most advanced technology, regulatory understanding and agility to meet evolving needs.

“Your service provider needs to have the scale to accommodate you when you’re going to [for example] fundraise in Q4 and launch in Q1 or Q2. And they need to be able to service you across all those jurisdictions, and in your very specific strategies,” added Guérard.

“It is becoming more challenging for smaller providers to accommodate those type of structures. You’re still going to have the mono fund, mono vintage, and so there’s probably a market for the smaller providers to do bespoke work, but once you get into the requirements of the larger GPs, you need to have dedicated teams across multiple jurisdictions.”

While there is no one-size-fits-all when it comes to service providers, during the discussion it became evident that fund managers with plans for growth need service partners with global reach and local knowledge to help navigate new tax and regulatory frameworks, and investor bases.

“If you have a global footprint but service clients locally, that’s a big plus for fund managers and the LPs as well, and I think that’s actually a key component when selecting a fund administrator or any service, whether it be a lawyer and an auditor as well,” said Anthony D’Silva, founder of Incu Global.

When it comes to regulatory complexities, and there are many around the world – not least through the SEC in the US – funds are leaning on providers to support them and understand the regulatory nuances and expectations in various jurisdictions.

“As a manager you want to focus on investments, performing for your investors and supporting your LPs,” added D’Silva. “Leveraging your service provider to be able to help you and guide you through all this regulatory reporting is critical and I do think going forward it’s going to be more onerous.”

Alongside the tangible factors in selecting a fund service provider, another critical component is commitment. Parallel to the ascension of private capital has been the establishment of specialist private capital service providers, who have then gone through a period of consolidation, bringing the number of administrators down again from the initial swell. Sticking power has therefore become an essential attribute when funds are selecting their administrators, who have become more like partners than just service providers in this new landscape.

“I’ve been through this myself,” explained D’Silva. “In a real-life situation where I was being serviced by a great service provider, which was then acquired by a larger firm, the question mark then hangs on the balance of ‘am I going to get the same service as I had previously after the acquisition?’

“With the acquisition of Intertrust by CSC, it’s not a private equity acquisition. It’s a very like-minded business with two service providers merging to become one big one and no doubt will provide a good service. But that’s always the question mark, especially on the acquisition side: Are you going to receive the same level of service? Will your investors be happy? And if the service does deteriorate, does that mean you’re going have to change or cross fingers and hope that it stays the same?”

Ultimately, a fund manager’s long-term success depends on the availability of a service ecosystem that supports each phase of the fund life cycle with the right mix of accounting, administration, governance, and investor services. Therefore, they need to have a forward-looking view and evolve from a ‘fund launch’ to a ‘fund life cycle’ mentality and assemble a service and technology ecosystem capable of elevating the investor experience, enhancing operational efficiency, and laying the groundwork for cross-asset class and cross-jurisdictional agility.

“We’re an extension  of the manager’s back-office and we’re there to support them, so when our clients, the managers, reach out to us, we need to be in a position to respond and address any queries or questions that come through,” concluded McHugh.

“The relationship you take on with a manager as a service provider is going to hopefully span many years.  You want to be able to give that comfort level to your clients so they know that the service quality  and the points of contact will remain consistent.”