Fund managers prepare for fitness test
Not everyone enjoys the effort needed to get into shape, but it is often necessary to reap the long-term benefits of good health and improved performance.
The same notion can be applied to alternative investment funds. As financial markets react to a vaccine-led economic recovery – and with allocations to alternatives expected to continue to increase –, fund managers would be wise to ensure that their business is operationally fit so they can act swiftly to swoop on attractively priced assets when the time comes.
Many asset prices were hit hard by the downturn whilst fund managers and investors, who had been waiting for more certainty, were happy to sit on record amounts of dry powder until they were convinced of more favourable market conditions. The release of this pent-up capital into the system is and will continue to drive a significant amount of activity.
Managers will also need their operations to be in shape to navigate the challenges that lie ahead. Against the backdrop of an increasingly complex global regulatory landscape, margin pressures and investor demand for transparency, fund managers will want to instil operational efficiencies to build their competitive advantage. While CFOs and COOs have been unable to control asset values during the pandemic, it has given them the opportunity to take a step back and consider their own operating models and find ways to reduce inefficiencies and costs.
Outsourcing the key to operational fitness
Whether fund managers choose to manage everything in house, fully outsource their fund administration and accounting functions or choose a blend between both, the pandemic has required them to take a long, hard look at their operational model and service providers to identify where and how they can improve.
Outsourcing can be part of the solution. It can free up manager time to focus on their core competencies of managing investors and investments. Research we conducted earlier this year showed that 72% of fund managers expect outsourcing to play an even more central role for the industry over the coming three years. However, any outsourcing arrangement is only as good as the partner selected, the success measures and the core competences that they bring, so making the right decision on a provider is vital to unlocking these efficiencies.
Fund managers will increasingly be looking for not just outsourcers with deep knowledge and expertise of both processes and asset classes to share their administrative burden, but partners who can proactively come up with ideas that will enhance the operational performance of their funds. An ideal partner will offer a winning combination of global reach and scalability, especially through use of the best technology and common data standards, but also maintain the ability to provide a high touch personal service.
Getting into shape for the future
Alternative fund managers need to be able to respond quickly to market opportunities. For example, real estate managers should be in a position to acquire property assets whilst they remain attractively priced. Therefore, their business needs to be agile and scalable. This can be hard to maintain amid increasing demands on fund managers to keep on top of regulatory changes and all the other administrative demands in their in-tray.
There are likely to be buying opportunities presented by distressed investments as they struggle with loan breaches in the wake of the pandemic. Again, fund managers need to move quickly to pick up on the opportunities but they may not have the relevant experience or expertise in-house to deal with restructures or insolvencies. Our research with capital markets professionals showed that, while 87% were implementing direct lending strategies, only 47% had confidence in their loss recoveries.
COVID-19 forced many managers to re-examine their operating models, processes and procedures to find efficiencies and cost savings. With valuations under pressure, they have been looking at ways they can control costs, operate more efficiently and in some cases respond to seismic changes in their customer bases by completely pivoting into new markets. This is likely to continue and firms will be looking for investment as well as help to do so.
Outsourcing is one solution but it needs to be implemented effectively. Fund managers won’t outsource for the sake of it. If it is too expensive to outsource and the efficiencies aren’t expected to counter that then they will likely keep the functions in-house. Size also matters. First-time funds often prefer a one-stop solution from their outsource provider because of economies of scale. Larger and more established funds are less constrained and can balance the risks by partnering with several providers.