Fund Admin Shake Up – May 2017

Hedge Fund Managers Shake Up Fund Admin Business
Article by
 Lydia Tomkiw May 10, 2017 | www.fundfire.com  

Cost and dissatisfaction with the quality of service are driving hedge fund managers to switch their fund administrators amid continuing merger and acquisition activity in the space, a new survey shows. And managers are also turning over other service provider relationships, according to the Preqin survey.

A quarter of hedge fund managers reported changing at least one service provider in the past year, with 39% changing their prime broker and 31% reporting they changed their fund administrator, according to a survey of over 270 hedge fund managers conducted at the end of 2016 by Preqin. The survey also tracked changes made to fund auditors, marketers, lawyers, and custodians.

Of the 31% of managers that chose to switch fund administrators, 38% cited cost as the leading factor, followed by 31% citing investor concerns about the fund administrator, and 25% voicing dissatisfaction with the quality of service, the Preqin survey found.

“Cost is the largest factor. Dissatisfaction at times can be related to cost,” says David Young, president at Gemini Hedge Fund Services. “I don’t think many people will admit it, but when you reduce cost, you might decrease the levels of reviews, and it does put pressure on the administrator to make sure they have the proper reviews in place.”

Managers evaluating and reevaluating their fund administration service providers comes at a moment of continued merger and acquisition activity. Yesterday, Apex Fund Services announced its acquisition of Equinoxe Alternative Investment Services, through the backing of private equity owner Genstar Capital, according to a press release. The acquisition, for which Apex owner Peter Hughes is also a main financer, will bring the funds under administration at the combined firm to nearly $80 billion as part of its goal to become “a top 5 global fund administrator within the next five years,” according to the release.

A larger Apex will still face competition from the current top five fund administrators servicing hedge funds, according to Preqin’s tally: SS&C GlobeOp, Citco Fund Services, State Street, BNY Mellon, and Morgan Stanley Fund Services.

Apex’s move follows a raft of merger and acquisition activity in 2016, with SS&C Technologies acquiring Conifer Financial Services, Wells Fargo Global Fund Services and Citigroup’s Alternative Investor Services, while Fundadministration was acquired by MainstreamBPO, as reported.

Service providers are under a lot of pressure to deliver as outsourcing continues to grow in both the hedge fund and private equity space, says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration market. With more merger and acquisition activity to come, managers should expect that if they select a smaller administrator, that firm could be sold or end up being involved in some type of a roll up, he says.

“Manager due diligence in looking for a service provider has to be a lot more thorough and exacting than it ever has been before,” he says. “You have to know the technology the provider is using, even the specific version… Are they developing their own technology? Do they have the budget? Why are they growing or why aren’t they growing?”

Possible disruptions caused by mergers and acquisitions to an administrator’s staff as well as concerns over the quality of service are driving fund managers to evaluate other options in their search for stability at a lower cost, Young says.

“If you have the A Team working on it, you’re very happy, but the A Team can only service so many clients. When an administrator is large enough you do have some fracturing of service offerings,” he says.

Despite the pressures of meeting the expectations of fund managers, new administrators are continuing to enter the space looking for niche areas, trying to carve out special market segments, or targeting a specific geography, Salus says. While the top 25 fund administrators control a significant portion of the market, those new entrants are also aware of the potential they will be acquired.

“The attraction of the merger and acquisition activity is attractive to new entrants. They are becoming administrators because they know they can sell or be acquired later,” he says.     Read the full article here.

Hedge Fund Trends – May 2017

The Five Key Operational Trends Reshaping Hedge Funds

by Bill Salus for HFMweek.com

Several watershed trends are impacting managers in significant ways… Read Here

Real Assets Managers Step Up Fund Outsourcing – May 2017

Real Assets Managers Step Up Fund Outsourcing
Article by
 Tom Stabile May 31, 2017 | www.fundfire.com  

Private real estate and infrastructure managers are following in the footsteps of their private equity peers that in recent years have bumped up their use of third party fund administrators, largely responding to pressure from institutional investors.

The market for real assets managers using fund administrators is still small at $638 billion, compared to the $2.2 trillion these providers report administering for private equity managers, according to a recent eVestment report. But it’s an area where fund administrators see growth potential for the same reasons that have sparked hires by private equity firms, says Minkyu Mike Cho, senior research analyst at eVestment.

