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PE firms should be wary of scale for scale’s sake

The most significant downside of an increasingly large fund administrator is that customer service may fall by the wayside.

By Reid Thomas, JTC Americas

The wave of M&A in the fund administration space, buoyed by an influx of new private equity firm clients, has gained steam for a number of good reasons: a rising demand for services as the market for alternative asset classes explodes and regulations tighten; the benefits of scale, both globally and technologically; mounting cybersecurity threats and the pressure for more transparency – to name just a few.

Reid Thomas, JTC Americas

Yet while it’s certainly true that acquiring another fund administrator can often help meet some of these needs, not all large fund administrators are created equal. In other words, interested PE firms should understand a critical distinction: between a fund administrator who seeks scale for scale’s sake, and one that grows strategically via acquisitions (not just of other fund administrators, but ancillary companies) from which clients tangibly benefit.

This is important because fund administrators leaning towards the former route risk sacrificing the very principles that their PE firm clients today require the most: first-rate customer service, specialty and impact fund administration expertise, and the ability to quickly innovate and adopt new technologies.

Here’s why.

First-rate customer service

The most significant downside of an increasingly large fund administrator is that customer service may fall by the wayside. It’s only natural, after all, that when a company grows it will put its best people on the biggest clients – which may leave others feeling like they’re not getting the customer service they deserve.

As Jill Calton of UMB Fund Services put it, “We’ve seen some private equity firms enter an RFP process because their administrator lost personnel or feel they’re not getting adequate attention now that they’re a smaller fish in a much larger pond.”

These issues can be exacerbated by the slower response times and added convolutions that can come with a larger company’s bureaucracy. What’s more, the merger itself (and its associated synergies) often creates service issues, be it the removal of some operational overhead items to cut costs or hiccups in adopting an entirely new IT infrastructure.

Fund administrators who scale with specific, client-centric purposes in mind – and who, no matter how big they get, promote a collaborative, one-team approach – are more likely to avoid these pitfalls. For PE firms in need of personalized, responsive, and comprehensive customer service more than ever before, it’s vital to take these factors into account.

Specialty and impact fund administration expertise

The pandemic catalyzed a drastic increase in ESG and impact investing – and PE funds took notice. As of last October, 700 firms had signed onto the Principles of Responsible Investing, a UK-based organization that promotes ESG factors in investment decisions; a recent survey of UK PE funds, meanwhile, found that nearly two-thirds now take ESG into account.

But for this rapid adoption of ESG principles to have a real impact – and to avoid claims of “impact washing” – PE funds will have to work with fund administrators with deep expertise in highly regulated fund types, complex regulatory requirements, and world-class impact measurement capabilities.

Just because a fund administrator is large doesn’t mean it has the specialty fund administration experience necessary to provide the impact reporting and measurement know-how PE funds need. Thus, PE firms should look for fund administrators who made strategic acquisitions – for instance, of ESG consultancy and/or reporting servicers – in order to stay competitive in today’s evolving marketplace.

The ability to quickly innovate and adopt new technologies

The digitization of PE firms has tended to lag behind comparable industries, which is why the technological capabilities of their fund administrators remains such a draw.

What’s more, pressures to adopt cutting-edge technologies has only increased, going beyond automating calculations and cybersecurity protections and towards interactive, purpose-built online portals that allow managers and their investment partners access to data in real time.

The ability to seamlessly deliver such technologies – and constantly innovate on them – can be difficult for a fund administrator that’s growing merely for scale. During big mergers, for instance, organizations will likely have to rationalize two (or more) different technological systems for any given task. Seeing as most fund administrators are themselves not really technology companies, this integration can either make it more expensive for clients or reduce the efficacy of their offerings.

Fund administrators who grow with purpose are more capable of ensuring smoother transitions on behalf of clients. They’ll also have made acquisitions of specialty technology companies who can accelerate – rather than inhibit – technological development and in-house engineering functions.

Amid the present consolidation craze, it can be tempting to lump all fund administration-related M&A into one bucket. But as the PE industry becomes more focused on specialty funds and ESG – and more reliant on technology to help report and measure their efforts – it’s important that firm leaders identify fund administrators who have grown simply for scale’s sake versus those who have made strategic, client-focused acquisitions.

Reid Thomas is Chief Revenue Officer and Managing Director at JTC Americas.