Hedge Funds Look to Private Equity – January 2017

Hedge Admin Shops Stretch Deeper into Private Equity Biz

By Lydia Tomkiw January 11, 2017 | www.fundfire.com  

Fund administrators are increasingly looking to private equity and other alternatives as areas of growth for 2017, following a difficult year for the hedge fund industry in which liquidations are on track to outpace launches. That also will follow another active year of mergers and acquisitions activity in the fund admin market.

As administration firms look to expand their umbrellas as all-encompassing alts administrators, however, navigating different structures also poses challenges.

“What you find is that administrators that have alternative funds administration experience are looking to diversify into other global fund administration, including private equity,” says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration space. “I think that part of the reason is that the stability or trending of pure hedge funds is slowing and therefore it makes sense as a business for administrators to look at applying their skills and business structures to other alternatives.”

While historically hedge fund managers were active moving between administrators, these days most managers are looking for continuity and sticking with their providers, causing administrators to expand their service offerings and increasingly look to other markets for new business, says David Young, president at Gemini Hedge Fund Services.

“It’s less likely that hedge funds move their administrators now,” he says.

While total hedge fund assets under management grew to over $3 trillion by the end of 2016, withdrawals were over $66 billion through the third quarter of 2016, as previously reported, and hedge funds continued to battle redemptions and lower returns. At the same time, private equity managers are increasingly turning to external fund administration amid a tougher regulatory environment and institutional client demands.

Business growth expectations for fund administration providers were ranked highest for private equity funds, with strategies including private debt, distressed, and small/middle buyout topping the list, according to data from an eVestment survey and report on alternative fund administration from the spring of 2016. Real estate assets also showed room for growth.

“The private equity market institutionalized. Those institutional investors are driving reporting and transparency and standardization requirements as they did with the hedge market,” says Peter Sanchez, CEO of Northern Trust Hedge Fund Services. “The same is happening with private equity and the expectation that managers spend less time on administration activity and more on transparent reporting.”

While 2017 offers a significant opportunity for hedge fund admin firms to continue moves to service private equity structures, build outs away from hedge fund services also pose the potential for gaps to meet the needs of private equity clients. Systems must be able to handle deal level reporting and long-term investment returns, Sanchez says. Northern Trust has built out its hedge and private equity capabilities in the same systems.

Read the full article here.

Private Fund Tech Upheaval – November 2016

Hamilton Lane Bets on Private Fund Tech Upheaval
Article by Tom Stabile November 9, 2016 | www.fundfire.com  

Hamilton Lane’s latest corporate investment in a data analytics firm aims yet again at an opportunity it sees brewing in its own backyard – its private equity peers automating systems and operations and upgrading from the market’s low-tech roots.

The private equity advisor and fund of funds manager, which runs or advises on $315 billion, last month made its fourth direct investment in a technology provider to its own industry, becoming the largest shareholder of Bison, which provides performance and analytics systems for private market firms. That added to prior corporate stakes in Black Mountain Systems, Deal Cloud, and iLevel, a firm later sold to Ipreo, in which Hamilton Lane now has its stake. The fund manager declines to outline the size of its corporate stakes in these outfits or the value of those holdings.

“It’s a 40-year-old industry, but a lot of participants are doing things the exact same way as 30 years ago,” says Erik Hirsch, vice chairman and head of strategic initiatives at Hamilton Lane. “It remains very Excel-driven, with not a lot of online data sharing mechanisms and being very manual in how things are run and shared. If you were buying a stock, you wouldn’t pull out an Excel table to get a pricing model – you’d have real-time information.”

Hamilton Lane isn’t done scouting the market for firms that can bring private equity up to date, he adds.

“We’re meeting with new potential partners every couple of months,” Hirsch adds. “It’s a relatively under-invested area.”

