Overview
Whether deal activity is low or not, operations teams must grapple with these challenges, not only to contain costs but also to prepare for an upcoming growth wave to avoid limiting the development of their firms.
Alternative fund operations teams are squeezed from all directions having to deliver on lower costs and building a scalable operational set-up. The private market is currently facing a phase of higher interest rates, fewer transactions, and a slowdown in fund-raising. Additionally, talent shortages, salary pressures, and limited resources to fund technology ambitions further complicate the landscape. Whether deal activity is low or not, operations teams must grapple with these challenges, not only to contain costs but also to prepare for an upcoming growth wave to avoid limiting the development of their firms.
This challenging environment has driven alternative fund managers to become more cost-conscious, forcing additional operational changes that are likely to increase complexity and impact scalability. Some common ongoing developments include:
· Fund-raising challenges: Fund managers are compelled to build increasingly complex fund structures to meet investors needs, while simultaneously providing more perks such as fee discounts and no-fee-no-carry co-investments, which add to the complexity of managing these diverse arrangements. The steep costs associated with these arrangements often become apparent when service providers need significant manual workarounds for their standard system settings.
· Lower liquidity and returns: Lower liquidity and returns are driving the adoption of more innovative structures and debt instruments, such as NAV facilities, which add significant additional operational and reporting burdens for operations teams.
· Smaller funds and sub-scale vehicles: Smaller funds and sub-scale vehicles directly impact economies of scale, pushing the expense ratios of funds higher.
As fund managers strive to enhance efficiency and scalability, the focus on operational quality has highlighted the critical role of asset servicers in maintaining quality in an environment of increasing complexity. Fund managers frequently blame service providers for poor quality and highly manual execution. This problem arises from a combination of unstructured communication between parties and insufficient technology infrastructure to orchestrate these processes that run across institutional boundaries. Also, tasks are often not clearly handed over to service providers but are instead arbitrarily assigned, leading to unmet expectations.
As fund managers strive to enhance efficiency and scalability, the focus on operational quality has highlighted the critical role of asset servicers in maintaining quality in an environment of increasing complexity.
Rather than building an appropriate technology architecture to manage the required data and processes, asset managers have reacted by building complex functional organisations with large teams that perform highly manual and repetitive oversight tasks. There are rarely any task allocation and oversight tools, most of these activities are coordinated in an ad hoc manner or by professionals that manage relatively small teams due to the complex and sporadic nature of quality issues. These teams are a primary source of control over quality issues. However, growing costs, lack of talent availability and inability to manage large volumes show limited effectiveness of such solutions, the impact of which can be seen in poor quality of deliverables as well as uncaptured mistakes that seep through to investors, auditors, and regulatory or tax authorities.
Strategic Responses to Challenges
Recognising the urgency to address these multifaceted challenges, private market firms are increasingly motivated to implement strategic operational changes and technological innovations. To achieve this, fund managers should consider the following key initiatives:
Envision an ambitious roadmap: Develop a technology roadmap that targets all key processes, ensuring a cohesive system that supports end-to-end execution, maintains data quality, and delivers reliable information to stakeholders.
Align business and technology: Mandate operations teams to shape the future operating model by collaborating with technology teams to align advancements with business objectives, ensuring innovations support operational goals.
Invest in scalable solutions: Develop a technology infrastructure that scales with growth and adapts to changing business needs, ensuring long-term sustainability and flexibility.
Integrate data into processes: Utilise data for more than just dashboarding by building a robust data architecture that automates processes and facilitates real-time decision-making and efficiency.
Start small and scale: Begin with small pilot projects to validate capabilities before larger deployments, helping to identify challenges and fine-tune solutions to meet organisational needs.
Build an agile and continuous delivery capability: Implement agile methodologies for continuous delivery and improvement, with iterative development cycles, regular testing, and robust feedback loops to quickly adapt and optimise efficiency.
All in all, once transaction volumes increase again and managers require again all hands-on deck to execute deals and raise new funds, their only option will be to solve the data-process-equation with a strong focus on end-to-end thinking and continuously building new solid and sustainable data points along the value chain. This will allow them to provide the quality within a highly bespoke system that is required by investors.
For more information, visit our .
, Partner, Alternatives Advisory Leader, at PwC Luxembourg
, Partner, Alternatives Leader, at PwC Luxembourg