Keeping LPs happy

However, when the private equity market was flourishing, some investors did not place as heavy an emphasis on transparency if it was evident that the fund had made good returns in previous vintages, and had a long track record in the industry. Recent events have changed that and LPs have become far more discerning about allocation.

One veteran fund manager told AVCJ, "We have good track record as a PE player [that has been around for a while], but now LPs are very concerned about corporate governance, and they request much more in the way of documents and reporting than before."

Another GP said, "LPs are definitely spending more time deciding if they will make investments," while another fund manager quipped, "It's a real pain [for us]."

There is one way to keep everyone happy, and that is by leveraging the services of fund administration professionals and technologies aimed at helping the alternative investment community meet the standards of reporting now expected around the world.

Today, GPs and LPs are more aware of the importance of using third parties or specialist software designed for private equity/venture capital use to operate fund administration matters, helping to improve communications between the two parties. In the alternative funds space in the US and Europe, hiring fund administration professionals or purchasing administrative software is common, but here in Asia is not yet the norm. That said, as the industry grows in the region, the need for this type of service and the value it adds is growing as well.

Competition among companies that perform fund administration duties is growing, with more and more international firms opening offices in Asia. Banks in particular are branching out in this direction, targeting hedge funds in particular.

The benefits of outsourcing

AVCJ asked Andrew Gordon, head of alternative investment services in Asia, at BNY Mellon, how fund administration is evolving. He believes, "this is not only in Asia. It is a global issue, the need to outsource fund administration functions because the needs of LPs are increasing."

He explained that there are three main reasons this is happening now.

1: How much internal capacity is there for GPs to manage the fund's books and the maintenance of LP records? Outsourcing involves a variable cost that includes professional fund administrators, sophisticated technology, and backup (Business Continuity Planning) both of data as well as the operating capability itself. If the GP does this "in-house", there is a need for a potentially high investment in terms of systems and staff.

2: Existing managers are receiving pressure from LPs to outsource certain functions, like the upkeep of the books and records of the fund vehicle, to improve governance.

3: GPs that launch multiple funds often risk stretching their existing infrastructure, which is no longer sufficient for the scale of their business. As the business grows they reach a point where they have to decide to either invest more money into their internal infrastructure, or to outsource.

Growth in Asia

BNY Mellon launched its Alternative Investment Services arm in 2008, and the firm is optimistic about growing this type of business, choosing initially to set up offices in Hong Kong, Japan and Singapore to service its Asian clients.

Gordon said, "Because of our brand name, which was primarily developed in securities services that account 75% of our business, potential clients recognized us and show more interest in hearing about our services."

BNY Mellon uses Investran which is a Sungard system to automate capital call management system, while PE Edge is used by GPs and LPs to deliver information.  Investran is a specialised PE fund accounting system and is used by some of the large GPs themselves

Maples Finance Asia Limited, founded in the Cayman Islands in 1997 by international law firm Maples and Calder, is another specialist in fund administration. Since 2003 it has provided specialized fiduciary, accounting and fund administration services. In 2006, the firm expanded to Asia, setting up a regional office in Hong Kong. A firm with a global reach, Maples Finance now has offices in the British Virgin Islands, Cayman Islands, Dubai, Dublin, Luxembourg and Montreal.

Hugh Thompson, director of Maple Finance Asia Limited told AVCJ that about 80% of its clients are hedge funds while 20% are private equity clients. In aggregate, the private equity clients have approximately $9 billion in capital under administration.

"There is a clear trend in this sector," says Thompson. "The global financial crisis has led to greater expectations from LPs to increase their focus on the corporate governance infrastructure surrounding a fund. The appointment of independent third party fund administrators using the most up to date technologies available goes a long way to satisfying these concerns." Maples Finance currently uses Advent Geneva, the global hedge fund portfolio management, reporting and accounting software, and the firm is in the process of sourcing and implementing a PE-focused fund administration software. The demand for online platforms through which funds can distribute information is also increasing as LP's become more assertive.

Although new funds – particularly in China – continue to set up shop, Thompson warns, "Those who have great investments strategies may not have much in the way of infrastructure around the funds." Comparing the developments and learning curve in Asia with the situation in Europe, Thompson said that PE funds here have been slower to see the benefits of outsourcing much of the accounting work, but the education phase is in full force and funds are more interested in hearing about what fund administration can offer. "We are most often asked about the value we can bring and how we can improve the lives of the fund managers." He concludes, "I think there are growing incentives for fund managers to outsource fund administration."

Private equity backing fund admin technology

Perhaps the most compelling testament to the potential for fund administration growth is the private equity sector's interest in backing groups that perform these types of services. Sungard, mentioned above by BNY Mellon's Gordon, was acquired by a private equity consortium led by Silver Lake Partners that included Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. L.P., Providence Equity Partners and TPG Capital. The group paid approximately $11.3 billion for the company in 2005.

SS&C Technoloogies, which launched in 1986, was acquired by an affiliate of US buyout giant the Carlyle Group in 2005 for around $982 million. About two and a half years ago, the company launched fund administration services for the alternative investments space in Asia. In March 2010, the private equity firm sold a 16% stake for $161 million in the company when it relisted on NASDAQ, but is reportedly still one of the company's major shareholders, with a substantial tranche of shares.

Last month the group soft-launched its private equity-focused fund administration software system, TNR Solution™ (TheNextRound), in Asia. Siva Ahnantham, Sales Manager for Fund Services, Asia Pacific at SS&C said, "Funds in Asia are very secretive, so they would rather install software in their system and use it themselves."

The group says 75% of its clients are investment funds, including private equity, VC funds, fund-of-funds and LPs, usually operating in the $500 million to $5 billion range. However, Ahnantham added that business is growing among mid-size fund operators with funds between $100 million and $300 million. Globally, 5% of the company's clients are in Asia.

Asked about the company's development in the region, Ahnantham said, "We see more growth opportunities here [than in Europe]. When we speak with potential clients, larger funds show interest and understand the value." The company expects to see 20% growth in their Asia business this year.

While the benefits of outsourcing these types of operations might seem self-serving for those in the industry, at the end of the day, several human resources issues and the fund size determine what makes most sense. Funds with more money can afford to hire someone. Full stop. However, anecdotal evidence suggests that turnover in this particular role is relatively high, leaving firms without dedicated support – potentially when they need it most. Fund administration service providers are much more stable, and are not headcount on the books. Additionally, as LPs look for more standardized corporate governance, third-party providers are one way to ensure that investors get a clear and unbiased picture of how the fund is doing

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• Topics
• Performance
• Advisory
• Regulation
• Funds
• Goldman Sachs
• The Blackstone Group
• Providence Equity Partners
• TPG Capital
• KKR