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Cross-border deals have raised challenges for in-house operations, Intertrust Group tells webinar

31 March 2021

Chitra Baskar

President, Fund Solutions

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Chitra Baskar

President, Fund Solutions

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The internationalisation of private capital investments has increased the complexity of deals and made in-house operations more problematic, according to Chitra Baskar, Intertrust Group’s Chief Operating Officer and Global Head of Funds and Product.

Chitra told a Global Custodian webinar, entitled Private Capital Funds: The race to meet rising data demands, that fundamental values remained the same in the private capital world but the complexity of how deals are structured has changed significantly. She commented: “The reach across the globe is completely different now to what it was 20 years ago. People create vehicles and SPVs and hold assets in multiple countries that are far removed from where the CFO’s office is.” As such, the complexity of consolidating information to give valid, timely and reliable inputs to investors is significantly higher, Chitra added.

Richard Schwartz, Head of Research at Global Custodian and chairman of the webinar, asked Chitra whether fund companies often set out to invest in their own technology to address these issues – but changed their minds as costs became too expensive.

Chitra responded: “Yes, typically with much larger organisations, but it varies. There are larger funds that would set up a lot of things and begin investing in their back-office accounting and technology, most often because private capital is acknowledged as a complex asset class and they believe they will get the best in terms of expertise by doing this.

“Sometimes though this becomes too unwieldy, costs blow up, they find themselves running huge teams and they can’t keep pace with technology changes. They then start looking at whether there is an institutional service provider that is investing in the technology, trying to be best in class and stay abreast, if not ahead, of the market place.”

“Today, investment is happening around the world and fund companies can’t be everywhere, so a solution can be a hybrid mix. Most CFOs and COOs are focused on keeping their core house under control and asking: what can I leverage with a best-in-class institution? It can be less of a headache to get everything under one roof with a couple of vendors than to build it all yourself, which leaves you becoming a jack of all trades.”

Meanwhile Maqbool Mohamed, CFO and COO, Clarion Partners Europe, told the webinar that geographic locations are an important factor in considering resource decisions. He said: “A US-headquartered fund manager can do work in-house domestically but may need to outsource when operating in Europe, for example, unless they are willing to open offices in various countries. It is not always a natural decision for certain organisations, but someone has to prepare tax returns, manage local compliance, file statutory accounts and so on. An in-country service provider makes more sense in those situations.

“We have to ask ourselves: where do we want to add value as a finance and operations team? We don’t want to be doing reconciliations but we want to review them; we don’t want to be preparing financials but we want to review them; we might not even want to be preparing bank transfers but we want to release them. So you have to figure out, based on your organisational model, where you can add value and focus internal resources – and how you can get investors, management and team members comfortable that that is the right operating model. There are other benefits of course. There is more flexibility as you can always scale up or scale down with outsourcing, tap into the best IT systems for a particular asset class and get more informed updates on local reporting requirements.”

The webinar examined issues raised by research* conducted by Intertrust Group in partnership with Global Custodian that surveyed more than 300 CFOs at private capital funds globally to gauge their thoughts on technology and data. The survey found that the CFOs expected their LPs to require data updates with increasing frequency over the next decade.

Asked by Richard Schwartz whether there has been much change over the last decade into the kinds of data LPs expect to receive, Chitra responded: “There is a definitive and clear push towards more transparency and information that people want to know. The whole journey of going into separately managed accounts also comes from the need for more oversight and control of data that allocators and investors have.

“The liquid alts world and hedge funds have significantly changed over the years and the private capital world is clearly coming on the back of it in terms of expectations. The investors are largely the same, changing their allocations from highly liquid to liquid alts and now to private capital so these demands have changed significantly.

“It is a one-way street. The demands are for data on companies, investments, the robustness of operations, on IT infrastructure, cybersecurity – there are demands from investors everywhere to ensure they are in a comfortable place when it comes to the various aspects of how a fund is managed.”

Patrik Burnäs, Group Head of Fund Operations, EQT, commented: “We should be thinking about having a robust, quality data management strategy in place now because eventually the requirements will be out there from regulators and LPs. When you look at megatrends, such as ESG and inclusion, even though these are not a must today they will be over time.”

Cyril Demaria, Affiliate Professor, EDHEC, added: “There used to be a time where reporting and data production was just used to communicate but now, since there are permanent fund-raising processes in some institutions it has become an argument to leverage the capacity of the institution to showcase its expertise, and that is introducing a new dynamic: what used to be perceived as a cost and somehow a burden now becomes a commercial argument and a way to actually differentiate yourself versus the competition.

There will be more investment and more will to deliver higher quality information, and that is probably where the intervention of specialised institutions will be even more relevant.

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*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 88 in the US