“They certainly anticipate that it’s going to be a big growth area, particularly for administrators that didn’t have a presence in real assets and real estate in the past,” he says. “These firms are now seeing [private fund] firms are more receptive to outsourcing.”

The larger players in the market include Citco Fund Services, SS&C Technologies, and State Street Alternative Investment Solutions, all of which report having more than $100 billion in committed capital from real assets fund managers, according to the eVestment report.

The private equity market’s accelerated push toward hiring third party administrators has played out over the last three years, but the real assets echo has been much more recent, says Bill Salus, CEO at Paddock Consultancy.

“These are tricky assets to account for and manage – infrastructure and real estate – and they’ve been under pressure to be more efficient and less costly,” he says.

The past year has been busier for real assets manager inquiries and business across a range of strategies, says Dennis Westley, managing director for North America at Apex Fund Services. The third party administrator has seen funds that target assets such as residential housing, hotels, and storage units seeking outsourced help, in addition to a larger surge of activity from private equity managers generally, he says.

“That’s something that two or three years ago you did not see quite as much,” he says…. Read More

Industry Change Continues – March 2017

Directly speaking, there is no doubt that the investment management space is being hit by the most disruptive series of forces in its history. Commercially, fees are being driven down, regulatory requirements have become increasing complex, compliance frameworks are under constant scrutiny, high infrastructure costs are driving accelerated outsourcing trends, distribution channels have become expensive and highly selective, and investment management strategies strive to become differentiated.

The Financial Times reports that new money moving into hedge funds dropped significantly last year, while ETFs grew. Vanguard founder, Jack Bogle, has predicted that hedge funds will never recover to surpass the ETF industry, blaming the shift on “deep disenchantment with hedge funds among large investors” based on high fees and poor performance.

Rather than look into a crystal ball to see the future, managers are looking in the mirror, wondering who they are and how to make money. “Discount brokerage has driven the cost of transactions to zero, ETF’s have driven the cost of investment management to zero, and digital advice is driving the cost of financial advice to zero,” our friends at Tiburon Advisors explain. What’s an advisor to do?

The trends of transparency and lower cost securities are extremely broad, penetrating waves of change, leaving no sector untouched. Consumers desire safe, describable, non-correlated yet predictable returns. They also want their choices presented to them across all digital and human channels, at increasingly lower costs. Alternative investments, fueled by the resurgence of private equity, can’t hide from these impactful trends, but have made a permanent place in asset allocations, institutional and retail alike. In their recent report (“The Future of Private Equity”) SEI warns that private equity is “well on its way to becoming mainstream”, a thought distant just a decade ago.

At Paddock Consultancy, we find ourselves in the midst of fund operations rising to a glamour spot as a result of investment managers’ increasing reliance on partners to help with growth strategies, expense control, cybersecurity, and regulatory assistance. Nearly every aspect of a manager’s infrastructure is on the table for outsourcing. Fund administrators, particularly in private equity funds, are looking to grow their product suite, geography or target markets. Investors like private equity funds are looking to invest in firms who appear to achieve and sustain revenue returns appealing to institutional investors. The monthly league table reports from Convergence reflect the changes in rankings from administrators moving up and down (or out) due to consolidation plays…another trend we follow.

In the robo markets, there is no stopping the proliferation of investment information and choices served to consumers across a digital platform. This is not a simple Millennial consumer trend, but as reported in these pages previously, is evidence that low cost securities perform as well as actively managed ones and need to be distributed in low cost, but not cheap, ways. Robo 2.0 adds the human touch to these digital products, and advisors are quickly adding access to a financial advisor within their digital platform, at no additional cost. Response to demand.

DTS kasina echoes that concept in their recent paper (“Capitalizing on Disruption: Transforming Asset Management for 2020”), stating, “As it is now, critical gaps need to be closed between client needs and product features, between distribution models and distributor demands, and between marketing practices and client expectations. Many asset managers are not yet positioned to support the evolving requirements of professional buyers and investors as we approach 2020.”

Finally, we recently had an incredible chance to spend time with the good folks from Harvard astrophysics department, The Weather Channel, Beacon Hill Institute and the meteorology department of Suffolk University. We explored the impact of weather on investment trends and selection, and the inconsistencies in public data being released by presumed esteemed organizations such as our national weather bureau –  clearly information that’s relied on across consumer, manufacturing, economic, agriculture and energy sectors. It’s nice to have your head in the clouds from time to time…’til then.

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