Fund administrators are increasingly looking to private equity and other alternatives as areas of growth for 2017, following a difficult year for the hedge fund industry in which liquidations are on track to outpace launches. That also will follow another active year of mergers and acquisitions activity in the fund admin market.
As administration firms look to expand their umbrellas as all-encompassing alts administrators, however, navigating different structures also poses challenges.
“What you find is that administrators that have alternative funds administration experience are looking to diversify into other global fund administration, including private equity,” says Bill Salus, CEO of Paddock Consultancy, which focuses on the fund administration space. “I think that part of the reason is that the stability or trending of pure hedge funds is slowing and therefore it makes sense as a business for administrators to look at applying their skills and business structures to other alternatives.”
While historically hedge fund managers were active moving between administrators, these days most managers are looking for continuity and sticking with their providers, causing administrators to expand their service offerings and increasingly look to other markets for new business, says David Young, president at Gemini Hedge Fund Services.
“It’s less likely that hedge funds move their administrators now,” he says.
While total hedge fund assets under management grew to over $3 trillion by the end of 2016, withdrawals were over $66 billion through the third quarter of 2016, as previously reported, and hedge funds continued to battle redemptions and lower returns. At the same time, private equity managers are increasingly turning to external fund administration amid a tougher regulatory environment and institutional client demands.
Business growth expectations for fund administration providers were ranked highest for private equity funds, with strategies including private debt, distressed, and small/middle buyout topping the list, according to data from an eVestment survey and report on alternative fund administration from the spring of 2016. Real estate assets also showed room for growth.
“The private equity market institutionalized. Those institutional investors are driving reporting and transparency and standardization requirements as they did with the hedge market,” says Peter Sanchez, CEO of Northern Trust Hedge Fund Services. “The same is happening with private equity and the expectation that managers spend less time on administration activity and more on transparent reporting.”
While 2017 offers a significant opportunity for hedge fund admin firms to continue moves to service private equity structures, build outs away from hedge fund services also pose the potential for gaps to meet the needs of private equity clients. Systems must be able to handle deal level reporting and long-term investment returns, Sanchez says. Northern Trust has built out its hedge and private equity capabilities in the same systems.
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