Interview: Funds rethink private markets administration

The rise of private markets investment is leading to a rethink over asset management middle and back-office operating models, Dan Sharp of Sionic tells Nick Fitzpatrick.

A £500 million private equity investment awarded by Wales Pension Partnership, a pooled local authority pension fund, to Schroders Capital, recently reflected the importance of private-markets investing to institutional investors.

Investor surveys over recent years have indicated growing allocations by pension schemes to non-listed assets as schemes pursue diversification or seek protection from inflation – a benefit touted for infrastructure assets.

Fund managers operating traditionally in liquid assets have responded to this growth by launching ‘alternatives’ businesses to increase access to non-listed assets. Netherlands-based fund manager Robeco recently launched its second private debt fund, for example, and even Allfunds – a mainly traditional fund platform – has launched a division to increase access to private equity and other alternative investments for its fund-selection clients.

“Best-of-breed versus harmonisation has to be thought through carefully. Some asset classes in private markets look similar, but firms find there is increasing complexity when they get into more detail.” 

Growth in private markets has seen fund administrators who are specialised in this sector booming. Sanne Group held a successful IPO in 2015. Intertrust Group listed later that year, and JTC Group listed in 2018.

Fund administrators for large-volume and highly automated traditional investment funds have eyed the rise of the specialists with interest. Many specialists emerged from the offshore corporate trust sector and have attracted experts from traditional administrators to work for them.

Dan Sharp, a partner at financial service consulting firm Sionic, says the proliferation of private markets investments – and the increased specialisation within these assets and strategies – has forced a rethink by traditional fund managers about how middle and back-office operations should be structured when working with outsourced providers.

A key question is whether fund firms will continue to ‘harmonise’ public and private markets fund administration with their incumbent providers – or instead hive off the admin for private-markets businesses, switching to specialists.

Already happening

“I think it’s already happening,” says Sharp, who specialises in operating models and outsourcing projects. “The best-of-breed model versus the ‘harmonised’ model is a consideration for many multi-asset managers.”

He adds: “On the public-markets side, we have seen more harmonisation within an incumbent provider, but on the private side, the best-of-breed approach is developing where an asset manager looks to appoint a specialist administrator for a certain fund or strategy rather than use the existing full-service provider.”

Higher levels of growth in private markets have partly spurred this, says Sharp.

“As some firms have grown their private markets business, the default has been to give the business to their incumbent provider, but higher levels of growth mean that approach is increasingly under review.”

Greater complexity of private assets versus vanilla, on-exchange equities and bonds is another driver.

“Best-of-breed versus harmonisation has to be thought through carefully. Some asset classes in private markets look similar, but firms find there is increasing complexity when they get into more detail.”

Labour shortages

For fund managers and administrators alike, scaling private markets is difficult, in part due to a lack of people with the right skills. For example, sourcing back and middle-office talent, or accountancy professionals, who are sufficiently knowledgeable across multiple complex asset classes may be a significant challenge. As a result, firms might resort to using generalists, says Sharp.

“When firms build up their private-markets capability, there is a focus on investment professionals first, and then on proliferating knowledge through the rest of the organisation, such as operations, finance and other support functions. But it’s widely acknowledged there’s a general labour shortage exacerbated by growth in the sector.”

Shortages can also mean competition to recruit people who are competent in implementing technology such as Yardi, a popular real estate management package, albeit Yardi Systems offers training.

And running parallel to a shortage of people able to implement certain specialist technology is a shortage of technology itself. Private markets administration lacks the high levels of automation seen in the world of vanilla equity and bond funds.

The lack of tech, and the people to use it, sits behind one of the greatest challenges in asset management generally: data management.

“When firms build up their private-markets capability, there is a focus on investment professionals first, and then on proliferating knowledge through the rest of the organisation.”

Sharp – who was a judge in the Funds Europe Awards 2022 – says a great deal of data in the private markets sector is kept in spreadsheets and updated manually. It’s also static and – being often aggregated – there is little look-through into important details, such as exposure to a particular country, such as Russia. Fluidity, along with data that can be generated on demand, is important for a firm’s portfolio managers or its clients pursuing details about such exposure.

ESG data that is needed to make investment decisions only adds to the pressure on private markets investors, Sharp says.

But the market is responding, he adds. A proliferation of data providers means there are now over 70 ESG data providers across public and private markets on Sionic’s database, according to Sharp.

Fund administrators and data providers are also collaborating to overcome data obstacles. Burgiss, which offers data on private equity exposure and liquidity risk, collaborates with fund administrators and custodians such as JP Morgan, SS&C, BNY Mellon and Northern Trust.

The same is seen where skillsets are needed in specialist assets. For example, Funds Europe reported last year how HSBC Securities Services partnered with Mount Street, a loan servicing specialist, and won a landmark private markets mandate from Aviva Investors.

Loan administration might readily be outsourced, suggests Sharp, but increasingly outsourcing approaches the line where front and middle offices meet, he says. For example, data validation and augmentation in support of front-office sales or portfolio management.

“But it’s widely acknowledged there’s a general labour shortage exacerbated by growth in the sector.”

A truly landmark appointment whereby a private markets fund admin mandate leaves the likes of HSBC or another major fund administrator, such as BNY Mellon or State Street, is perhaps still to be seen.

Sharp says: “Asset owners we’ve worked with are largely still looking to consolidate a strategic relationship across public and private markets with incumbent providers – though we have seen more than one who appointed a specialist.”

But whether through IPOs or M&A, specialist fund administrators are growing. According to Sharp, some are not only looking at branching out into liquid markets.

And for both asset managers and administrators, Sharp says digital assets are coming to the fore as firms look to increase the distribution footprint for illiquid assets.

“Tokenisation is a growing area of interest for firms, which could make private markets more accessible for a wider range of investors, such as through the LTAF [Long-Term Asset Fund] in the UK.”

© 2023 funds europe

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