General Atlantic, Hg and IHS Markit see a strong growth trajectory in back-end technology for alternative asset managers, General Atlantic’s Aaron Goldman and Hg’s Thorsten Toepfer told PE Hub.
The parties announced a joint investment in Gen II Fund on November 6, leaving GA and Hg equal investors in the company. IHS Markit, a new shareholder in the fintech provider, will be a minority owner alongside existing investor Cobepa SA.
Gen II, based in New York and Luxembourg, is a global provider of outsourced fund administration services for alternative asset managers. The company services clients in the private equity, real estate, infrastructure, energy, fund of funds, credit and retail industries.
It administers over $375 billion of private capital on behalf of its clients across more than 500 funds and their 25,000 investors, according to Gen II.
As a thematic investor, General Atlantic’s interest in the company was fueled by the growth of alternative asset classes, according to Goldman, head of financial services at GA, a growth-focused PE firm.
The more capital allocated to alternative asset investment firms, the more those firms turn to outsourced providers like Gen II to deal with compliance and reporting complexities, he said.
“We see more and more people putting assets into passive investments, such as index funds, and we also see more allocation to alternative investments, such as alternative credit and private equity,” Goldman said.
“As we see growth in assets under administration in private equity and private credit, we’re likely going to see the growth towards outsourcing of fund management and fund administration in those areas.”
Hg’s Toepfer agrees. The investor told PE Hub that fund administrators carry out some very important functions for investment managers, helping them avoid precision and compliance mistakes.
“It is a service that is very important for private equity funds solving the problems where you definitely don’t want to get things wrong,” Toepfer said.
The investor also shared that Gen II has performed “incredibly strongly” through covid-19 thus far. After experiencing volatility through the crisis, that added even more conviction to Hg’s belief in the business, Toepfer said.
“Why we at Hg liked this company so much is because it behaves like a software company from the revenue profile, so you are dealing with an end customer, which has an incredibly stable investor base,” Toepfer said.
“That customer doesn’t have very volatile revenue streams and, in the same way, is using a service provider that has very little volatility.”
The remote working environment brought on by the pandemic has increased interest in Gen II from new clients eager to try out new technology and new solutions, according to Goldman.
“The pandemic has been a catalyst in pushing people to re-evaluate how things are traditionally done – how their tech and systems work, and the efficiency of their processes and procedures – and to explore new solutions in the market,” Goldman said.
“While we can’t attribute a direct net positive impact on the business to covid, I do think that it has caused a number of firms to think even more about how their organizations operate – and this creates an opportunity for Gen II.”
GA and Hg plan to continue growing the company organically and through M&A, the investors said. The firms will also focus on having Gen II further penetrate the European market, Hg’s Toepfer added.
“The company has bought an office in Luxemburg, but [its] European share is still a small part of the company today,” the investor said.
“But our plan – and it is a shared plan with GA – is to really build out the European footprint and do that both organically and inorganically.”
GA and Hg are both experienced investors in fintech and compliance.
GA previously backed Citco, a provider of administrative and trade processing services for hedge funds, private equity and real estate firms, institutional banks, Global 1,000 companies and high-net-worth individuals. The firm exited its investment in 2018.
Hg, which invests across the tax and accounting, fintech, and legal and compliance sectors, is an investor in ATC, a provider of fiduciary, management and administration services based in The Netherlands; and in Sovos, a software provider of regulatory tax compliance.
Hg also clinched the largest software buyout ever at $12.2 billion to become a majority investor in Visma, a provider of mission-critical business software to SMBs in Northern Europe.
Hg invested in Gen II out of its latest fund Hg Genesis 9, which closed on €4.4 billion in September 2020.
Genesis typically invests in mid-market companies with enterprise values between $560 million and $1.7 billion. Hg’s typical equity check is between $200 million and $590 million and it aims to make 10-12 investments in the latest fund.