Expect an uptick in activity as fund managers rush to deploy dry powder.
The beginning of 2023 may be the calm before the storm.
In private equity, valuations are down and deal-making remains sluggish. Asset managers are keeping their powder dry for the right moment—and there’s a lot of dry powder around.
Most recently, 2021 was a record year for global buyouts, and 2022 beat the past five years, despite activity declining steeply at the end of the second quarter. But this slowdown will not last forever. Sooner or later, valuations will drop to an enticing level and a rebound will begin.
When it happens, deals will be rushed through the door as managers compete to deploy stockpiles of capital in the most effective way. Managers will want to focus on investment activity and not back-office administration—and now is the time for them to address administrative issues. The sprinters are in the blocks awaiting the starting gun. With that in mind, here are five predictions for fund management in 2023.
- Economic uncertainty produces growing complexity
When the starting gun fires, deal-making and fundraising will explode into life.
With so much dry power around, competition will be fierce. That will lead to innovation in asset classes and the targeting of new investor groups with family offices receiving increasing attention.
Private equity is an ever more regulated space, so this drive towards novelty will create complexity for managers and administrators. Bespoke contracts and structures will bring opportunity at the expense of simplicity. We predict that this complexity will increase the burden on back offices significantly.
- Regulatory compliance will focus on the bigger picture
Regulators will keep a close eye on developments as private equity funds extend their fundraising reach.
Regulators continue to focus on anti-money laundering (AML) and the prevention and detection of other possible financial crimes. We see this in Jersey, where the local regulator is broadening the scope of anti-money laundering regulation and has increased the number of financial services businesses that come under its scrutiny.
Jersey is acting ahead of an expected MONEYVAL review that will take place in Q3 of 2023—but focus on AML compliance is global.
The landscape for managers is increasingly complex. They deal with increasing AML, countering the financing of terrorism (CFT), countering the financing proliferation of weapons of mass destruction (CPF), and sanctions requirements; asset-specific complexities such as increasing state controls on microchip manufacturers; and the relaxation of state aid rules in Europe for green energy.
- The people problem isn’t going away
Administrators have been competing to recruit talent since the start of the pandemic. Most have exhausted obvious initiatives such as flexible working models and increased pay.
And the problem remains. The answer may be the wider implementation of automated processes that remove the burden of basic but labor-intensive tasks from hard-pressed teams.
But that is no magic bullet. Automation requires a skilled workforce that can run the systems and manipulate the data they produce. It requires people who can spot errors and fix them quickly.
Automation can lead to efficiencies and allow funds to do more without adding to human resources costs. But it must be accompanied by a corresponding sharpening of skills. Automation with education will be a key theme in 2023.
- The flight to quality is on the runway
With fund administration, you really do get what you pay for. Despite a well-documented squeeze on fees, we predict a flight to quality in 2023 as managers and investors see the value in skilled and well-resourced back-office teams.
Without skilled and motivated staff, back-office processes are slower and more error-prone. Under-resourced operations teams don’t have the capacity to anticipate problems before they arise or find extra insight in complex data.
Fund administration can drive better decision-making and reduce business and regulatory risk, but not at bargain basement prices. More new managers will see that for themselves in 2023.
- There will be an increased focus on the back office
All these themes coalesce into one overarching trend: greater focus on the back office. When economies thrive, businesses tend to focus on revenue and profit. In a downturn, forward-thinking funds focus on creating efficiencies.
In 2023, fund administration will be at the heart of that. Managers increasingly realize that an efficient back office can drive funds forward without piling on cost.
The administrative burden is growing in private equity. This year will be about equipping teams to meet that challenge in a cost-effective way.
Why CSC
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.