Cutting through complexity

As operations become more complex, private equity and real estate investors are seeing the advantages of outsourcing

First movers among Europe’s private equity (PE) and real estate (RE) investment firms are moving to outsource administration. Although the trend is still in its early stages, the number of requests for proposal (RFPs) has increased notably in the past six months, and a few early mandates have already been issued.

With operating complexity mounting, managers are questioning whether continuing to build in-house capabilities is a good use of resources. Some managers are in fact concluding that entrusting the task of administration to third-party specialists is a better use of internal resources and will allow fund managers to get back to their own core competencies: raising and investing capital. Ultimately, discussions with many industry insiders point to a re-engineering of the PE and RE fund operating model, which to date has been largely self-administered.

Causes of change in the industry

At Citco, we believe that the complexity of fund operating models will not only continue to accelerate, but also will create a permanent change in the dynamic of the industry. Our experience shows that fund managers have faced huge increases in the complexity of their operations, as a result of both expanding their product offering into non-traditional PE and RE investments (e.g., credit, middle-market, infrastructure) and increased regulatory reporting requirements (e.g., AIFMD and FATCA). FATCA, in and of itself, might oblige a large PE firm to register several hundred special purpose vehicles.

As if this were not daunting enough, the largest investors – and their intermediaries – have become far more demanding in terms of reporting. Investors tend to receive more detailed quarterly reports, with extensive capital account statements, which are delivered just a few days after the quarter end. The result: far more customisation and less standardisation.

For managers, rising to the challenge is time consuming, expensive and difficult. Citco’s PE/RE service model allows managers to take advantage of Citco’s specialist expertise and scale, as well as the corporate governance benefits of having an independent party in charge of investor reporting.

Developing proprietary reporting tools

Citco’s PE and RE clients also gain access to the most up-to-date technology solutions at a time when the cost of technology is rising significantly. Citco invests approximately 15-20% of revenues in technology each year. This allows Citco to invest in not only the best off-the-shelf solutions, but also to develop customised proprietary solutions to supplement the out-of-the-box capabilities of the off-the-shelf solutions.

For example, Citco has recently introduced an automated AIFMD reporting tool and is currently developing a fully-automated proprietary waterfall solution.

Finally, Citco employs outstanding specialists in the field of PE and RE administration as a critical component of its fund services business. These specialists ensure that Citco continually improves its products to meet evolving client demand. As one of the leading specialist fund administrators, Citco can offer talented individuals rewarding careers that might not be available from a PE or RE manager.

Meeting new operational challenges

At a time when new operational challenges are constantly emerging, Citco’s broad market experience is invaluable and allows it to identify and address ever-changing investor concerns and requirements.

Citco actively maps client or regulatory concerns, aiming to spot trends early, informing our clients and developing solutions. For example, if investors’ questions suggest they are unhappy about a particular area of service or disclosure, Citco will alert the GP so it can act appropriately.

In time, increasing numbers of PE and RE managers will benefit from the abilities of specialist administrators. The past six months’ acceleration in RFPs indicates that demand for outsourcing is building. The market has yet to reach a tipping point, but the trend is clearly noticeable.

Our contacts

Claudia Bertolino

Claudia Bertolino

Head of Private Equity and Private Credit,
Citco Fund Services (USA) Inc.

T+1 212 551 3251
LNew Jersey, USA