For super funds and their advisers

Challenges in fund admin with mushrooming private equity

Martin Smith

You’d have to say the global private equity market is going gangbusters. Whether or not that’s good for investors is a different question, of course. But when a fund administrator, such as Mainstream Fund Services, has its say, it tends to provide an extra degree of authenticity to the discussion.

At the latest in its series of breakfast discussions for clients and investors, in Sydney last month, Mainstream focused on private equity from both a market and an operational perspective. Increasingly a global company itself, the ASX-listed Mainstream even has a chief executive for private markets based in New York, Jay Maher.

Maher told the audience that there was large volume of new funds and assets coming into that part of the industry. “We access a data source which scrapes all the SEC filings,” he said. “That shows that there is US$15.733 trillion in assets [in private equity], which is up 14.5 per cent in the year to January 2018. There are 52,255 funds, which is up 7.19 per cent.”

Martin Smith, Mainstream’s CEO, said that the growth in private markets investments, including real estate and venture capital, as well as private equity and debt, has put extra strains on operations. Apart from the less-frequent and often private valuations for the asset class, there were other differences compared with open ended funds which needed to be addressed.

He said: “”Institutional investors are focused on operational compliance and governance but a manager could be running a single asset with 15 investors on a spreadsheet. I have seen it in billion-dollar managers. It’s frightening.”

Mainstream has had the challenge, and consequent benefit, of being the administrator for Magellan Group funds since that firm’s inception in 2006. Magellan was the pioneer in the active ETF space several years ago, which required re-negotiating the landscape with the ASX and ASIC. It has also been the fastest-growing Australian-based global manager almost since inception.

Smith said: “There’s a debate on whether you can run VC, PE, RE funds in an open-ended structure. They are typically closed-ended structures. The big challenge is how do you amortise the set-up costs equitably. You might have one building or one investment that incurs an up-front cost. So there are some challenges around how you amortise or treat everyone equitably if it’s open.”.

Jay Maher told the breakfast audience that there also appeared to be a recent convergence in returns between private equity and venture capital, with the 11 per cent annual return last year from venture being nearly matched by the 10.6 per cent return from PE.

According to data from Preqin, the global alternatives assets research firm, he said: “We are seeing a lot of family offices coming on board as private equity clients. They are wanting to diversify into that sector. But, with the hedge fund sector, investors tend to be undecided [whether or not they increase allocations] at the moment. About 20 per cent say they are likely to reduce their allocations to hedge funds.”

Sara Gilbert, the director of operations for AltaReturn, an alternatives global technology platform, said that the industry was witnessing disruption partly because of the use of data. “Everyone wants to be able to see and analyse the data. It’s being driven by the investors,’” she said.

“We look at the asset flows and where they are coming from. A lot of the flow is from the big US endowments which are looking for institutional-grade infrastructure opportunities.”

Andrew Sharp, a partner at EY in the transactions advisory area, said there was a lot of “dry powder” in the PE world. “Investors are increasingly looking at public companies to take private,” he said.

Martin Smith said: “A recent industry report talks about 11 to 13 per cent of capital now looking for alternatives because of capacity constraints in the public market. But they don’t want operational compliance risk. Third party service providers like Mainstream minimise that operational compliance risk.”

– G.B.

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