This article is sponsored by Alter Domus
With the acquisition of Cortland Capital Markets Services in 2018, Luxembourg-based fund and corporate services firm Alter Domus cemented its global capability to provide administration and compliance for private debt managers. In this increasingly complex space, characterised by global and regional investment structures, there is a need for greater transparency with regard to investors and regulators. Maximilien Dambax, Alter Domus’s head of fund services, North America, and Tom Gandolfo, the firm’s head of sales, North America, explain how outsourcing to a partner with scale, expertise and cutting-edge technology can help fund and investment managers meet the challenges.
How has the acquisition of Cortland Capital Market Services transformed Alter Domus’s debt fund administration business in the US?
Maximilien Dambax: It has been a real game changer. From a successful but concentrated geographic reach in Europe, we expanded our footprint in North America, the deepest and most mature market with half of all private debt activity globally. More important is the service, people, expertise
and technology we now have. We can provide a fully integrated suite of services from middle office through to back office. We do this not only at the portfolio level, but across multiple investment vehicles covering commingled funds, joint ventures and separately managed accounts, including business development companies and collateralised
Tom Gandolfo: Alter Domus gained a tremendous franchise dedicated to alternative investments. Cortland is one of the few fund administrators that really has an end-to-end solution which can support the private debt community through services like administrative agency, trade settlement, CLO services and fund accounting. When you combine that with the capability to service each level of the structure – at the holding company, special-purpose vehicle, fund and asset levels – we think that’s a unique offering in the market today.
What other benefits does it bring?
TG: We have 40 locations worldwide, so that ability to provide a global one-stop shop is a big value-add for our existing clients in the US, especially as Luxembourg is such an attractive jurisdiction for fund formations. About half of Alter Domus’s client base was headquartered in the US pre-acquisition, and we can now support them at the local level as well.
MD: It’s a two-way street. For example, US-based managers can tap into our Alternative Investment Fund Managers Directive solution in Europe – either by working with us on the full set-up of their own AIFM or through an outsourcing arrangement with different hybrid solutions. On the other hand, our European clients now have access to a very strong and experienced team of credit and capital markets practitioners in the US, many of whom have been through multiple credit cycles.
How is the increasing scale of US private debt markets changing the playing field for managers and investors?
TG: The private credit market is expected to top $1 trillion of assets. With increasing investor appetite, a lot of managers are moving into credit from other asset classes, notably private equity and real estate. These managers realise that their infrastructure is going to have to adapt, which has led more of them to consider outsourcing solutions for reporting and administrative functions. This allows them to focus on the business of capital raising and investment management.
MD: In addition to the infrastructure requirements, there is the catalyst of the credit cycle on special events like workouts or restructurings. These scenarios require a proper technology platform to capture data and process it, as well as dedicated and specialised turnaround and restructuring teams. The US has a little way to go to catch up with Europe on the outsourcing trend, but it is accelerating.
What demands are investors placing on fund managers, and how are those managers reacting?
MD: At the macro level, as private debt markets become more developed, some managers are moving beyond the blind-pool fund model to offer alternatives, such as co-investments, JVs or separate accounts. Such structures offer exposure to certain assets and give investors more control over their portfolios – and potentially lower fees – while tapping into the managers’ skills and deal pipelines. And, on the asset manager side, those vehicles are fostering stronger investor relationships and providing an additional source of funding to execute deals. The result is that managers’ platforms need to be able to sustain that diversity, while communicating effectively with different stakeholders, including investors and regulators.
How is transparency evolving and what are the key topics?
MD: Transparency requirements have dramatically increased in recent years. The Institutional Limited Partners Association’s Principles 3.0 are a good illustration of the trend towards best practice, and how it directly impacts the middle and back office. For instance, in addition to standardised disclosures on fees and expenses, managers have to provide data on capital calls and distributions with carry calculations, or fund performance, with or without the use of subscription lines. The challenge is not only to capture and disclose the data, but also to have the right level of automation to cope with the volume and data aggregation in a cost-effective way.
We have seen an important emphasis on environmental, sustainability and governance procedures and protocols, going beyond a commitment to behaviour and into documentation and verification. Frameworks need to be put in place to measure and report the true impact of ESG. It’s also impacting us as an organisation, as we have a new generation that is spending more time investigating and understanding ESG matters.
What are the regulatory issues the US private debt industry needs to consider, and how should it prepare?
TG: There are a number of things happening on the regulatory front that managers need to consider as they continue to raise new funds. LIBOR is expected to end as early as 2021 and it’s important to be prepared for a new benchmark rate. From an industry perspective, understanding the documentation and deals today, and having the ability to adjust existing systems and data feeds to link to a new rate, is going to be crucial for a seamless transition. There is the possibility of more stringent privacy laws in the US, similar to the General Data Protection Regulation in Europe. Counterparties need to be able to identify, track and capture personally identifiable information quickly. Flexibility of systems and investment in compliance procedures will be increasingly important to comply with those requirements.
Alter Domus also supports a number of BDCs operationally, and the enactment of the Small Business Credit Availability Act in March allowed them to increase their leverage profile to a 2:1 debt-to-equity ratio, up from 1:1. This has resulted in more activity in the BDC space and we think that will continue.
How can technology and data management tools help managers meet the rising demands of investors and regulators?
TG: Investors, regulators and other third parties are increasingly data-driven. There is an expectation to have self-service access to information like portfolio and asset performance, or trading history and trend analysis, which is best achieved through a web-based platform. Data is not the only driver as managers use portal access to provide content to market their funds, articulate investment strategies and push regular communications. Providing digital content in the right way really strengthens the relationship between a manager and investors.
MD: Technology is definitely a critical enabler in transparency. Today the same core information needs to be sliced and diced and disclosed differently for managers, regulators and investors. It’s definitely a balancing act between industry and regulatory standards, with a certain level of flexibility needed to accommodate specific LP requests. But as the asset class matures, we see customisation as another way for managers to stand out from the crowd. The investor experience is also being reshaped through digitisation, with data access through web portals providing huge benefits in terms of accessibility, security and transparency.