Outsourcing offers solution for UK private capital funds as transparency demands rise
Edwin Chan
Director, UK Funds
View bio Edwin Chan
Director, UK Funds
Edwin Chan joined Intertrust in November 2019 as Director of Business Development in the U.K. where he’s responsible for leading Intertrust’s expansion of its client base among alternative fund managers and investors in Europe. He has a particular focus on specialist alternative asset servicing solutions across hedge funds, private equity, private credit, real estate, infrastructure and renewable energy funds.
With over 20 years’ experience in the alternative fund industry, Edwin joined Intertrust from DMS Governance where he was EMEA Head of Business Development and from Northern Trust where he led the business development efforts in the private capital sector within EMEA. Prior to that he was a Senior Director in business development at SS&C GlobeOp and spent eight years at Wells Fargo where he held several roles, latterly as the Global Head of Fund Accounting. Previously he was European Head of Fund Accounting of Black River Asset Management, a US$ 12BN hedge and private equity manager.
Prior to this, Edwin has held various senior positions at HSBC in Hong Kong, Citi in Bermuda and qualified as a Chartered Accountant with PwC in London.
Edwin is an active contributor to the alternative funds’ industry having been the co-editor for AIMA’s Guide to Sound Practices for the selection of fund administrators, part of the Working Group for the Hedge Fund Standards Board for Administrator Transparency Reporting; and publication of a white paper on hybrid alternative fund structures. Edwin has also ran multiple masterclasses for AIMA and leading law firms on performance fee/carried interest calculations.
Close Edwin Chan
Director, UK Funds
View bio Edwin Chan
Director, UK Funds
Edwin Chan joined Intertrust in November 2019 as Director of Business Development in the U.K. where he’s responsible for leading Intertrust’s expansion of its client base among alternative fund managers and investors in Europe. He has a particular focus on specialist alternative asset servicing solutions across hedge funds, private equity, private credit, real estate, infrastructure and renewable energy funds.
With over 20 years’ experience in the alternative fund industry, Edwin joined Intertrust from DMS Governance where he was EMEA Head of Business Development and from Northern Trust where he led the business development efforts in the private capital sector within EMEA. Prior to that he was a Senior Director in business development at SS&C GlobeOp and spent eight years at Wells Fargo where he held several roles, latterly as the Global Head of Fund Accounting. Previously he was European Head of Fund Accounting of Black River Asset Management, a US$ 12BN hedge and private equity manager.
Prior to this, Edwin has held various senior positions at HSBC in Hong Kong, Citi in Bermuda and qualified as a Chartered Accountant with PwC in London.
Edwin is an active contributor to the alternative funds’ industry having been the co-editor for AIMA’s Guide to Sound Practices for the selection of fund administrators, part of the Working Group for the Hedge Fund Standards Board for Administrator Transparency Reporting; and publication of a white paper on hybrid alternative fund structures. Edwin has also ran multiple masterclasses for AIMA and leading law firms on performance fee/carried interest calculations.
CloseThe UK remains at the forefront of the world’s financial centres despite Brexit. Its private capital fund managers are more global looking than in most other regions and they often lead the way in responding to market challenges.
Along with general partners (GPs) around the world, they now face a new challenge: meeting growing demands from investors for more transparency.
Traditionally, private capital GPs have not provided the same levels of transparency as the wider asset management industry because of the confidential nature of the deals they conduct.
But now rapidly rising numbers of mainstream investors, including UK pension funds, are heavily investing in private capital because of the attractive returns the asset class offers in a world of ultra-low interest rates – and they want the transparency they are used to having, not least for regulatory reasons and their own governance standards.
GPs must either meet these demands or face significant competitive disadvantages and possibly regulatory pressures.
To understand more, Intertrust Group and Global Custodian conducted research* among more than 300 GPs globally. The findings are outlined in a new report entitled The future private capital CFO: Evolving in a digital age.
Demand seen as strongest for portfolio performance data
The research shows that chief financial officers (CFOs) at UK private capital funds very much expect their limited partners (LPs) to require data updates with increasing frequency over the next decade.
The strongest anticipation is in relation to portfolio performance data, with two in three (67%) respondents expecting their investors to be looking for access to live or daily updates on this.
It is unsurprising that so many CFOs anticipate their investors will soon want such timely updates on portfolio performance, which is more than just returns – they should include KPIs that show how the business is being managed on a daily basis, such as debt or cash levels and sales figures. This result reflects the maturity we are seeing in the UK private capital market, as mainstream investors increase their allocation to it.
The second highest anticipated demand (61%) is for real-time/daily updates on operational service level agreements (SLAs).
UK CFOs anticipate higher priority will be placed on SLAs than their peers elsewhere: only 50% of CFOs globally anticipate live or daily updates for this function. Again, this demand is a sign of a maturing market in which investors want increased governance and control.
Just over half (56%) of CFOs expect LPs to demand real-time/daily updates on cybersecurity. This figure is perhaps surprisingly low as cybersecurity is such a major risk for both managers and their LPs.
Just over half of UK CFOs (56%) also expect demands for real-time/daily updates on environmental, social and corporate governance (ESG). Such regular updates do make sense given ESG breaches can spark PR crises and regulatory interventions.
Nearly one in five will outsource
How will CFOs meet these increasing demands for more information? The two most popular responses are to invest in technology, which is cited by 29%, followed by 19% saying they will outsource more functionality. A third of the UK CFOs surveyed said they were looking to outsource expertise in technology.
Other solutions cited include increasing the size of the in-house finance team (17%) and investing in distributed ledge functionality (13%). A further 16% say they will retain their existing balance between in-house and outsourcing.
Outsourcing is an option for international funds
While technology clearly has a key role in CFO responses to LPs’ increasing demands for more information, it does not offer a complete solution. Human resources are needed to monitor the technology and ensure it is regularly updated and in line with industry standards and regulatory requirements.
This can be taken in-house but private funds are generally lean operations that are best focused on raising and deploying capital. It is often more cost-effective to outsource the required functionality to specialist service providers.
Brexit will not change the fact that many UK private funds attract investors worldwide. If these funds want to keep up with the complexities of international standards such as European Union’s new Sustainable Finance Disclosure Regulation (SFDR) – also known as the Disclosure Regulation – which comes into effect in March 2021, then they need to determine their technology and human resource needs now. These pressures – along with ESMA’s recent calling for greater EU regulation on ESG data providers – can be alleviated by outsourcing part or all their administration to global specialists.
*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 69 in the UK