fund management

As the funds landscape becomes increasingly complex, fund managers are outsourcing large chunks of their operations to bespoke and specialist fund administrators. But what are the pros and cons of outsourcing? and how do you manage the process to protect your clients and your reputation?

Sharing the burden

Words:

David Craik

THE PANDEMIC HAS piled the pressure on all global businesses, prompting many to review their operations – from costs to talent, supply chain and technology.

Some, particularly in the retail, manufacturing and IT sectors, have taken the decision to ‘in-house’ some or all of these operational elements to save money and improve resilience in an uncertain economic climate.

The fund management sector has done its own fair share of soul-searching, but continues to hang its hat steadfastly on outsourcing rather than insourcing its operations. According to a recent survey of 100 alternative investment fund managers, carried out by fund administrator Ocorian, 70% of managers expect to increase the amount of functions they outsource in the next three years, with 72% expecting outsourcing to “play a more central role”.

This is primarily down to the need for more oversight in a time of increased regulation and cost efficiencies, as margins and fees come under more pressure.

Typical outsourced tasks include investor onboarding, financial reporting, company secretarial services, preparations and review of constitutional documents, trade execution, dividend payments and fund accounting, bookkeeping and valuations.

For Anita Weaver, Director of Corporate Services at Stonehage Fleming, the benefits are clear. “What fund managers receive from administrators is independent accounting, particularly for fund net asset value (NAV), calculation of performance and carried interest fees,” she says.

“They also get experienced staff across the spectrum. It can be quite challenging for smaller fund managers to attract top talent and keep them busy all the year round as some of the activities are cyclical.

“It can also be more cost-effective from an office space perspective. Administrators just have more economies of scale.”

She adds that administrators also provide key relationships with other service providers, such as banks and regulators.

“The sharing of best practice is crucial,” she adds. “The administrators can offer this as they often sit on industry committees.”

Aside from these benefits, there are several key structural drivers behind the demand for outsourcing. One sounds simple – letting fund managers get on with their day jobs.

“It allows them to do what they do best, which is maximising returns for investors,” says Simon Burgess, Head of Alternative Investments at Ocorian. “If they focus too much on the back office, they may take their eye off the ball from the front-office work.”

Jody Newark, Managing Director of Guernsey fund administrator Obsidian, believes that the culture of fund management is well aligned with outsourcing some activities.

“A fund manager thinks about your investment portfolio, your clients and the transactions they are going to place,” she says. “Fund managers will outsource because they don’t want to get bogged down in a high level of technical detail. A portfolio manager has no specific interest in how the financial statements are prepared. In-house administration is just not in a fund manager’s mindset.”

Newark adds that most, if not all, fund managers had already outsourced at least part of their operations prior to the pandemic.

“Outsourcing meets with a lot of fund managers’ risk appetite. Institutional investors also want to see a certain level of control around the administration process,” she says.

“We’ve had the financial crisis and the subsequent need for more regulation and transparency, and we’ve also had scandals such as the Bernie Madoff case, which may not have happened if there had been a third-party administrator involved in the process.”

CAPITAL GAINS

Burgess says the rise in investor capital is another driver. “In key markets such as the Channel Islands, the number of funds being launched is not increasing but the assets under management is,” he says.

“The levels of sophistication among investors in terms of information, data and reporting are now higher when fund managers look to raise capital from them. Using administrators can make this process easier and if you have happy investors, they are more likely to re-invest.”

Newark says she has seen an increase in funds as a result of the pandemic. “There have been a lot of positive investment opportunities arising out of Covid-19

and, as a result, we are seeing more fund managers entering the market,” she says.

“More international fund managers are coming to Guernsey given some of the issues around economic substance in other jurisdictions such as the Caymans. They are looking to outsource here to save costs.”

Another fundamental driver has been the increase in regulations and the subsequent need for compliance and transparency in recent years – Know Your Customer, AIFMD, BEPS and FACTA.

“The needs of stakeholders have expanded, for investors, regulators, auditors and tax authorities,” says Weaver. “This can be prohibitive to smaller managers, who require the same technology ▼

An administrator has specialist expertise – they have knowledge of how your fund works and how others work as well

We may even see new services being outsourced, such as ‘routine trades’ and ESG reporting

as their larger counterparts in order to appeal to investors and comply with their regulatory requirements.”

Access to technical and technological expertise is therefore crucial, which explains Ocorian’s recent acquisition of two specialists, Newgate Compliance in the UK and Platinum Compliance in Guernsey.

Ocorian’s technology solutions include eFront, a software allowing fund managers access to investment reports and data, and dedicated client portals.

“It’s about building out a tech platform to provide information to fund managers to suit individual investors,” explains Burgess. “It’s about having that granularity of information at a fund manager’s fingertips and slicing data to help investors make good decisions.

“Such a platform is expensive to run in-house for just two or three funds. An administrator might have 100 funds spread across the platform and thus the cost base per fund is lower.”

He adds that with technology and staffing, an administrator can also scale up and down more easily in response to market changes. “It might be too challenging for a fund manager to get a team in place to take advantage of the next wave or current pricing,” he says.

“An administrator has specialist expertise in place such as technical accountants. They have knowledge of how your fund works and how others work as well, which proves helpful.

Despite the strengths of fund administrators, Burgess is quick to emphasise that fund managers need to manage their outsourcing strategy.

