Share page with AddThis

Supplements » Luxembourg 2017

TALKING HEADS: ‘No sign of slowing’

Funds Europe quizzes Luxembourg’s alternative investment professionals about regulation, asset class growth and fees – and finds that private debt is one of the bigger drivers of business as investors search for yield.


The Alternative Investment Fund Managers Directive (AIFMD) forced private equity and real estate fund administrators to re-examine their offerings. In broad terms, how has the AIFMD shaped these offerings?
AIFMD has brought about a professionalisation of the outsourced fund administration model.  The better administrators will consult with fund promoters to understand their operating model and then offer a suite of outsourced services to complement this. 

We have also seen additional, specialised services supporting the core fund administration requirement take hold.  These can be AIFMD depositary services or more sophisticated ‘ManCo’ services, with ancillary services for Annex IV reporting, for example.

At a time where fee pressure from promoters has intensified, competition in these areas has been fierce.

In which investment areas have private equity and/or real estate managers expressed the most interest over the past two years and what was the cause?
The search for yield has pushed private equity real estate managers into niche areas. The UK private rented sector has received a lot of interest, reflecting shifting trends in the UK housing market. Student accommodation also remains attractive, although is perhaps reaching maturity. The big focus has been on the private debt market, with alternative lending platforms seeing some phenomenal growth over the last two years, showing no sign of slowing.


Are private equity and/or real estate valuations moving upwards or downwards?
This is a difficult question to answer as there is large spectrum of country-specific differences.

The period of low interest rates has clearly maintained valuations in the high band these last few years. However, we have recently seen a trend of flat valuations in specific geographic areas due to the important uncertainty of geopolitics. For example, Brexit is already impacting real estate valuation in London and President Trump’s declarations on the regulation of the housing markets are pushing many investors to wait before confirming a deal.

In which investment areas have private equity and/or real estate managers expressed the most interest over the past two years and what was the cause?
We have seen interest on all investment areas, even if primary markets remain strong. However, the appetite for secondary markets is increasing and in particular new constructions; this goes with the improvement of local economies of most countries. As an example, in most European countries, there is an attraction for new real estate product in secondary cities.


In which investment areas have private equity managers expressed the most interest over the past two years and what was the cause?
This is a fast-changing industry where private equity managers are constantly adapting to the requirements of their investors, but we see two very interesting themes.

Private debt and credit funds are responding to an appetite for higher yield, compared to traditional debt funds: in the current low interest environment, investors are pursuing yield and private equity managers are often looking for investments which will deliver that yield to their investors. With the tightening of bank finance, funds take over the role as loan or credit providers nowadays. 

A second theme that we have seen emerge is an increasing interest in funds focusing on specific industries or sectors. These funds present the investor with exposure to niche opportunities that they might otherwise have not had access to. The managers’ competitive advantage is deep domain expertise, which sets them apart from funds with more generic investment strategies. We have seen particular interest in healthcare and technology strategies.

In terms of geographic centres of attention, it seems as though interest in emerging markets has waned, with investors preferring to deploy capital in more mature and established developed markets.


Are private equity/real estate administration fees trending upwards or downwards, and what are two or three of the main drivers?
Considering the current environment, it would be fair to say that the fees in the overall market are rather stable. Competition on the market put prices under great pressure. However, internal costs of asset servicers counterbalance a possible price decrease. Those are mainly driven by constantly increasing compliance obligations for asset servicers, as well as by the demand for more sophisticated and complex types of reporting. A number of players have entered into smart-sourcing models – mainly through mergers and acquisitions – in an effort to lower costs by either leveraging global pools of competence or relocating production in more cost-effective centres.

To what extent are fee models in the administration industry harmonised, and is one form superior in terms of transparency?
Three main models of remuneration currently coexist on the market.

The time-spent fee model is losing pace as it does not easily allow for fund managers to budget their costs and does not always reflect the value added by the asset servicer. NAV-based remuneration models are still used by some global custodians but tend to become marginal due to the mechanical increase in costs when fund value increases. The third model, transaction or task-based, is becoming the most widely spread one. It offers full predictability and transparency to both fund managers and asset servicers while facilitating the benchmarking exercise between competing offers.


Are automation levels in private equity and/or real estate fund administration increasing? Are headcounts increasing or decreasing and is automation a driver?
Transparency and operational efficiency have become the two key indicators for operational excellence, forcing PE and RE [private equity and real estate] fund administrators to implement a more cost-effective and scalable strategy. The main focus over the past years was put on increasing the automation of internal process, particularly regulatory and investor reporting.

Although the tech industry has significantly adjusted its service offering to the PE and RE market, most administrators still run an inefficient mixture of customised and off-the-shelf systems coupled with spreadsheets, manual processes and other measures. This is prolonging the dependency on people and preventing a material reduction of headcounts.

Are any specific areas or functions within private equity and/or real estate fund administration acting as a drag on performance and can third-party administrators do anything about it?

Inefficient data management and exchange of information between GPs [general partners] and service providers is today’s main drag on performance for PE and RE funds. Fund administrators who play a central role in most operating models are uniquely positioned to collect information and documentation in a data warehouse and make it available via a customisable reporting platform to GPs, investors, distributors, auditors and depositaries. Enabling these parties to become self-servicing would reduce costs and enable front-end personnel to focus on those requests that clients can’t solve themselves.

©2017 funds europe