ONE Group looks at Core vs. Non-Core Business Models Post COVID-19.
Throughout its history, humankind has lived through social revolutions centred on the themes of increased specialisation and deployment of technology. From our starting point as hunter-gatherers, we established agrarian societies, followed by industrialisation, and the post-industrial service industries. What remained constant was an increased rate of specialisation and abstraction, as well as technological developments. There was a time when we had to be experts in everything. In the modern world, we can segregate abstract tasks and delegate them to experts.
We believe that fund governance is currently experiencing a similar revolution, augmented by the COVID-19 crisis. Whereas fund governance firms used to be one-stop shops – from custody to administration to management company (ManCo) services – today’s smart industry players focus on their core competence and purchase non-core services from specialised, tech-enabled solutions providers.
The three traditional business models of fund governance
Forty years ago, one-stop shops were common place in the world of investment firms (asset, wealth and fund management). In the golden age, before margin-, regulatory- and value-for-money pressure, large investment firms kept everything in-house; it was cosy to have the full value chain under one roof despite the inefficiencies. The less competitive market environment allowed for models where custody, fund administration, transfer agency, middle office and the management company were all carried out by generalists with home-grown or non-specialised technology. In practice, this often meant adapting legacy platforms to cater to the requirements imposed by regulators across these business lines and down the full value chain across multiple jurisdictions as firms became global.
Over the decades, the asset servicing landscape evolved, the advent of the global custodian/administrator who moved gradually yet steadily up the value chain, first with custody, then administration, followed by middle office. More recently, the ManCo specialised governance solutions, became the natural progression of this trend of managers focusing on core functions, i.e. investment management and distribution.
Luxembourg as a fund domicile pioneered and continues to be the market leader for the delegation model in a multi-skilled ecosystem, which led to the outsourced ManCo or the hybrid model of retaining an in-house management company which delegates one or more of its functions to specialised service providers (whilst monitoring those delegated activities).
As the world emerges from its COVID-19 hibernation, fund initiators find themselves confronted not only with cost pressures, but with a desire to focus on core competencies and the true value-add.
Therein lies the possibility for a fourth model, an enhanced hybrid solution – the NextGen ManCo – that looks to third-party service providers with dedicated expertise and technology, in order to be uniquely positioned for future success.
Just like an alpine guide knows the regional terrain, third-party service providers are local specialists with their ears on the ground ensuring that all service solutions meet the current state of laws and regulations. Among other services, these third-party solutions providers combine specialised expertise and tailor-made governance technology to deliver best-practice results in the following areas of fund governance:
Third-party expertise for fund governance
1. Management Company
The specialised third-party ManCo should be more than a mere regulatory substance provider. Rather, the ManCo should be a strategic partner and local resource covering, among others, independent risk management, investment compliance monitoring, portfolio management backing where needed, and distribution support.
The NextGen ManCo constantly asks itself the following questions: How do we provide full transparency to clients who wish to outsource their governance processes? How do we use technology to design efficient governance solutions? How do we cope with the ever-changing regulatory landscape? How do we complement clients’ processes so they can focus on core business activities?
The NextGen MancCo is a fund governance solutions provider offering modular third-party governance services with innovative fee structures to asset managers from around the globe. Featuring a diverse and experienced team, it will design technology-backed solutions in line with the latest regulatory requirements covering liquid and illiquid strategies.
2. Regulatory and Compliance Consulting
The COVID-19 crisis has increased regulatory risk and the need for operational efficiencies, driven even further by having dispersed teams working from home offices. Running effective compliance programs and day-to-day operations in a time like ours is a challenge. Now more than ever, businesses go through peaks and troughs in terms of the demand on resources and having access to short-term capacity during peak times from a resource pool of experienced and proven industry professionals at a reasonable cost is key.
The NextGen compliance and governance consulting firm asks itself: How do we use technology to create scalable processes? How do we address the scarcity of resources and the high turnover rates in teams? How do we uphold the creation of value and quality as the industry undergoes seismic transformations? How do we make a difference?
The NextGen consulting firm will be a specialist solutions provider acting as an extension of a client’s daily operations and relieving compliance resource challenges. These solutions may be full service, but could be modular, flexible business process outsourcing, technology-only solutions.
Scalable technology solutions for compliance and governance processes reflecting the current state of Luxembourg and EU rules and regulations will be an integral part of the service offering. Cloud-based compliance technologies will offer a secure data repository, retain a full audit trail and corporate memory, and will be equipped with a non-Excel–based task management tool. NextGen solutions providers for the fund industry will employ smart processes with tailor-made, technology-based applications for compliance, governance and oversight. Compliance tools should be built by compliance officers for compliance officers and offer a state-of-the-art control framework that enables the centralisation and automation of compliance processes.
3. Corporate Governance
NextGen solutions providers will offer end-to-end corporate support for the fund industry. Experienced teams will employ smart processes and technology-based solutions, supporting corporate governance from provision of corporate secretary to fund domiciliation to offering independent directors. Taking this a step further, as with Uber, access not ownership is important, and a new phenomenon of solutions based on specific access needs at certain times (e.g. running a single meeting as a service).
Providing a full overview of fund, market and governance information through a consolidated interface is a challenge few ManCos have met, even though converting high volumes of complex data into meaningful information for investment managers should be a core ManCo service. But there is light at the end of the tunnel: the NextGen ManCo technology will offer a full overview of a fund’s structure, markets, governance, workflows, documents, contacts and other key information – streamlining complex data into a workable, efficient format. Scalable technology solutions for compliance and governance processes will reflect the current state of Luxembourg and EU rules and regulations and will integrate risk, compliance and middle-office solutions. Accessing key information anywhere, anytime will allow effective decision-making, even when team members are not physically present.
The key features of any MancCo technology will be its ability to distil complex data into meaningful information for fund managers, governance officers (conducting officer, designated person, senior manager) and the fund board.
The next revolution in fund governance is here, those who evolve and embrace it will prosper, particularly in this current market environment. A focus on core competence by harnessing the expertise and technology of NextGen governance service providers may determine the fine line between excellence and extinction.
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