“You can’t just hand it over and say: ‘Ok, get on with it’,” he says. “It’s like working with your accountant on your tax return. You have to manage the process with them.”

That means putting in place a system where people know whose role it is to do what and by when. “What are the handoffs?” he says.

FACILITATING RELATIONSHIPS

Weaver suggests a specific role, head of operations, should be put in place in a fund manager to facilitate these relationships. “They can be the bridge between the administrator and the portfolio manager,” she says. “There should be regular updates and calls every two weeks. It’s a strategic partnership.”

To ensure the relationship works, she advises fund managers to take their time and do ample research before choosing an administrator.

“Do you go for a full turnkey solution, where the one administrator provides the full service, or look for specific partners for areas such as Know Your Customer?” she says. “You need to identify the ‘musthaves’ on your list.”

There’s always the option to keep administration in-house. “You get more oversight and more control,” Weaver says. “You live and breathe the funds as it is what you do every day.

“But on the other side, you need cost efficiencies and scalability and the technology in the transparency and reporting requirements.

“There are areas that fund managers will keep in-house, such as portfolio management and deal origination, but overall the outsourcing trend will continue. We may even see new services being outsourced, such as ‘routine trades’ and ESG reporting.”

Burgess agrees. “There will be administration services that develop off the back of ESG reporting requirements, with the EU sustainable finance regulation coming this year.

“Generally, we will see more capital moving into renewable infrastructure funds such as wind and solar, which will need administering as well.”

He also expects to see an increase in bespoke administration rather than providing a standard product offering.

Meanwhile, Newark wants to see more bespoke administrators such as Obsidian entering the Channel Islands, given that company’s success since it was launched in March this year.

“[Bespoke administrators] can be an extension of a fund manager’s own team. We have great knowledge of their investment portfolio, but we are also there as a general sounding board,” she explains. “We take fund managers’ headaches away.” n

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Flurry of activity in UK capital markets

Rachid Frihmat, Audit Director, KPMG in the Crown Dependencies, explores the current – and future – listed funds landscape

LISTED CLOSED-ENDED investment

funds (listed funds) continue to play an important role in the Guernsey funds sector. The island is home to more non-UK listed entities on the London Stock Exchange (LSE) markets than any other jurisdiction globally.

Based on LSE data (December 2020), there were 102 Guernsey-incorporated entities listed across its various markets.

Since the start of the Covid-19 outbreak, the boards and sponsors of listed funds have focused on dealing with many challenges and opportunities – significant fluctuations in share prices, the widening or narrowing of discounts and premiums, valuation issues, changes to dividend policies, pressures on ongoing charges and changes to the regulatory environment.

As management teams learn to operate within this Covid-19 environment, stakeholder confidence in capital markets is returning – and new investment opportunities are emerging.

From our discussions with clients, fundraising projects and investment transactions that were postponed or cancelled during 2019/20 are now being reinvigorated and executed.

We are also seeing new opportunities driven by renewed demand for real assets, private and digital capital and sustainability focused investments.

FUNDRAISING – H1 2021

The first half of 2021 has seen a significant increase in the level of investment activity in the UK capital markets when compared with the same period last year.

A significant proportion of the capital raised on the LSE during this period has been through existing listed fund structures, which have utilised either secondary or C-share issuances.

Against this backdrop, Guernsey listed funds have performed strongly, with five such funds (based on capital raised that was greater than £100m) raising in total more than £1.364bn via secondary or C-share issuances.

The underlying asset classes driving these Guernsey capital raises were: ● Private equity (£820m raised) – private firms are now staying private for longer, so investors are allocating a greater proportion of capital to private or unlisted companies ● Renewables (£246m raised) – as governments around the world set their net-zero targets, demand for renewables continues to rise ● Covid-19 has accelerated the investment in digital assets (£185m raised) and infrastructure-related projects (£113m raised). In addition to these allocations, nonGuernsey funds have seen significant investment activity in sectors related to healthcare and life sciences.

Consistent with the prior year, H1 2021 continued to be a difficult environment to raise capital through the IPO process. Of only a handful of the IPOs that managed to raise new capital, £549m was raised by two Guernsey funds – Cordiant Digital (investing in digital assets) and Taylor Maritime (investing in shipping assets).

FUNDRAISING – OUTLOOK

For the second half of 2021, the expectation is that the trends noted above will continue, while acknowledging that much will depend on how the UK economy (and beyond) reacts to the relaxation of lockdown measures. Alternatives, including private equity, infrastructure, renewables and digital-related assets, are expected to continue to provide opportunities to the capital markets.

Several Guernsey listed funds have already set out their intention publicly to raise further capital in H2 2021; the outlook for secondary or C-share issuances for the remainder of 2021 remains positive.

It is expected that opportunities for new IPO issuances could be limited and will be restricted to listed funds launching on either a niche investment strategy and/ or capitalising on an excellent investment manager/sponsor track record.

With the Financial Conduct Authority’s policy statement on SPACs having been revised, this will be a key topic to review in the upcoming months.

Guernsey is well placed to capitalise on these opportunities. It can demonstrate its depth and breadth of experience in the alternatives listed funds space. n

FIND OUT MORE

Rachid Frihmat is an Audit Director at KPMG in the Crown Dependencies, based in the Guernsey office. He specialises in delivering audit and assurance services to financial services clients predominantly in the investment management industry, including funds listed on the LSE, the AIM of the LSE and alternative investment funds, comprising private equity, renewable energy and hedge fund structures.