Centaur Fund Services predicts five trends that will drive fund administrators in 2016. This year’s predictions focus on the changes and challenges within the industry. These include:
- The shift away from bank owned administration businesses
- Merger & acquisition activity increasing among fund administrators
- The dramatic changes in how Private Equity firms do business
- The rise in the number of Family Offices outsourcing fund administration
- Cyber threats and how they are impacting the industry.
Finally, Centaur takes a brief look at its 2015 predictions to see how many they got right.
So what can we expect in 2016?
- HEDGE FUNDS WILL CONTINUE TO SEEK BETTER FUND ADMINISTRATION SERVICE BY MOVING AWAY FROM THE MAJOR BANKS
2015 saw the continued trend of hedge funds serving notice on major bank owned fund administrators as fund administration becomes increasingly marginal and unprofitable for many banks. Significant changes in many banks have caused them to re-focus on the viability and profitability of many of their non-core business lines. For many banks, this includes fund administration. As a result, many bank owned fund administration businesses have suffered from lack of investment, lack of leadership and demoralised staff. The impact on their hedge fund clients has been truly terrible service levels.
A huge number of funds – many of whom are running multiple billions of dollars – have either moved away or are currently exploring moving from the bank owned administrators to seek better service provided by specialist hedge fund administration companies.
Karen Malone, Founding Partner of Centaur Fund Services, comments “In the last couple of years we have taken on a significant number of hedge fund groups who have decided to trade up after experiencing very poor service standards from less focused groups. We are currently in discussions with several hedge fund groups – both large and small – who are looking to make the same move.”
She continues, “There are issues with the legacy technologies of large banks and many of them are unwilling to continue to invest and focus on this business line. The continuing need to keep up with industry reporting and regulatory requirements means that administrators have to develop bespoke solutions for each of their clients. This is simply not possible for many of the larger institutions working off legacy systems”.
- ACQUISITION MANIA WILL CONTINUE - SOME WILL BE POSITIVE FOR CLIENTS BUT SOME WILL LEAD TO DISTRACTION, CONFUSION AND POOR SERVICE
The hedge fund administration industry has been notable for many years for the number of firms that have been sold to or merged with bigger competitors. While there have been some successful deals where the result has been better capitalised firms with motivated and committed management teams, many result in distracting integration plans, significant technology disruption and management changes. Clients need to take care that they are not the victims of service disruption as a consequence of corporate activity.
“We are extremely confident that M&A activity in the sector will continue in 2016. When such deals are executed well, the result can be a stronger balance sheet, a motivated management team and a commitment to invest in the business. This can be a significant positive for clients. However many deals give rise to significant changes in servicing models and can lead to disruption of client service,” says Karen.
She continues, “Several hedge funds have moved their business to Centaur in the last few years to escape the fallout of new ownership and integration issues they experienced with previous service providers.”
- PRIVATE EQUITY FIRMS WILL INCREASINGLY EMBRACE THE TREND TO OUTSOURCE ADMINISTRATION
Private equity firms are changing. As regulatory pressures increase and investment strategies become more complex, private equity funds are outsourcing their administration operations in order to put their focus on generating returns. This trend is also driven by market pressure on firms to deliver better reporting and tighter accounting processes with greater transparency. Although most private equity firms still tend to be self-administered, Centaur expects the number to drop significantly in 2016.
“In 2015, we gained several new private equity fund clients. Investors are demanding operational excellence and private equity firms are responding by outsourcing their administration operations. This operational excellence is delivered through customized reporting in a transparent, timely and reliable fashion,” says Karen.
She continues, “As the industry positions itself for further growth and private equity firms come under regulatory and operational pressure, we expect to see a dramatic rise in the number of private equity firms outsourcing their administration operations.”
- FAMILY OFFICES OUTSOURCING FUND ADMINISTRATION ON THE RISE
2015 saw a big increase in the number of family offices hiring fund administrators and this trend is set to continue. As they face mounting regulatory and operational costs, family offices are realising the benefits of outsourcing this function.
In order to service family offices, administrators need to be flexible and to be able to adapt their processes and reporting to the often unique requirements of the individual family groups.
“The trend for Family Offices to outsource fund administration is relatively new and I believe it is one that will grow significantly in 2016,” says Karen. “Often, each Family Office will have its own unique servicing requirements. Families also often invest in a wide variety of asset classes and structures, straddling formal hedge funds, private equity funds and real estate funds and less structured SPVs and direct investments. These diverse requirements call for flexible service providers who can adapt their processes and reporting to match the unique needs of each client.”
- CYBER THREATS WILL REMAIN HIGH ON THE RADAR FOR FUND ADMINISTRATORS
Technology still remains the most important element in ensuring an administrator has the most efficient and cost effective operating model. As the industry demands greater transparency and more efficient reporting, successful administrators must continually invest in robust technologies that improve efficiencies and allow for the seamless dissemination of information.
At the same time, Fund Administrators will need to remain hyper-vigilant towards cyberattacks throughout 2016 and beyond. The days of relegating cyber risk management to the IT department are officially over and any administrator worth its salt ensures that cyber risk is proactively managed through informed decision making within each level of their organisation.
It’s about being proactive and ensuring a robust Risk Assessment Process is in place along with a sound control environment to ensure proper management of data, ensuring that it remains accurate and accessible whilst being protected.
Karen says “It is vital for administrators to take cyber security extremely seriously and manage cyber risk continuously and proactively. We have no doubt that cyber threats will increase in 2016. At Centaur, we take an integrated approach to cyber risk by ensuring that we have robust procedures in place, which are being followed and continuously reviewed. Our team of professional engineers and consultants ensure that Centaur provides a safe and secure environment for clients and employees, backed by the best technology partners and products the industry has to offer.”
Karen concludes, “At Centaur, we are enthusiastic about the future of the Fund Administration industry and are looking forward to 2016. There is no doubt that there will be challenges ahead such as the continuing cyber security battle, but the industry is shifting and new sectors are entering the market which offer tremendous opportunities for growth.”
So, how did we do in our 2015 Predictions that we published in January 2015?
How many did we get right?
- Large Bank Administrators dropping mid-market Managers
In 2015 we saw a change of sentiment in the market as clients are realising that fund administration is a long term partnership. Managers are seeking out more suitable service providers who offer a more collaborative approach between the administrator and client, backed with superior service compared with the large banks.
- Due Diligence Set to Grow
Due diligence requirements grew in 2015 and it was principally investor-led. As Investors continue to sit in the driver’s seat in the decision making process around Administrator choice, there remains a strong and clear desire for evidence of independent and accountable third party administrators.
- Steady Rise in Regulatory Reporting
Demand for regulatory reporting, such as AIFMD, FATCA, SEC registration and Dodd Frank grew significantly in 2015.
- Administrators to Become Key Partners to Funds and Managers
As management fees continued to fall in 2015, fund managers looked toward their administrators to become key business partners and to provide cost-efficient service solutions.
- Increased Demand for External Control Audits
Compliance was a big feature for 2015 as the industry experienced an increased demand for service organisations such as Administrators to have External Control Audits (like ISAE /SSAE) on their entire business.
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