Investor demands and expanding entity portfolios make the case for technology investment.
The growing sophistication of hedge and private market fund technology in Australia is being driven by three trends: the demands of investors, diversification by fund managers, and the increasing complexity of fund structures.
This mirrors the findings of CSC’s Future Private Capital CFO report. Although the research focused on U.S. based investment firms, similar patterns with a distinct regional twist can be identified in the smaller Australian funds market.
Challenges were created by managers’ determination to expand into new territories and diversify into new asset classes, along with investor demands for more frequent and detailed reporting.
They were underlined by the need to facilitate expansion with more complex fund structures, a greater use of fund credit, and more special purpose vehicles (SPVs), all of which add to funds’ administrative burden.
Investor expectations
In Australia, investment in technology is being driven by investor expectations.
Australian real estate, infrastructure, and renewable energy are huge draws for overseas investors. This has only increased since the government’s recent introduction of tax incentives for offshore investment in the build-to-rent sector.
These investors are usually institutions, and often from the U.S. or Europe, and tend to demand a higher level of technological maturity than their domestic counterparts. In particular, they want investor portals that give them instant access to portfolio performance data.
More and more managers are looking to third-party administrators to offer portal access as part of a comprehensive service. Either way, investor portals are becoming a must-have for local and overseas managers looking to attract major investors to Australian assets.
Another trend is towards web-based subscription tools for investors. These allow smaller investors like high net-worth individuals (HNWIs) and family offices to submit know your customer (KYC) and other documents online. They also record the subscription amount, so they’re an onboarding tool and a one-stop digital record of investments.
Fund expansion and diversification
As elsewhere, the trend in Australian private markets is towards diversification. Australian markets are a few steps behind the U.S. in terms of complexity but, increasingly, hedge funds are moving into private equity. And private equity funds are looking at real estate and infrastructure.
Moving into any new asset class adds administrative complexity, but real estate can be an especially burdensome asset in this respect. For tax efficiency, real estate investing in Australia often involves multiple SPV layers between the asset level and the holding trust. We regularly see as many as six SPV layers.
This is an accounting pain, to say the least. Traditionally, fund accountants would maintain all the individual entity accounts in a generic accounting system, and thereafter work on processes for consolidation.
This is time-consuming and can be prone to human error if a suitable system isn’t in place, and only increases as you add more entities. However modern fund accounting technology can automate consolidations both horizontally and vertically, significantly reducing the time it takes to produce net asset value (NAV) calculations and reports.
Effective entity management
Expansion of assets is being accompanied by expansion of jurisdictions. The success of the Singapore Variable Capital Company (VCC) as a fund vehicle means many funds managed by Australian-based asset managers are now investing in global assets through entities domiciled in Singapore, as well as traditional jurisdictions such as Cayman. Furthermore, the VCC allows fund managers to use a variety of fund strategies that can be catered to specific needs.
Managers are continually adding to their entity portfolios. Multiple entities in multiple jurisdictions create challenges around annual returns, tax deadlines, and reporting deadlines. The result is an increased demand from GPs for portals that provide a top-down view of their entire entity portfolio, alongside information about deadlines and compliance responsibilities.
Service providers play a major role in giving Australian and offshore managers access to important new technology to manage the increasing complexity of their fund structures.
Download our Future Private Capital CFO report for more information.
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