The Growth of Fund Administrator Business
Fund administrations are firms that provide a wide range of back-office services to different kind of funds. They execute all those activities necessary for the existence of the fund, but that are not related with the management of investments.
This sector has benefitted from the general growth of its clients. For example, the business of hedge funds has been booming in recent years moving from about 3 trillion dollars managed in 2016 to 3,8 trillion dollars in 2020. Private equity business grew similarly, in fact, the global buyout capital raised has increased from about 100 billion dollars in 2011 to about 300 billion dollars in 2021. This sharp increase is due to the growing monetary base and the low interest rates that have encouraged traditional financial institutions to diversify their investments into actively managed funds as those funds provide higher returns that are uncorrelated with the performance of the financial market.
As business grows, the bureaucratic complexity of funds increases accordingly and more and more of them prefer to outsource all their back-office activity to fund administration firms. As those firms are selected based on their expertise, technology and width of services, it is worth analyzing how the fund business will change and how it affects its providers.
Trends Led by Technology
- Using technology to reduce costs: The traditional incentive formula 2-20 is outdated. Nowadays, the average management fee has been constantly reduced to 1.37% and the average incentive fee similarly reached 16.4%. In this business context, fund managers need to reduce costs using different technologies that can be provided by fund administrations, for example, centralization of data, automatization of work, consolidation software, cloud technology, ….
- Artificial intelligence and machine learning: These tools are requested more and more by asset managers. Artificial Intelligence is a technology that can make decisions independently based on large amount of data. Machine learning is software that can identify patterns from a large dataset and to build predictive formulas from them. In 2018, over half of professional investors used AI for investment decisions by analyzing masses of data to forecast corrections in supply and demand imbalances, and predict market movements. In this context fund administrations need to prepare themselves to provide these tools.
Trends that Require New Services and Expertise
- Gender equality in finance: Fund administrations will have to pay an increasing amount of attention to the presence of female managers in funds. So far, only a minor number of the thousands of existing funds are managed by women. This number will quickly increase in the future as investors are becoming more and more concerned about the gender inequality in the financial sector. Fund administrations will play a role in this area by providing relevant information about the diversity of investment teams to investors and by supporting funds to employ more women.
- ESG: Environmental, Social and Governance are non financial factors used by investors to select investments. Nowadays, one-fifth of all evaluates funds with those factors and this percentage will increase in the future. Therefore, fund administrator will need to provide more information to investors to help investors make more socially conscious decisions.
- Digital assets: About one-fifth of all hedge funds invests in digital assets and those funds allocate about 3% of their assets in these products. As the number of investments grow in the future, Fund administrations have to need to provide consulting services on those cryptocurrencies as each of them has its own specifications
Fund Administration Evolving Business Model
In the past, fund administrations served traditional funds such as private equity firms, hedge funds, real estate funds and Venture capital funds providing traditional services such as:
- Back office accounting and reporting of results
- Asset custody
- Regulatory compliance
- Investor management such as communication, onboarding, Know-your-customer rules
- Bank account management, investor distributions and dividend payments
- Computation and definition of methodologies for NAV / Fees
- Management controls
- Carried interest computation
- General consulting
This model will be shaken soon as funds administrations must prepare to serve new clients such as ESG funds, crypto funds, private credit funds, women led funds, … and provide new services such as:
- Technology consulting
- Investment tools based on Artificial intelligence
- ESG evaluation
- Management of Crypto accounts