Private Equity set to accelerate Fund Administration Outsourcing and Automation

29 June 2020 - The reduction in economic activity due to the lockdowns enforced by governments in response to the Covid-19 pandemic have affected private equity significantly. One trend that might be exacerbated by the recent ‘new normal’ is that of outsourcing. AlphaWeek’s Greg Winterton spoke to Nik Perros, Head of Private Equity at fund services provider Citco Fund Services (USA), Inc., to understand trends in the PE fund administration space.

GW: Nik, the current environment is an uncertain one for private equity GPs, with valuations of their portfolio companies set to fall significantly. How is this impacting trends in the fund administration space?

NP: We see the uncertainty that has gripped the world, as exacerbated by current events amongst other things, as a continuing part of the evolution of business and society in general. With respect to the impending change impacting the participants in the alternative investment arena, we see that this evolution will also apply to outsourced providers. We believe that what was already a significant shift in practice away from an internal administration function will only accelerate the outsourcing of administration in the private equity sector going forward. The principal considerations contributing to the existing mind-set - such as efficiency, scalability, leverage and cost reductions – will be further enhanced in the post-pandemic world.  

With Q1 ’20 reporting closed, what is evident is that portfolio company valuations have dropped between 10%-20%, with significant risk for additional decreases if lock-down and its after-effects persist over the longer term. Valuation decreases of this magnitude are putting pressure on all managers to look harder at their business and consider alternatives with respect to investment strategy, operations and administration. Even in an eventual recovery scenario, reduced valuations will further serve as an impetus for managers to lower their cost profile across the various aspects of their business in the near future.

GW: Covid-19 or not, there has been an increasing trend in recent years of PE firms moving towards a more automated fund administration model. Which areas of the business is this impacting the most, and why?

NP: Pandemic aside, the move towards a more automated administration model had been gathering pace in private equity in recent years, particularly with respect to fund-raising activities and the related subscription processes, including AML and KYC. We believe that the move toward automation will only gain further traction in a full or partial remote-working environment. While virtual data rooms have already largely replaced human interactions when it comes to data room management and paper-based documentation processes on subscriptions, the continued automation of other administration functions will further decrease those interactions (this time inclusive of the third-party administrator personnel). This will benefit both GPs and LPs via substantial time savings, cost reductions and a more seamless overall experience.

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Nate Goodman

Nate Goodman

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Citco Fund Services (USA) Inc.

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