Private fund managers are showing an increasing penchant for firing their fund administrators. A new report by Preqin shows that a surprising 36% of fund managers changed their fund administrators in 2016.
While that figure is alarming in and of itself, the trend for fund administrators is unfortunately heading in the wrong direction, as this is a +29% increase from 2015. All indications are that this will continue in 2017, as the report shows that 72% of private fund managers review their fund administrators at least annually, with 30% doing so every single time they bring a new fund to market.
Have fund administrators lost their way, or are they being scapegoated by their own private fund manager clients? The study lists the primary drivers given by fund managers for this level of firing as:
- Dissatisfaction with quality of service provided (27%)
- Cost (23%)
- Increased portfolio complexity (23%)
- To cope with regulation (23%)
I would argue this list is deceiving though, because the inability to help clients deal with more complex portfolios and cope with regulation would both contribute to a dissatisfaction with the quality of service being provided. I don’t see these factors as separate from each other, but rather interconnected.
As such, I interpret the results as confirming that the overwhelming reason (73%) that fund administrators were fired in 2016 was because of the lack of service they provided to their private fund manager clients.
Going one level deeper, I also feel that a lot of this discontent is driven by a lack of modernization. The Alternative Investment industry is overwhelmingly document-based and manual in nature. The wave of technology-driven automation and efficiency that has swept through other areas of financial services has only recently started to impact Alternative Investments.
A “peek under the hood” of how a private fund is managed and administered would reveal an industry seemingly stuck in the 1990s, with manpower typically being the biggest determinant of the speed and quality with which the industry operates.
Private fund managers are tiring of the difficulty they are experiencing with their fund administrators over critical and repetitive actions. Things like getting monthly financial packages completed, formalizing agreements, sharing validated information with stakeholders and more.
The other factor that is at play here is that fund managers themselves are under increasing pressure from their investors/limited partners. Many fund administrators and private fund managers alike forget that the same person that is invested in a private equity fund has banking and brokerage accounts at a bank or credit union.
These people are used to being able to see and interact with their information digitally on a laptop or a mobile device, be able to take certain actions in a self-service manner, and access their information at any time. Being force-fed performance metrics solely in document-form where that document is typically emailed to the investor is making them skittish about the fund manager and frustrated by the whole experience. To make matters worse, the volume of documents increases linearly with the number of investments that the investor has with a fund manager!
So why does it seem like fund administrators are bearing the brunt of the industry’s lack of modernization? Because in many ways the fund administrator has become the conduit for the complex interactions between not only the investor and the fund manager, but also that for the interactions between the fund manager and the fund administrator themselves, as well as other key stakeholders like auditors, attorneys, etc.
Private fund managers are increasingly looking to their fund administrators to provide them the tools to better manage their own funds and service their investors. As evidenced by the Preqin study, private fund managers are showing an easy willingness to change to a fund administrator that they feel gives them what they need.
Fund administrators that are absorbing this message are starting to take the right steps to address the quality of service that they provide to their clients. They are taking actions like creating an Investor Relations team that can better handle communications and interactions with not only their clients, but also with investors. They are investing in technology that will help automate manual processes between themselves and their clients, as well as make the needed transition to be able to present investment metrics in dynamic and interactive digital dashboards rather than in static documents.
These are the types of actions that fund administrators will need to take to ensure they are on the right side of the firing line.
You can find the full Preqin report here.
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