Private equity firms have, to date, avoided much of the regulation faced by US hedge fund managers. But it’s only a matter of time before they too will face enhanced transparency demands and regulatory reporting.
In Europe, under the AIFM Directive, this is already becoming a reality. The days of self-administration could become a thing of the past, particularly as investor profiles are also changing. As banks look to strengthen their balance sheets, large institutional investors are stepping in to their place and calling for greater portfolio information on a more frequent basis.
“Because of regulation and investor demands, PE firms are becoming more open to the idea of exploring the possibilities of outsourcing their administration function. If you look at the efforts the GPs are making to raise capital, what investors demand is an operational infrastructure that offers more reporting capabilities and transparency.
“Consequently, we’re fielding a lot more enquiries,” confirms Jason Brandt, Regional Head of Fund Services for the Americas, Maples Fund Services. While the largest PE firms can handle increased operational costs, outsourcing might become more attractive to the second tier of smaller GPs who are battling hard to raise assets.
“They’re facing increased pressure to have an institutional operational infrastructure but at the same time they’re under pressure to reduce their fees or at least have some form of graduated fee structure. I think in the US that’s going to provide a lot of opportunities to service providers such as ourselves,” suggests Brandt.
This transformation is not going to happen overnight. PE managers are the most well informed when it comes to their portfolio companies and are, therefore, best placed when it comes to the valuation process. Handing over that responsibility requires a lot of trust. “It takes time to build trust and confidence that you’re going to be able to deliver that information in a format and a timeframe that they want.”
Operationally, Maples Fund Services is well placed to accommodate the unique administration demands of private equity funds with a strong technology infrastructure that gives the firm the flexibility to handle and process a wide range of data.
“The GPs and their investment committees are the experts on their investments. They interpret the data coming from their portfolio companies, but often translating that information and presenting it in a format that is easily understood by the investors, can prove challenging. What we are able to do is consume that data, and then transfer it into an easily digestible format for investors,” adds Brandt. “As fee structures become more complex, we need to ensure that we’ve got the flexibility to properly calculate those fees and account for the income and distributions to the underlying investors so that everything is accurately allocated.”
Although investors aren’t going to need daily look-through capabilities on PE investments, this might become more important to those firms that look to create hybrid fund structures.
The fact that less than 20 per cent of US private equity firms currently outsource these functions represents an exciting growth area for firms likes Maples Fund Services that can also leverage the legal expertise of their affiliate, Maples & Calder.
“That puts us in a good position. We’re ready today and starting to enter into dialogue with GPs who are in the early stages of considering outsourcing their administration function,” confirms Brandt.