This article is sponsored by Citco Group of Companies (Citco)
Private funds GPs, by and large, have navigated recent unpredictability and unrest with plenty of skill and grace, but the experience has no doubt left them re-evaluating their assumptions.
And their LPs are no different. A rigor in reporting and LP servicing that may have been spurred on by the 2008 Global Financial Crisis has now become the accepted standard. The result has been a boom for outsourcing, with an army of service providers constantly upgrading technology, processes and talent to meet their clients’ needs.
This is bound to continue, according to Claudia Bertolino, head of private equity and private credit, fund services of the Citco group of companies (Citco). With 20-plus years of experience, she predicts that the standards for asset servicing will only continue to rise.
Are you seeing growth in the number of clients, growth in the scope of services current clients are requesting, or both?
Both. Absolutely. Among alternative assets, private equity has a longer history with keeping fund services in-house, when compared to more liquid strategies. In the past, they might have tried to keep up with a growth in AUM by hiring more personnel, but the volume of work has increased so quickly, technology and automation have become the key solutions. And that’s led a lot of GPs to reach out to service providers who have been able to innovate and master the best technology and systems to do that.
Also, as GPs move into new strategies, they’re asking us to match their own complexity, servicing those new asset classes as well. And for us, there are synergies to be had across multiple asset classes, although it should be noted that there are challenges unique to each.
What challenges are unique to private equity?
The complexity of the fund structures without a doubt, as well as the tendency for funds to be domiciled in more diverse jurisdictions. Then there’s the increasing level of complexity in regard to waterfall calculations (particularly among funds with a high transaction volume, where the treatment of recycled proceeds, current income, and multi-tiered preferred return structures impact not only carried interest calculations, but also overall portfolio performance when calculated as an IRR or MOIC). And as more large allocators are requiring side-letter provisions as a contingency for their commitments into the funds, back-office calculations are becoming more and more integrated into front-office decision making.
It seems that, as much as PE has grown, it resists commodification. This resistance must make developing any kind of uniform reporting standard difficult, no?
Right, and of course investors don’t want to wait for their data to arrive. One of the most common requests we get from GPs is to find a way to compress the timeline for reporting, without reducing the quality or quantity of the data, and that’s something we’re proud to say we’ve been able to do for a lot of clients. Speed is just as important as the accuracy or amount of information – and that’s true regardless of the specific kind of private funds we’re talking about.
In regards to standardization in reporting practices across the private equity industry, there has been some progress but more needs to be done. For example, ILPA’s reporting template is one whereby various stakeholders worked to establish a standardized framework and, with the support of ILPA, the widespread adoption of that standard by many in the industry showcases that a uniform standard can exist for private equity.
However, as alternatives continue to be a desirable asset class for investors, the demand for more data and better transparency will only continue, so the need to establish further standardized frameworks across the industry is key going forward.
How crucial is it for managers with varying industry, asset class and geographical foci to choose a nimble asset service provider?
It’s mandatory. GPs should be picking the service provider for where they’re headed, not where they are. This means that, as an asset-servicer, we’re not just servicing a client’s current needs. We have to be proactively helping to identify the next big opportunity to enhance their offerings and better support their LPs. We’re seeing GPs starting new strategies and funds that are outside the normal asset classes they would have previously been focused on. It’s important to pick a service provider that has not been singularly focused on one asset type alone, one that has a wide range of expertise and specialized technology to handle the nuances of these multiple asset types. Innovation is a necessity here. And the large, scalable nature of a player like the Citco group of companies (Citco) can be tapped not merely for “follow the sun” efficiency, but also for jurisdictional expertise in the global centers where a GP is likely to expand in the future. In some ways, we can share experience or help them think through all the issues around say, domiciling that new fund in a jurisdiction they have not launched a fund in previously.
We end up becoming a partner in strategy, not simply administration. And those strategic conversations that tap into the knowledge base we built by servicing so many different clients in so many strategies in so many jurisdictions are what allow our clients to be informed by the best practices around whatever they plan on doing next.
What role has increased regulation had in driving volume and complexity in asset servicing needs?
We’ve seen regulatory attention to be sure, and it might play a role, but my sense is that LP needs and demands have been the major driver here, although I should point out that the situation bifurcates between North America and Europe. Let’s say a US private equity manager launches their first fund domiciled in Luxembourg, then regulatory requirements will be making the administration more complex. It’s a bigger driver in Europe, where GPs want help with compliance, which is a matter of both complying with any relevant regulations and reporting to the appropriate authority in a timely and accurate fashion.
What do you expect to see in your industry in 2023?
We may see some further consolidation, even if that’s been a common theme for years now. I expect that to continue, but not for us at Citco. It’s simply not the path we’ve traditionally taken, given that often there’s an onboarding period with any acquisition, where the administrator is trying to access the synergies that warranted the deal in the first place. And that’s time taken away from clients, and away from innovation. We want to spend our time and money innovating even better technology and processes, rather
than trying to integrate our latest acquisition.
The reason that innovation matters so much is that our clients are raising the bar, too. It’s not just LPs dragging their managers into the future. GPs are looking to get faster, more robust, more flexible servicing models in place. And that’s not going to change, even if we find ourselves in the best period of performance we’ve seen in 50 years – the bar is set for asset servicing, and it won’t be going any lower.