Private equity firms are indeed signing on for technology and systems upgrades more often, particularly in the realm of hiring external fund administration firms, says Bill Salus, CEO of Paddock Consultancy, which he founded this year after leaving his role as an executive at Apex Fund Services. And to that end, there may well be more industry players joining Hamilton Lane in the provider scrum, he says.

“Firms have been developing expertise in these systems in-house, and there’s a value for providing these services on a third-party basis,” he says. “I’m not sure it’s for everybody – for some it’s not in their knitting to engineer a product and sell it up and down the market. But there are some that feel they can monetize their [ideas], because there’s a scarcity value of real experts in private equity [operations].”

Automating operations, using standard templates, sharing data between systems, and adopting flexible technology have been growing themes in the private equity business for several years, driven by various factors, including pressure from limited partners and regulators, and from new tools coming online.

“The investor demand for reporting and transparency is constantly increasing,” Salus says. “Firms need the reporting and analytics for the investors, and there’s always something new that regulators want.”

That was a big factor in the rapid growth for private equity fund administrators in recent years, with investors asking fund managers to outsource operations and have more checks on their books and records, Salus says. “Our private equity pipeline [at Apex] was probably five times the size of our private equity book,” he says.

As new financial technology startups have become active targeting the private funds market, they have been pulling in investments from venture capital and private equity funds adding them as portfolio companies, Salus adds. “There is a wide range of companies focused on supporting the growth of assets and these [fund managers],” he says.

Read the full article here: http://fundfire.com/c/1496033/172993?referrer_module=SearchSubFromFF&highlight=bill%20salus

Saving Money – October 2016

Saving money seems to be top of mind for investment managers, particularly on cost of infrastructure…we call it Total Cost of Ownership at Paddock, and it refers to the growing costs of supporting technology and third party providers, from front to middle to back office…SEI’s recent paper on the costs of middle office show upwards of 36% of a managers overall spend is directly associated with infrastructure…second to compensation…if managers are running their shops “as a business” these cost are alarming…and growing…in the face of distribution challenges, and regulatory purgatory…

Private Equity markets are booming, with capital seekers running to private sources in funding in the face of the bank’s systematic withdrawal from massive lending…see BNYMellon’s piece on the global growth of these markets, and the pressures of funds being able to build operational models to support eh structures…that means private equity administration is suddenly vogue and an attractive investable commodity…we see funds want to own a piece of the admin services action, with little to buy in the market…this scarcity value will bump up the multiples that investors will pay for service providers…hmm, admin in vogue?!…

Wealth management take center stage with fund managers and advisors…how to capture more market, and do it for less…this has fostered the digitization of the wealth management space, or, affectionately, the Robo Advisor space…manager cringe at the thought that millennial wealth management clients would rather select an advisor while watching Netflix, than at a polo game…how to handle to costs of these digitally delivered products…a topic that is confronted daily at Paddock…especially when the actual investment instruments are ETF bundles or managed accounts of some sorts…Vanguard can do it, with an advisor available to chat, for 25bp…how does the RIA community react to that?…

Speaking of ETF’s, a good read is PWC’s latest paper on the global expansion, no explosion, of ETF’s…global custodian turn pale, and investment managers realize that if they don’t have their strategies in these products, they will be competitively expensive…meaning less competitive…ETF growth disruptive in many ways, pressuring back office efficiencies as well as cost and infrastructure management…

Leading to the FinTech space..Lookout for our upcoming regular feature – 3 Questions with…-where we will spotlight one of the movers & shakers in our industry…our first post of this series will feature Steve McClaughlin of FT Partners on his view of the disruptive – or disjointed – impact of the many tech companies developing products in the financial services space…

Finally, if costs and products and regulations proliferation wasn’t enough, manager success is dependent on growth…capital raising is still top of mind…job #1…but what wins with today’s discerning retail and institutional consumers?…Brand, performance, safety, price?..remind me of the joke where a dog food company Chairman asks his employees why, if they have the best company and best salespeople, revenue is down?…their response: because the dogs don’t like the food…send us a note on your thoughts around your barn…’Til then…Bill