The biggest trends undergoing the fund administration industry may turn into an evolve-or-perish situation in which only those who will react in a fast and smart way will succeed in tomorrow’s industry.
In an era characterized by rapid technological advancement and shifting regulatory landscapes, the role of fund administrators is evolving at an unprecedented rate. As key players in the investment industry, fund administrators are responsible for the day-to-day management and operations of investment funds and securitization transactions. Their role involves diverse tasks such as ensuring regulatory compliance, transactions’ processing, cash management, records’ maintenance, measurement, reporting of fund performance, and more.
Yet, the future of fund administration is likely to look very different from its present. The advent of new technologies, changing investment structures, emerging trends in ESG investing, and an increasingly globalized investment industry are all contributing to a seismic shift in fund administration.
This article seeks to explore the future of fund administrators, examining the major trends that are reshaping the industry, speculating on what the role might look like in the years to come. As we peer into the crystal ball, the only certainty is that change is inevitable, and those who adapt will be the ones who thrive in the evolving landscape of fund administration, winning new clients and generating new revenue streams.
Here are the main trends we expect will shape the future of Fund Administration:
- Globalization of the investment industry
- New asset classes and investment structures
- Data Management
- Regulatory changes
Globalization of the investment industry
Funds, borrowers, originators and investment structures are increasingly multi-jurisdictional and global in their value chains.
Corporates and Family Offices operate and invest globally, and originators and fund managers seek access to international capital and both private and institutional investors increasingly want to pursue strategies that mean operating internationally.
This all leads to increased demand for providers of professional services that can advise and work across borders with detailed cross-jurisdictional knowledge to navigate the increasing complexity and risk that comes with it.
As investment becomes more global, fund administrators will need to deal with complexities of administering funds across different jurisdictions, with different regulations and tax laws.
In this context, fund administrators need to have a scalable global platform with an established presence in all key jurisdictions and the flexibility to establish partnerships and cooperations to expand product and geographic reach. As a consequence, Fund Administrators must be able to offer both institutional and private clients seamless services as they operate and expand across multiple jurisdictions.
New asset classes and investment structures
Allocation to alternatives has surged in the recent negative interest rates environment and is expected to keep the pace as major investors and asset owners have modified their allocation targets from traditional 60/40 to a 50/30/20 model. Preqin forecasts alternative assets will continue to grow at a CAGR of 11.9% (2021 – 2027).
Alternative investments encompass both seasoned asset classes like private equity and private debt but also instruments such as specialty finance, buy-now-pay-later (“BNPL”), revenue based finance, marketplace finance, rent-tech financing and all the novelties tools that fintech brings every day on the market. And this is coupled with new structures like Collateralized Fund Obligation, CCIVs (Corporate Collective Investment Vehicles), securitization of real assets, tokenization, etc.
Squeezing a BNPL into an amortizing loan data model implies losing many of the unique nuances of this asset class and preventing the ability to properly calculate performance or classify a position as past due. Switched-on clients will know this – the Administrators need the right tech-enabled capability to respond to these more esoteric underlying.
New asset classes come with a specific business model that generates new data points that need to be managed and that can provide additional value on both the specific market segment but also contribute to build a wider view of financial market and economy therefore providing valuable insights to GPs and LPs. Want to deep dive into the data challenges for emerging asset classes? Read our dedicated article here.
Data management is becoming increasingly critical for fund administrators as the volume and complexity of data continue to grow. Fund administrators handle vast amounts of data related to investment portfolios, client accounts, transactions, regulatory requirements, and more. Effective data management is crucial for maintaining accuracy, ensuring compliance, facilitating decision-making, and delivering value-added services to clients.
Managing data for a Fund Administrator includes both data collection and retrieval from multiple sources (investment managers, custodians, exchanges, asset servicers and collection agencies) regarding trade records, asset, cashflow and borrower information, investor data, and compliance data. Timely and accurate data collection is essential to maintain up-to-date records and generate reliable reports for clients and regulators. This requires to validate, cleanse, reconcile and standardize the data to ensure consistency and accuracy. While Excel can be a useful tool for basic data management tasks, the complexity and criticality of the processes and data involved in fund administration make it unsuitable for ensuring high levels of accuracy. Performing manual data entry, manual checks, and the impossibility of version controls can introduce significant risks, leading to inaccuracies, compromising the reliability of reports, and increasing reputational risk.
Data collection and its secure storage is just the beginning of the process, as data analysis is becoming an increasingly important component of data management for fund administrators. As the investment industry becomes more data-driven, administrators are leveraging advanced analytics techniques to extract insights from the data they possess. This can involve using data visualization tools, applying statistical models, and employing machine learning algorithms to identify patterns, detect anomalies, and gain a deeper understanding of investment performance and risk factors. By harnessing the power of data analytics, fund administrators can provide value-added services to clients, such as performance attribution analysis, risk reporting, and investment recommendations.
In a data-heavy context such as financial market and structured finance transactions, the importance of data management is not only proven by ChatGPT generated content but also from industry evidence. In a piece from June 2022, Private Equity International states that “demand for growing volumes of data, and more frequent access to such data shows no sign of waning”.
In a poll run by Intertrust among private capital funds and their investors, over 60% of the 300+ respondents expects to have to provide at the very least daily information on portfolio performance.
