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Reevaluating the Fund Service Ecosystem

As alternatives move into the mainstream the opportunities—and challenges—are multiplying. To address the challenges, fund managers are reevaluating criteria and realigning their vendor ecosystem.

Alternative assets are attracting more attention and creating higher expectations than ever before. Staying on top of fund administration, accounting, and reporting requirements while keeping up with regulatory compliance can shift focus away from adding value and delivering returns that keep investors happy. 

As a result, fund managers are asking more of their service partners so they can channel their energies into attracting investors, allocating funds, and preparing for growth. When it comes to fund administration, the expectation is that service partners will do more than react to regulatory and cultural changes transforming the industry. They need to lead from the front, supporting rapid growth across all fund types and jurisdictional boundaries. At the same time they must anticipate the needs of regulators and investors whose demands for operational and reporting transparency continue to grow.

Fund managers reconsidering their options and evaluating new fund service partnerships are doing so at an opportune moment, as a wave of consolidation activity has redefined the possibilities. Today, the market offers more sophisticated options that integrate multijurisdictional expertise and groundbreaking technology. But finding the perfect partner means changing the evaluation criteria.

A new landscape for fund administration

Over the past decade, fund administration has seen a dramatic transformation. As a new landscape emerges, general partners are rethinking their needs and reevaluating their options.

Fund managers have experienced a seismic shift. The levels of operational and regulatory complexity are rising. As regulators and investors request more of them, they are asking more of their fund service partners. Unfortunately, those partners don’t always rise to the challenge.

Indications that fund managers wanted more from their fund administration partners began surfacing some years ago. According to a Preqin special report, 25% changed their fund administrator in 2019, with 56% making the switch because they were dissatisfied with the quality of service.[1]

Today’s fund managers are thinking bigger. They’re launching larger funds, exploring new fund strategies, and pursuing a more diverse investor base. They need a fund administrator who can keep pace with those ambitious plans while meeting investor expectations and regulatory requirements.

Fund complexity

Against a backdrop of unprecedented growth for the private markets, fund managers are moving toward a model that is multiproduct, and multijurisdictional. Investors have become more sophisticated, which has driven the market for specialized strategies and structures including hedge funds, real estate, private debt, hybrid funds, fund of funds, parallel funds, co-investments, side cars, blockers, and special purpose vehicles (SPVs).

While these strategies create new opportunities for fund managers, they also pose new administrative challenges that not every fund administrator is equipped to manage. As fund managers move into multiple or complex fund strategies, it signals the need for a move into a fund service partnership that covers bespoke solutions delivered across myriad investment strategies around the world.

This is especially true if the fund manager plans to set up funds or market to investors in new jurisdictions. This requires the oversight of a global fund services partner with a knowledge of the corporate and regulatory requirements and, ideally, a presence in the new jurisdictions.

Investor expectations

For many years, investors were willing to overlook a lack of transparency in the alternative asset class considering its consistently excellent returns. But today’s investors are more sophisticated, more vigilant, and less likely to overlook operational shortcomings. Operational due diligence has become an intensive activity designed to ensure the fund manager can communicate consistently and meet regulatory requirements as well as generate alpha.

Organizations such as the Institutional Limited Partners Association (ILPA) and the CFA Institute (GIPS®) have also raised the bar by giving investors templates and standards against which to evaluate fund managers and their reporting practices.

In addition, the alternatives industry is experiencing a “retailization” on two fronts. The levels of access, customization, and transparency delivered by the liquid asset category are spurring limited partners to demand more communication, transparency, customization, and convenience from their relationships with fund managers of alternative, and especially illiquid, funds.

At the same time, changes in accredited investor criteria are expected to bring an influx of less sophisticated investors into the alternative space who expect more responsiveness and support. Both trends are exerting new pressures on the fund managers who need to compete for their commitments.

Smoothing the transition

Change is never easy, but when the fund manager and fund administrator follow best practices, the potential for disruption and downtime during the transition can be minimized or eliminated.

Technology can ease the transition for fund managers who plan to switch to a new fund administration partner. Advanced technology platforms migrate historical data using automated processes, making the transition to a new fund administrator smoother and more efficient as well as enabling the firm to report internal rate of return (IRR) and other metrics.

A well-planned and detailed transition can ease the migration and ensure that back-office processes and investor services experience minimal disruption.

Read the full insight report which includes detailed evaluation checklists: Switching Fund Administrators

How CSC helps

CSC is the trusted partner of choice for more than 90% of the Fortune 500®, more than 90% of the 100 Best Global Brands®, and more than 70% of the PEI 300.  We provide tailored administration and strategic outsourcing solutions to support the complex world of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance.

Founded in 1899 and headquartered in Wilmington, Delaware, USA, CSC prides itself on being privately held and professionally managed for more than 120 years. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®.

[1] Private Funds CFO, Private Funds CFO Insights Survey, 2022