As new paths open for private capital’s growth complexity increases for the fund operations team.
Private capital continued a historic stretch of growth through mid-2022 despite inflation and geopolitical conflicts. Then midyear, as high inflation persisted, central banks increased interest rates and headwinds intensified, setting up new challenges for dealmakers.
To gain a deeper understanding of evolving challenges, we conducted extensive, exclusive research with more than 150 leaders and heads of private capital firms. The result is a comprehensive report that sets out the next-generation operating framework for private capital.
In a more competitive market fund managers will have to work harder to find opportunities and investors. More creative deal-making will be the order of the day. For those who are resilient and innovative in deal making and developing new types of fund structures fresh prospects will arise.
But these efforts will be undermined if fund operating models are not prepared for the new complexity appearing on the horizon. Stretched back offices will be pushed even further – making it a judicious time to take a closer look at how to augment the function for more complex structures.
The retailization of private capital
With high interest rates and subdued stock markets investors have limited alternatives. And retail investors are less discouraged by five or 10-year private equity lock-up periods than they once were.
But retailization of the sector brings new challenges. Stock market investors have grown accustomed to easy access to detailed information through self-serve portals and sophisticated online tools.
They may be surprised by what they find in private capital. Away from the largest asset managers, this sector is still largely run by spreadsheet. As fund managers seek new investor groups, technology becomes a differentiator.
Private equity trails behind hedge funds, but fund administrators will come under increasing pressure to offer instant-access technology platforms and bespoke reporting capabilities to attract data-hungry investors.
New investor groups in private capital
The retailization of the sector will also lead to greater regulatory obligations. Private capital has traditionally been the preserve of institutions. Now it is drawing in investor groups that require more protection.
Funds must prepare for greater oversight, as regulators respond to private capital’s growing impact on the wider economy. With international expansion as another path to growth, they’ll need to keep abreast of new rules and regulations as they emerge around the world. Ambitious fund managers understand that one way to sidestep fierce competition in a single jurisdiction is to operate globally.
For example, the next great investment for a U.S. private credit fund might be in a wind turbine manufacturer in the Netherlands. A regional fund administrator would need to know the rules around operating a special purpose vehicle in Europe. And if their next investment target is an Indonesian auto parts business, that’s a whole new set of regulations to understand.
Private credit comes of age
At the same time, they are spreading their wings internationally, private capital funds are stretching them creatively. If private equity enters a period of slower growth, fund managers will be forced to find evermore imaginative ways to deploy accumulated capital.
Private credit, for one, has grown exponentially over the last few years. Real estate and infrastructure also offer opportunity. But private credit deals tend to be highly bespoke. The responsibility for maintaining and overseeing them will lie with hard-pressed fund administrators.
A new era of complexity in private capital
All of this adds up to new complexity for your back-office team—if you have one. There are more than 25,000 private equity firms globally and many have no real operating model. As growth targets push firms into more niche and complex areas, that will have to change.
At the top end, large players with established operations will be in the vanguard of chasing international opportunities and attracting new investor groups. Their priority is to streamline operating models, so back-office inefficiency doesn’t become a drag on growth. On the other end, emerging managers will need to build an institutional operating model to attract sophisticated investors and have the flexibility to deploy capital anywhere without being delayed with operational and regulatory matters.
In either case, doing nothing isn’t an option. Private capital has had a charmed life up to now. But in more straitened circumstances, fund administration must become more streamlined and cost-effective as firms pursue rockier paths to success.
Download our full report, Introducing the Halo Framework, here.
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.