Private Equity: The benefit of a third-party specialist
Amid an uncertain economic future and the aftermath of a pandemic, it is more important than ever for private equity fund managers to stay focused.
Private equity fund managers faced with intensified demands during and following the pandemic, need to find ways of freeing up their time. General Partners (GPs) need to maintain ‘business as usual’ while facing practical obstacles like maintaining working from home infrastructure, lack of face-to-face meetings and ongoing liquidity concerns for portfolio companies.
As such, GPs have welcomed support from their administrators during this time and are continuing to seek their help to weather further market turbulence. At Apex Group, we spend considerable time, effort and resources to ensure we have the infrastructure and technology to do more for our clients at a lower cost, more efficiently, with more transparency and ultimately provide better service levels. Digital technology, block-chain and data analytic tools are some of the areas we have been focused on and continue to evolve.
Private Equity firms have sometimes been reluctant to cede control of their operations to third-party service providers, since they are ultimately responsible for governance and performance. But the unprecedented demands of the pandemic demonstrated the benefits of freeing up time and resources to allow managers to focus on their core competencies: raising and deploying capital to achieve attractive returns for their investors.
A recent noticeable uptick in private credit strategies, distressed debt and hybrid funds has created renewed demand for outsourcing not just fund administration but also other services. Notably, these include portfolio monitoring, data gathering and validation and transparency reporting. We are also seeing a narrowing in the number of service providers being appointed – managers are looking for a partner who can provide them with a complete end to end solution that can deliver fund administration and these additional services, a single source solution across different services and global jurisdictions.
After the pandemic…
The outsourcing trend is set to continue in 2021 and beyond even after the pandemic subsides. The increased tendency to work from home may have been brought about by coronavirus, but it has prompted many funds to want to permanently move most non-investment activities “off premises”. They see benefits in terms of cutting overall expense to the manager, and the ability to be flexible and scale up or down as required.
In addition, over the past year we have witnessed a sharpened focus on risks of all types, especially those related to environmental, social and governance (ESG) factors. Once we come out of the other side of the global health crisis, private equity investors and their portfolio companies are in a unique position to act as change agents to build back stronger economies – and ESG considerations will certainly play an integral part in this rebuilding.
GPs are facing regulatory pressure as well as greater demand for disclosure of non-financial metrics from their LPs and in turn are integrating these into transaction and acquisition due diligence processes.
It is easy to be critical of private markets’ slow uptake of ESG monitoring and reporting. Indeed, the task of accessing and analysing meaningful ESG data from private portfolio companies and underlying assets has been often deemed ‘too difficult’. The listed space already has a multitude of data collection solutions, providers and indices, but there are few reputable independent, global ESG providers for the private markets. However, regulation and investor demand is pushing private equity in the same direction. So ESG reporting has become essential for private equity funds and an additional service that managers are now expected to provide. This information requires expertise to collate, review, track and report on which is another area third party administrators can help.
GPs are finding that keeping on top of regulation, not only to comply but to enable their business, is a full-time job. They see the value in appointing a service provider who spends time working directly with regulators and understands the supervisory environment across multiple jurisdictions. This can ensure that private equity firms remain competitive and aware of any changes to the regime in advance, allowing them to adapt more easily, identify commercial opportunities and remain in full compliance at all times.
One key regulatory trend we have seen is the establishment of new private fund structures, as jurisdictions from Hong Kong (LPF) and Singapore (VCC) to Ireland (ILP) jostle for prominence and to attract re-domiciliation and launch of new private equity funds as the asset class grows. The greater choice of domiciles will inevitably lead to competitive pricing and lower costs for managers – and managers will need guidance and advice to navigate and benefit from this.
Advances in technology are also driving the outsourcing trend. GPs want the benefit of best-in-class technology. But they want it without the associated costs of licensing and the burden of implementing the technology, converting historical data and employing a large in house team to train on systems and maintaining the workflows.
Technology is playing a key part in minimising the need for manual, paper-based processes to more automated, transparent and shared processes. Advancements such as block chain, digital technology and access to real time data to improve operational efficiency, security, transparency and accessibility to data, have gone a long way towards making GPs feel comfortable enough to relinquish some of their control.
With greater technological integration, comes the perennial issue of cybersecurity. The virus-induced remote working situation has only heightened GPs’ and investors’ concerns on this issue. We have seen a marked rise in phishing attempts during this period as perpetrators seek to exploit potential cybersecurity weaknesses in the current environment.
The key to mitigating cybersecurity risk is to take proactive measures. Firms are undergoing third-party evaluations of their technology environment, completing regular penetration testing, maintaining, and continuously reviewing Disaster Recovery Plans and providing ongoing cybersecurity training to staff.
As they adapt to new ways of working, it is more important than ever that private equity firms also focus on new ways of maintaining client relationships, ensuring efficiency and staying compliant with a multitude of regulation.
As ever, though, they also need to focus on delivering returns – and an approachable, adaptable and effective service provider may be the key to achieving it all.
How we can help
Our private equity services covers the whole lifecycle of the fund to support private equity firms in their business operations. We focus on implementing the highest quality service delivery and wrapping that framework around the best technologies in the industry. The result is a powerful, scalable platform combined with private equity experts delivering local support.
Our unique single-source suite of solutions includes Fund Administration, Depositary Services, Super ManCo, ESG services and Bank Accounts, enabling you to keep all your providers under one roof
Contact us today to learn more.