Maples Fund Services
AST hears from Maples Fund Services senior vice president Karen Watson and Koger COO Ras Sipko about fund onshoring and administrator growth
Why has there been a trend towards onshoring of funds and how has this benefited Ireland?
Ras Sipko: According to the IFIA (Irish Fund Industry Association), more than 40 percent of hedge funds are being serviced from Ireland, making it the world’s biggest administration centre. From our point of view, this is no coincidence as there is a suitable framework in place to provide lower tax, a greater distributor network and a transparent regulatory framework—just to name the few. While offshoring will never completely go away, with wages sometimes being 75 percent cheaper than those near home, it’s hard to imagine that costs won’t still play a major role. The trend of onshoring, as service providers look to provide a high-touch service to their clients, is having a positive impact on the local Irish market, as one would expect.
How has asset volatility affected fees in the business?
Karen Watson: Other than the natural fluctuation of all asset-based fees that are directly affected by volatility, including administration and management fees, post-crisis, we are also seeing fee structures in funds following strategies with high volatility, that may have slightly lower fees or are structured to have longer crystallisation periods, and even claw-backs in some instances. From the administrator’s perspective, with many start-up funds that are launching with lower asset bases, fees are at minimum levels, hence fees are not affected so much as the cost drag on the funds.
Is more frequent and detailed reporting always necessary?
Watson: Perhaps not always necessary, but there is certainly a need for appropriate frequency and detail of reporting based on the nature of the fund that is generally more than what was seen pre-crisis. The credit crisis revealed invisible risks in funds and there has been a definite shift to increased reporting designed to identify and continuously monitor contributing factors to risks specific to the fund. Investor demand for increased transparency and liquidity has driven more frequent and detailed reporting as well, and lastly, fund administrators are typically providing a level of reporting that is used by managers in the investment decision process, often on a T+0 basis, rather than solely providing NAV calculation and transfer agency services.
Sipko: We would break that into two components. While it is important to be transparent to one’s investor base by providing more detailed reporting, the frequency at which it is done needs to correlate with the investment strategies deployed. Investors are asking for more details, and managers are given little choice but to comply. Even on the compliance side, there is a greater need for more detailed reporting. The ability to provide more detailed reporting to investors can be used as a competitive advantage through technology, providing more robust online access to key information and adding ad-hoc reporting to their suite of services.
What sort of revenue growth are you predicting over the next year?
Sipko: We’re predicting revenue growth will increase modestly across the market over the next few years in line with economic growth. As managers adapt to more robust compliance requirements, the burden will shift on administrator that will provide for further revenue. Over the past few years, administrators were forced to find efficiencies and to reduce cost while revenue suffered. With a more positive outlook on the economy, more capital is expected to be deployed to alternatives that should also help with additional revenue.
What sorts of technology are you investing in for the future?
Watson: We are continuing investment in efficiency initiatives, including enhancements to automated data management systems, as well as electronic workflow systems that allow increased functionalisation of tasks to increase efficiency while simultaneously increasing risk monitoring capabilities. We are also looking at system enhancements specific to regulatory drivers, such as the Foreign Account Tax Compliance Act, the Alternative Investment Fund Managers Directive and Form PF.
Sipko: Technology is changing very rapidly. We have been keeping a close eye on cloud computing and see a lot of potential there. Also, going back to reporting, it’s been a key area for us to continue to focus on transparency between managers and investors, whether using our online portal to allow access to anyone or our KORDS product that streamlines reporting tasks for fund administrators. In addition, we continue to invest in research to provide a fully automated, event-driven system that will eliminate processing delays for bigger organisations.
Are you seeing growth in private equity administration?
Sipko: We believe that growth in private equity is increasing and will continue to do so. While private equity does bring challenges of its own, it is an important new service line for administrators. We certainly see awareness between administrators of the challenges that private equity administration brings, but it is a challenge that they are willing to take on. Outsourcing administration of the private equity fund certainly provides more a effective cost solution, lower risk and greater transparency.
Watson: Private equity is always challenging to automate, in particular the profit and loss allocations and carried interest waterfalls. We are investing in proprietary solutions that provide the flexibility to deal with client nuances, but with the control and efficiency of automation.
Why is client profitability vital to a fund administrator’s business model?
Sipko: Profitability is vital to the administration industry as it encourages further re-investment in efficiencies and automation. Efforts on promoting further automation will reduce risk, improve service and ultimately benefit both managers and investors. We see that through reinvestment of some of the profits our clients are able to deliver greater volume of information in less time with fewer staff.
We are also seeing administrators focusing on more complex products that might have a higher margin and provide a higher retention rate. Leveraging technology to drive automation ultimately keeps costs low and provides better service. Koger, with its suite of products, is positioned to benefit from this way of thinking because we have systems that are designed to support the most complex funds and are continuously looking for ways to drive efficiencies into the administrator’s work flows.
Watson: A fund administrator’s revenue is asset-based and therefore growth in revenue partially relies on client profitability, which not only directly increases the assets on which fees are based but attracts new capital to clients, further increasing fees. For administrators that work with small start-up clients, where minimum fees apply and hence there is less direct impact on revenue, the track record being initially established by the fund will determine that fund’s ability to attract capital and grow to a level that surpasses minimum fee levels.
