Fund services report: 5 things to know about the industry

PDI breaks down the themes emerging in the private debt fund administration industry in 2018.

1. Industry consolidation

There were several high-profile mergers that took place across the fund services industry in 2016 and 2017. Neuberger Berman kicked off the trend in February 2016, spinning out its adminis- tration arm to Japanese financial group MUFG Investor Services. That deal was followed by the first of Sanne Group’s five acquisitions, when it bought Chartered Corporate Services in Ireland the same month. The firm has since been building a pipeline of potential deals which it expects to execute in 2018.

Among the most recent larger deals was also Northern Trust’s purchase of UBS’s fund services unit. Elsewhere, fund administrator Cortland Capital Market Services agreed to be acquired by Alter Domus Group in a move it said will bolster its private debt and real estate services. While this trend will benefit administrators looking to scale up as part of a bigger group as new regulations emerge, smaller managers will have access to fewer niche administrators.

2. Outsourcing demand

There is only so much a spreadsheet can do, and as managers encounter difficulties with using dated in-house systems – particularly in the context of a fast-moving regulatory and technological landscape – the trend for GPs outsourcing fund administration has continued. One of the main reasons is that many GPs have grown significantly in the past decade and now find their technology platform is no longer the most efficient way to integrate their organisations. Meanwhile, managers are increasingly comfortable with outsourcing sensitive functions that previously remained in-house, such as carried interest arrangements. This reflects the fact that fund administrators are offering more sophisticated solutions and are building more trust within the industry.

3. New technology

As the fund services industry has expanded and matured, the technology it employs has evolved. As larger workloads and growing regulatory demands have led to a greater need for outsourcing, managers and their fund administrators also need better tools and platforms to address their clients’ needs. Industry participants are also beginning to see opportunities in the more nascent areas of fund technology, like blockchain. Private equity funds are already using blockchain technology that allows a fund to transfer ownership stakes, and be managed, serviced and audited throughout its lifecycle. It is only a matter of time before blockchain makes its mark in the private debt world.

4. Cybersecurity

While new technology seeds new opportunities, it also brings with it new risks. Cybersecurity has now become a top priority for fund service providers. The threats firms face include phishing, pharming, identity theft, social engineering, malware, ransomware and denial of service. Attackers are more sophisticated, too. The threat is no longer coming from a loose network of hackers working in isolation but from highly organised teams running large-scale global operations. Not everyone is prepared for this new threat and often lack the in-house resources to tackle it. Many are turning to outsourced solutions. What’s more, robust cybersecurity protections are not just good practice, regulations on both sides of the pond now make it a legal necessity. Any cyberattack can also be a double hit for a fund if it must also face regulatory censure as a result.

5. Regulatory ups and downs

While this is an evergreen theme in the world of fund administration, there have been some big regulatory developments in the past year. The latest include the Anti-Money Laundering Directive and Regulation IV adopted in the EU in the middle of last year, and the new rules brought in by the Financial Conduct Authority for reporting fees and expenses. Europe’s MIFID II regulation has also come into force. As the industry becomes burdened with more and more regulation, it has arguably created opportunities for fund service providers. The ability of a specialist provider that can lighten the load for managers tackling new regulations has been a key driver behind increasing demand for outsourced solutions. As managers look to reduce costs and appease transparency demand from LPs, they are seeing the value in any administrator that can unpick impending legislation, make sense out of it, and anticipate potential pitfalls.