Innovation and maturation happen in waves. As an industry matures, what was once considered groundbreaking becomes standard, early adopters lose their advantage, and leaders seek the next innovation that will once again catapult them ahead of the competition.
Nowhere has that maturation cycle been more evident than in private capital. Decade after decade the industry has faced existential setbacks only to emerge stronger and more resilient than ever. Much of that resilience is attributed to the industry’s ability to consistently generate higher returns. But there’s a deeper story about the evolving role of fund services, which have enabled alternative asset managers to grow stronger, enhance credibility, and bring operations into closer alignment with the prevailing standards of the public markets.
Alternatives hit the mainstream
For more than two decades, alternative assets under management (AUM) have grown year over year. The private markets have now weathered the dotcom bubble, the 2008 global financial crisis, and the pandemic, reinforcing several times over the resilience of this asset class and its ability to generate alpha, even in volatile markets.
Growth estimates reflect this reality. According to Preqin, global investment in alternative assets is expected to grow from $12.5 trillion AUM to over $20 trillion AUM by the end of 2025.[1]
Shifting perceptions
Globally, alternative AUM has soared as investors seek to diversify their portfolios and optimize returns. In the U.S., private equity “plays an important role in our financial markets and the lives of everyday Americans” according to the U.S. Securities and Exchange Commission (SEC).[2] In Europe, private equity AUM increased by 13.6% between December 2019 and 2020 to reach €2.06 trillion.[3] Private equity investments in Asia-Pacific have grown even faster over the past decade, to $296 billion and a 30% share of global AUM at the end of 2021.[4] The recent broadening of the SEC’s definition of an accredited investor and similar efforts to open private equity funds to “non-professional investors” in Europe and the UK could accelerate the growth trajectory even faster.
Need for scale
These realities impact the fund life cycle in several ways on a global scale. They create an urgent need for processes and frameworks that scale without introducing more risk or opacity into operations across the fund life cycle. Whether a fund manager chooses to launch a larger fund or expand into new strategies or jurisdictions, they need to lean heavily on fund service partners who can support best practices on structure, investor onboarding, compliance, depositary, custodial, and liquidation to ensure the most advantageous and orderly progression for the fund.
Investor expectations
But the most important element is the administration of the fund because it is fundamental to the investor experience. Competitive returns are important, but as the alternative asset class matures, investors want to see reporting frameworks and technologies that signal a commitment to transparency, responsiveness, and flexibility in reporting and communications. And as a new generation of allocators, used to the retail experience, begin to evaluate alternative options, a different set of expectations about the investor experience will exert pressure on the fund managers who need to compete for their commitments. The most successful fund managers will be those who recognize that the private markets have reached an inflection point. Where they could once rely on past performance to attract future allocations, now they must focus on building a trusted brand and delivering a consistent, highly responsive experience across the entire fund life cycle.
The inevitable price of success
The mainstreaming of alternatives is transforming opportunities for fund managers and reshaping the fund life cycle. When alternatives played a small but vital role in the asset allocation strategy, they flew under the radar. However, as their impact on and contribution to the financial markets and the economy deepens, private markets are drawing deeper scrutiny and greater oversight from regulators and investors alike. As a result, fund managers must be ready to adapt quickly to meet regulatory requirements and evolving standards.
Regulatory agility
Regulatory bodies such as the SEC, the Internal Revenue Service (IRS), the European Securities and Markets Authority (ESMA), the Organisation for Economic Cooperation and Development (OECD), and the Monetary Authority of Singapore (MAS) are all moving toward greater oversight for the private markets. Anti-Money Laundering (AML) regulations governed by the Financial Crimes Enforcement Network (FinCEN) and overseen by state and federal bank legislators and other agencies, will continue to increase under the Anti-Money Laundering Act of 2020.
With each new regulatory requirement, funds must process more documentation and collect, secure, and report on more data. What was once a midlevel activity has become a complex, high-stakes function where specialist expertise is required to ensure compliance. New roles such as the Money Laundering Reporting Officer (MLRO) have emerged to ensure the entire fund life cycle remains compliant with current regulatory requirements and flexible enough to adapt quickly to changes.
Evolving standards
Beyond regulatory requirements, a host of other standards are exerting further pressure on the fund operations. While these standards are not always compulsory, they have become the benchmark against which fund managers are evaluated, and investors are increasingly referencing these standards in their due diligence and decision-making.
Read more about these standards and their impact on fund operations in the full insight report: The Next Evolution in Private Capital
How CSC helps
CSC is the trusted partner of choice for more than 90% of the Fortune 500®, more than 90% of the 100 Best Global Brands®, and more than 70% of the PEI 300. We provide tailored administration and strategic outsourcing solutions to support the complex world of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance.
Founded in 1899 and headquartered in Wilmington, Delaware, USA, CSC prides itself on being privately held and professionally managed for more than 120 years. 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®.
[1] Preqin Special Report: Service Providers in Alternative Assets, 2021.
[2] SEC, Private Fund Proposed Reforms Fact Sheet, 2022.
[3] EY, European Private Equity snapshot at the end of 2021.
[4] Bain & Company, Asia-Pacific Private Equity Report 2022.