There is a growing demand for higher quantities of updated data from various actors: regulators are placing pressure on the investment industry to enhance transparency in order to mitigate systemic risks and address misconduct. This push is evident in both the United States, as highlighted by the Securities and Exchange Commission’s call for increased transparency, and in Europe for what concerns sustainability/ESG and financial risks.
On the other side, investors are becoming more and more sophisticated in terms of data requests, that spun from intelligence on ESG to monitor the sustainability of their portfolios, to information at granular asset and cash flow level to fuel their data-driven decision-making processes that aim to reduce and balance risks while locking higher returns.
Fund administrators play a pivotal role in investment structures as they interact with various stakeholders such as general partners (GPs), limited partners (LPs), originators, securitization investors, and regulators.
Due to their central position, fund administrators are well-positioned to effectively manage and coordinate data supply to meet the diverse needs of these stakeholders, and become experts in data management.
The Fund Administrator ensures that funds and securitizations comply with all applicable laws and regulations. This could involve ensuring that appropriate disclosures are made, that a securitization is structured in a legal way, and that any required filings with regulatory bodies are completed accurately and on time.
As financial regulations continue to evolve globally, GPs, LPs, originators and arrangers bear higher and higher costs in terms of both reputation and possible fines and are therefore flying to high-quality jurisdictions and service providers.
In this context, fund administrators need to keep pace with changes in multiple relevant jurisdictions and ensure that all structures are compliant. This can require significant adjustments to their processes, available datapoint and therefore systems used to manage them. Also IT systems need to be flexible enough to accommodate interaction with service providers that can provide specialized services on niche assets/structures.
Building knowledge of ever-evolving regulations, coupled with the capacity and expertise to support clients in complying with strict regulatory standards, relying on solid IT solution that supports timely production of changing templates and other regulatory requirements, will create relevant barriers to entry for competitors.
The trends listed above are pushing for industry consolidation since early 2010s, in particular the opportunity to offer multi-sector and multi-jurisdiction capabilities and solutions, coupled with the need to reach a greater scale to face regulatory complexity related costs. The M&A in the industry has been one of the main growth driver for both PE owned and publicly listed operators as testified by several deals in the last decade (“barely a month goes by without a new acquisition or tie-up”).
In the UK and Europe, there are over 2,000 fund administration providers, while the US boasts over 1,000 providers. While the consolidation trend has recently decelerated due to macroeconomic factors, it is expected to regain momentum once the markets rebound.
How should Fund Admins react to these trends?
In this article we have identified the main trends that are impacting the fund administration industry, bringing new challenges to existing players across multiple fields.
Such challenges should not be considered as threats but rather as opportunities to build a more solid market position, increase process efficiency and lower costs.
Continuous advances in technology improve speed and efficiency, mitigate risks of human error and automate mundane tasks. This all leads to a better client experience, and increases the focus on human expertise. Freeing up resources from repetitive tasks that can be automated while at the same time improving quality and consistency of data, allows skilled and knowledgeable advisers, with an understanding of the nuances of financial transactions, legislation and regulations, to dedicate more time to provide a valuable service to clients. This not only allows to improve client experience by focusing on specific customer needs, but also to solidify relationships with customers.
Fund Administrators should not limit themselves to improve the status quo, but rather to grow the client basis and revenue streams by offering new products and services.
Evolve or perish
It sounds like data and technology evolution have the potential to be a perfect storm for the fund administration industry. Those who will not adapt to the new paradigm really risk seeing their current services made obsolete by the increase in automation and availability of data, with cost reduction that these will spur hammering their people-centered business models.
Opportunities from technology
Technology does not only support the improvement of process and cost reduction, it can also support the creation of whole new stream of revenues by enhancing product offerings. Long gone the days of building vs buy, the new paradigm is based on creating an ecosystem based on open architecture that allows Fund Admininistrators to combine multiple specialized solutions to scale faster and offer the best services for any specific needs.
By selecting the right technology that offers both computational power to deal with big data and the flexibility to manage new asset classes, innovative financial structure and dynamic regulatory requests, Fund Administrators can empower their clients to unleash the power of the data they manage.
These services can range from advanced monitoring tools to support the risk management team in keeping risk under control, simulation and benchmarking to the investment team in evaluating new investment opportunities, cash flow simulation to boost liquidity forecasts. Again, Fund Administrators can expand their coverage of the investment process by providing data room and marketplace services that allow them to have a role also in the origination of new transactions.
Furthermore, thanks to technology, Fund Administrators can provide their clients with seamless access to new datapoints, enriching the information available with market data (at Cardo AI we provide our users with access to index and benchmarks across multiple asset classes and European markets), ESG data, risk and rating information, access to third-party providers of fair market value and evaluation/pricing services, independent data on assets (including NPLs).
On top of helping their customers to leverage existing and new data, an additional step that Fund Administrators could play to strengthen the cooperation with their clients is to offer them the infrastructure to manage that data. Instead of initiating transfer of data via batch procedures or APIs, Fund Administrators, GPs and LPs could share the same technology to support their own value generating process, relying on consistent and always updated data.
This means Fund Admins need also to hire the right talent with the right skills to select the most appropriate technological partners that allow both effective execution and flexibility to be a long term partner in a very dynamic context. Data Analysis and Data Science champions will be able to spread the transformation into a data driven organization and create a culture that puts data at the center of every process, providing transparency and supporting informed decisions.