November 2015

Janet Du Chenne

The flow of Institutional capital to private equity is a key driver of further fund administration outsourcing in the private equity fund market.

In a recent article in Private Equity International (PEI) magazine, Tim Fitzgerald, Global Head of Fund Services, Institutional Cash & Securities Services, Global Transaction Banking at Deutsche Bank, explained that Institutional investors are growing increasingly keen on alternatives and are now “demanding products right across the alternatives portfolio”.

This trend, Fitzgerald expects, should continue and could have consequences down the value chain.

“As the industry increases it is becoming more institutional and no longer boutique, you are seeing funds growing to USD $50 billion in size and their institutional investors so they need to have independent administrators appointed,” says Fitzgerald. “’I think that is what is likely to drive the remaining 50% of the private equity market to move to a third party outsourced model. The same as with the hedge fund market.”

The convergence of the different classes of alternatives, with private equity firms buying credit, hedge fund managers doing a lot of structured credit type arrangements – private equity-style structures – and investing into bank debt or direct lending, is leading to a  “blurring or convergence of alternative strategies,” Fitzgerald told PEI.

Many Private Equity funds have historically done their own administration. However, with the institutionalisation of private equity, and the growth in the size and number of funds, in house operating models are no longer scalable, says Fitzgerald. This is a driver of recent outsourcing deals.

“They have built up middle and back offices to administer their products, which have grown in line with their firms growth and they are looking to reduce this substantial overhead and leverage best practice across service providers rather than doing everything on their own in house,” says Fitzgerald. 

“The second driver is that institutional investors have flooded the alternatives market  and are now providing best practices, which means having a third party administrator on the platform to oversee the books and records and do the reconciliations.”

The third driver is that with asset class diversification the regulatory reporting demands and the costs of running and maintaining internal infrastructure to meet that are increasing. “Pension funds, endowments and insurance companies make up two thirds of the investor base in alternatives and they want an independent third party administrator to have oversight and a segregation of duties to keep a check on the manager running the money,” says Fitzgerald.

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