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What are the barriers to greater automation for private capital funds?

1 November 2021

Jonathan White

Global Head of Fund Sales

Jonathan White

Global Head of Fund Sales

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Our report on the future of automation technology examines the most common obstacles to its take up for private capital fund managers

Most private capital fund managers know they must embrace technology. In particular, they are drawn to high-profile innovations such as artificial intelligence (AI), machine learning, big data and blockchain, realising that they will bring a competitive edge.

But our major report, The Future of Fund Technology, finds that while there may be general agreement about technology’s importance, it does not always equate to investment and adoption today. So what are the barriers? And are they universal?

We surveyed 300 senior-level decision-makers in private capital firms and found regional as well as other variations. Asia has the highest rate of disagreement – 28% – with the statement that automation has significantly increased its presence in the way private capital funds are administered.

Some of this reticence – and not just in Asia – may relate to cost-consciousness. Such technologies require significant investment, creating a tendency to wait and see whether costs fall rather than being a pioneer.

In the UK, Jersey and Europe, the data shows a gap between awareness of the competitive advantages of tech adoption and willingness to spend on it, with investment intent the lowest by region at 59%.

However, we must interpret this data with care. It is likely to reflect a tendency to leverage third-party administration in order to capture tech advantages. Also, for funds managing administration in-house, automated processes are more likely to be in use already, with the UK and Jersey having the highest net ‘most automated’ score at 55%, against an average of 42%.

How do fund assets under management shape attitudes to tech adoption?

Larger funds are the most willing to adopt and invest in technology and we can explain that in terms of revenue and momentum. We found that 77% of funds with assets under management (AUM) of $1bn or more plan to increase investment in automation and new technology over the next two years, compared with 48% of funds with AUM of between $250m and $500m.

Smaller funds have very different concerns to larger ones. They are developing relationships with investors in early vintages (funds that have already raised at least one round of capital) – and ensuring that those vintages perform. Larger organisations already have a notable track record. They also have proven strategies for deploying capital and established relationships with investors, giving them a more reliable source of capital as the funds grow.

Firms with larger AUM have a deeper reach across the capital pool and a more mature business. They are trying to stand out in a world of more deals and greater competition around those deals. To continue producing returns they must create unique opportunities. This sees larger fund managers investing more in technology. They have the necessary revenue streams and, perhaps more saliently, they see the value of technology as a differentiator.

They want to ensure they are servicing the investor relationships they have built over time correctly, for example when handling internal data, portfolio data and potential portfolio opportunities.

Reporting demands fuel shift from in-house to outsourced administration

Investor communication/management and reporting are the top two activities to be managed in-house, at 26% and 23% respectively.

But momentum has been building, especially in private capital, away from the attempt to do everything in-house, even if some firms still feel that would be desirable.

Part of the explanation is concerned around reporting. While this once had a quarterly rhythm, today’s investors want more data points and transparency.

Environmental, social and governance (ESG) is perhaps the most obvious space where we see this pressure, particularly in Europe. Although the US does not yet have the same level of regulatory interest driving ESG, North American investors are pushing this change regardless.

Third-party administrators can help funds address reporting demands

With investors increasingly driving the conversation, big data, ESG and regulation all play into the growing need for tools to be in place to deliver the flexibility around the required datasets. Over the past couple of years we have seen a significant shift, if not an acceleration, in how funds are seeking to address these reporting needs.

As a result, third-party administrators (TPAs) – once largely used for tasks such as computation of net asset value (NAV) or investor statements – are seen as a potential solution to these specific challenges. Across all regions and AUMs, only 17% of funds now conduct fund administration exclusively in-house.

Private capital funds must address increasing complexity of dataset use

For the average private capital fund CFO, one of the key complexities of the role is the need to report – to an investor, a regulator, or both – with the same underlying dataset.

How a fund stitches this data together is crucial to business efficiency and adding value for investors. And the complexity of these demands will not diminish.

Private capital is now treading the path already travelled by hedge funds; namely getting to grips with the complexities of meaningful aggregation of datasets to meet specific requirements of discreetly defined parties with their own unique priorities.

Increasingly, funds – regardless of size – will need to turn to TPAs to meet these demands.

Why Intertrust Group?

  • As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund. This against a background of ever-increasing reporting demands.
  • Our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
  • Expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
  • We offer bespoke solutions for funds of all sizes to meet administration requirements so they and their partners can concentrate on investor relations, fundraising, closing deals and profitable exits.
  • We help funds to navigate the increasingly complex regulatory environment with solutions tailored by jurisdiction and specific compliance requirements.