Raising the bar

As a result of the financial crisis, investors may focus even more closely on the quality of GP reporting. And that's good news for private equity administration specialists in Asia, Andy Thomson discovers.

Private equity professionals continue to hold their breath. In many other areas of the asset management industry, the effects of the global financial crisis can already be clearly seen. But quiz someone in private equity about what life is like post-banking meltdown and you might be greeted with a puzzled look. They might sheepishly volunteer that not all that much has really changed.

This sense of having stood on the fringes of the storm pervades conversations with fund administrators in Asia. “Based on our experience, the events of the last six to eight weeks have not yet had a major impact on what's happening day-to-day in private equity fund administration. Events have clearly been felt more severely amongst the more liquid asset classes, for example in relation to hedge fund redemptions, but not yet so much on the private equity side,” says Tim Mann, head of Asia fund administration at services group Mourant.

He adds: “Most of our clients in Asia are new funds and are not yet at the stage of distributing cash or exiting investments, so they've not had much experience to date of the distribution process. On the capital call side we've not seen any evidence of LPs having difficulty meeting their commitments.”

One possible repercussion of the crisis, however, is unsurprisingly being greeted with enthusiasm by the likes of Mourant. And that is the prospect of investors becoming even more demanding when it comes to back office procedures being as transparent and efficient as possible. Because, in that event, it's easy to assume that GPs will come to lean all the more on the services of fund administration experts rather than on their own resources.

“Based on our experience, the events of the last six to eight weeks have not yet had a major impact on what's happening day-to-day in private equity fund administration.”

Says Mann: “The trend over the last one to one-and-a-half years has been that investors have raised the bar in terms of what they expect from GPs in terms of reporting and accountability. So that's a trend that predates the current financial problems. But once the full impact of the credit crunch has taken effect, people will look for even higher standards.”

As Mann suggests, those standards are already high. For one thing, an increasing number of GPs active in Asia today have their roots in the US and European markets and are supported by LPs that have demanding reporting requirements.

Says Philip Millward, deputy managing partner at international law firm Walkers in Hong Kong: “Due to the increasing globalisation of the private equity funds industry, as more players flood into the Asian region, expectations on the reporting front have become aligned with US/European expectations.”

This in turn has prompted locally based managers to make sure their own fund administration is up to scratch in order to attract blue-chip international investors into their funds. Adds Millward: “The increased weighting of investment allocations to Asia has opened up significant opportunities for Asian-based managers who are now very familiar with the level of transparency and reporting requirements of US pension funds and other institutional investors.”

Evidence of Asian GPs' increasing willingness to prioritise fund administration is provided by Mourant's experiences since it launched its Asian operations a year ago. Mann says that the firm set out to address the needs of two constituencies: new clients from among Asia's home-grown GP community and existing global clients moving into Asia. While expecting to see a pick-up in demand from the latter category, Mann says that almost all Mourant's business to date has come from the former.

While it's admirable that Asian GPs – even those at an early stage of their development – are aspiring to high levels of administration, Mann points out that the reason why firms such as his are seeing burgeoning demand also has much to do with practicality. Given the likely expense and complexity of developing solutions in-house, many are readily persuaded of the benefits of outsourcing.

Says Mann: “The GP has to ask itself whether it wants to build the infrastructure for its own back office and, perhaps most significantly, whether it wants to invest in a system and a platform that is private equity specific. We use Investran as our software platform, which is a dedicated private equity product created by Sungard. A start-up fund may not want to incur that cost.”

Mann believes that another reason for the demand being experienced by Mourant, which meant the firm was in the process of recruiting five new professionals to its Asian team at the time of going to press, is that it spotted a gap in the market. He says the market for fund administration services for hedge funds and other [non-private equity] alternatives is competitive in Asia, but far less so when it comes to private equity. And private equity is Mourant's sole focus in the region, despite offering hedge fund services elsewhere in the world.

Also seeing a compelling market opportunity is Tarek Chouman, Dubai-based managing director for Asia and the Middle East at financial software solutions provider eFront. However, in his view, the Middle East is more promising than Asia Pacific. He says: “In the latter [region], a lot of hedge funds have suffered from the crisis and private equity companies are telling us they're cautious with their investments and may try to still rely on Excel before moving towards our system. The appetite is definitely coming from the Middle East.”

“Asian-based managers … are now very familiar with the level of transparency and reporting requirements of US pension funds and other institutional investors.”

He adds that the market for fund administration and technology is a little more embryonic in the Middle East. Organisations there, he says, are frequently acquiring software for the first time, whereas in Asia, many firms have moved on to second-generation software.

This should not be seen to imply, however, that the reporting requirements for Middle Eastern funds are any less sophisticated or complex – in some ways, they may be more so. Says Chouman: “Audit and compliance features are highly important for our prospects in an effort for countries like the UAE to crack down on corruption and malfunctioning internal controls.”

Asian funds also have nuanced requirements, adds Chouman. One example he offers is that “currency exposure reports are more important…compared to Europe due to the number of different currencies in a volatile currency market.”

Amy Newlan, vice president of private equity fund services at JP Morgan, says that, for Asian funds, “strong transparency and investor reporting is key. Asian GPs look for responsive customer service, with solid internal controls and expert knowledge and experience.”

She adds: “What we have seen amidst the current financial crisis is that private equity fundraising will take longer, but strong funds with a well defined strategy will be able to raise funds. We still view Asia as a key market of growth and opportunity in private equity.”

And, as more Asian funds are formed and more outside funds flock to lay down roots, that can only mean an increase in business for fund administrators active in the region. The crisis is having far-reaching effects the world over but – in the context of the day job, at least – private equity fund administrators in Asia do not appear to be feeling the pinch.