With buyout shops facing increasing compliance burdens and investors seeking more and clearer information about their funds, big custody banks such as State Street Corp see new opportunities in alternatives, says Bhagesh Malde, a senior managing director for the Boston-based institution.
“Our primary focus on this sector is as a fund administrator,” said Malde, who is global co-head of the private equity and real estate services for North American and Asia Pacific in State Street’s alternative investing services unit. The bank offers middle office and back office services, delivers quarterly reports to LPs and can coordinate capital calls and distributions for fund sponsors.
Its clients also include pensions, sovereign wealth funds and endowments, as well as GPs, Malde said. “We provide performance and analytics reporting to help LPs understand how their investments are performing.”
Institutional investors often ask State Street for help in analyzing risks, to decide whether their investments actually meet their goals, Malde said. “While there is a demand for more data, when you supply that data, often it is hard to understand.”
In a survey conducted in July for State Street by the alternative-asset data provider Preqin Ltd, 52 percent of respondents said that investor demand for greater transparency from their funds would be the biggest driver of change in the alternatives industry over the next five years. Among other things, large shares of respondents said they would add new investment strategies and offer managed accounts to investors.
As they are pressed to do more for their investors, fund managers are likely to see greater benefits in outsourcing, Malde said. “They are not in business to have a big middle and back office. They are in business for their investing skills.”
The second largest driver of change will be increased regulatory scrutiny of alternatives, which 36 percent of respondents cited.
To be sure, State Street is not the only bank trying to seize the opportunity in alternatives. Citigroup Inc announced in September that it has reached $500 billion in alternative assets under administration, comprising more than $300 billion in hedge fund assets, and more than $200 billion of committed private equity capital.
Malde estimated that only 30 percent of buyout firms outsource their back-office work today, probably similar to the position hedge funds were in 10 years ago. Today, more than 90 percent of hedge funds outsource back office work, he said. “The same sorts of things are happening on the private equity side. It’s a little bit slower.”