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In 2023, private equity fund administrators experienced a transformative year marked by a heightened focus on data collection and analysis, regulation, and the uptake of co-sourcing – all themes that will carry forward into 2024.
Recognizing the increasing complexity of the industry, administrators embraced advanced analytics tools to extract meaningful insights, enabling them to provide valuable decision support to fund managers. This shift allowed administrators to streamline processes, enhance efficiency, and position themselves as strategic partners in aiding investment decision-making.
We also saw the underscored importance of staying abreast of regulatory changes, with administrators playing a crucial role in helping private equity managers navigate evolving compliance landscapes, particularly as the SEC voted to adopt groundbreaking new rules aimed at private fund managers. Plus, the trend of co-sourcing back-office tasks, alongside outsourcing, has shifted and expanded the focus of fund administrators, with private equity managers entrusting them with a broader range of responsibilities, further contributing to operational agility and resource allocation efficiency.
Overall, 2023 was a year of adaptation and evolution for private equity fund administrators, emphasizing the critical role they play in facilitating success within a dynamic and data-driven industry. For more on our outlook, and the outlook of valued Allvue partner JTC Group, dive into our top fund administration trends for 2024 below.
“Co-sourcing promotes a flexible and collaborative ecosystem, fostering a more dynamic and responsive approach to market challenges.”
The trend of co-sourcing in private equity gained significant traction in 2023 as firms sought innovative approaches to enhance operational efficiency and maximize returns. Co-sourcing, which involves software selection and purchase by a GP and the hiring of a fund administrator to perform accounting and reporting on the GPs’ systems, allows private equity firms to leverage specialized expertise and resources without fully outsourcing key functions and losing control of their data.
In surveying GPs in Q2 2023, Allvue found that only 12% of GPs rely on co-sourcing while 68% still hadn’t heard of the concept. Heading into 2024, we expect these numbers to grow, as co-sourcing becomes an increasingly covered and considered topic.
This growing awareness indicates a strategic shift from traditional outsourcing models, enabling greater control and customization in managing various aspects of the investment lifecycle. Co-sourcing promotes a flexible and collaborative ecosystem, fostering a more dynamic and responsive approach to market challenges. By tapping into fund administrators’ proficiency in specific domains, private equity firms can streamline processes, mitigate risks, and ultimately optimize their investment strategies in a rapidly evolving financial landscape. And many fund administrators are aware of the opportunity and ready to capitalize on it.
Co-sourcing’s benefits align with key observations from Harold Patch, Head of Fund Administration at JTC, as we move into the new year.
“Recent reports have shown the Private Equity market becoming increasingly competitive, with funds potentially targeting new types of investors and the pressure to lower fees greater than ever before,” he said. “With technology being a major driver of efficiency, outsourcing key fund administration tasks to an experienced team that knows how to create value can help funds stay competitive by keeping back-office costs down, but it’s important to find an administrator that has the capacity to help you meet your goals so you aren’t forced to make a change down the line.”
“Specialized expertise will be one of the most crucial ways to gain value from a fund administrator in the coming years. Not only will we see the implementation of new disclosure rules for private funds, but also climate disclosure rules that could potentially affect all funds types, even those without an impact focus.”
Private equity managers increasingly rely on fund administration guidance to navigate the intricate landscape of regulatory requirements. As regulatory frameworks evolve and become more stringent, fund administrators play a crucial role in helping private equity managers stay compliant with diverse and complex regulations. This is especially the case as GPs in the US face a challenging and in-depth adjustment to their investor reporting operations by early 2025 – a timeline many are finding daunting as they dig into how the requirements overlap with their finance team’s current data collection and reporting capabilities.
Fund administration professionals provide valuable insights into regulatory changes, offering guidance on how they may impact fund structures, reporting obligations, and overall operational procedures.
“Specialized expertise will be one of the most crucial ways to gain value from a fund administrator in the coming years,” Patch said. “Not only will we see the implementation of new disclosure rules for private funds, but also climate disclosure rules that could potentially affect all funds types, even those without an impact focus. While in the past, sectors like ESG were considered niche markets, that’s no longer the case: the growth of the ESG market has shown that funds need to be prepared to disclose more information not only to regulators, but to investors as a potential differentiator in an increasingly impact-conscious world.”
Given the global nature of private equity investments, fund administrators also assist in ensuring compliance with international regulations, facilitating cross-border transactions, and managing the intricacies of various jurisdictions. With their specialized expertise, fund administrators act as strategic partners, helping private equity managers interpret and implement regulatory updates effectively, thereby reducing compliance risks and ensuring the longevity and success of their investment strategies in a highly regulated environment.
“Customization is an important factor. Depending on the fund’s size, specialization, and the point it’s reached in its lifecycle, administrative needs will change.”
Private equity managers are increasingly turning to fund administrators to outsource a variety of tasks, marking a notable shift in the industry’s operational dynamics. Recognizing the benefits of efficiency, cost-effectiveness, and specialized expertise, private equity managers are entrusting fund administrators with an expanding array of responsibilities, particularly beyond the traditional accounting and investor reporting services.
These may include regulatory compliance, portfolio monitoring, and even high-level investment data strategy implementation. Outsourcing allows private equity managers to focus on their core competencies of deal sourcing, value creation, and portfolio management while leveraging the technical proficiency and scalability offered by specialized administrators – all while keeping their headcount low. This trend not only enhances operational agility but also enables private equity firms to adapt swiftly to regulatory changes and market demands. By outsourcing tasks to fund administrators, private equity managers can achieve greater flexibility, streamline their operations, and allocate resources more strategically, ultimately contributing to improved overall fund performance.
This customizable service approach is becoming a key need in the private markets service provider space, according to Patch. “Customization is an important factor. Depending on the fund’s size, specialization, and the point it’s reached in its lifecycle, administrative needs will change. Functions like onboarding, Impact/ESG reporting, and cross-border compliance apply to different types of funds at different stages of growth, so if you’re purchasing an “out of the box” fund admin solution, you’re likely either paying for something you don’t need or not getting something you will eventually need. It’s important to ask the right questions to evaluate whether a prospective third-party admin is really going to create value.”
“Embracing data-driven methodologies not only enables administrators to streamline processes and improve efficiency but also positions them as strategic partners in aiding fund managers to make more informed and proactive investment decisions.”
The industry is undergoing a transformation driven by the increasing volume and complexity of fund and portfolio-level data. Private equity fund administrators, traditionally focused on record-keeping and compliance, are now harnessing the power of data analytics to help their GP clients extract meaningful insights.
By leveraging advanced analytics tools, administrators can enhance their ability to interpret financial trends, evaluate investment performance, and provide valuable decision-support to private equity managers. Embracing data-driven methodologies not only enables administrators to streamline processes and improve efficiency but also positions them as strategic partners in aiding fund managers to make more informed and proactive investment decisions. In an era where data is a key driver of competitive advantage, private equity fund administrators are recognizing the necessity to evolve, becoming proficient not only in data management but also in extracting actionable intelligence from the wealth of information at their disposal.
Check out our other 2024 trends content:
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