How private equity fund administration is changing

22 February 2024
The private equity sector is changing, with proliferating reporting requirements, emerging technologies, a new emphasis on attracting retail investors, and other developments.

Fund administration is evolving to address these and other realities. Middle- and back-office services are still critical to fund administration, but fund managers are also looking for compliance advice, secure and versatile fund platforms, and tax and other expertise in jurisdictions around the world.

To look at the details of how fund administration is changing, we interviewed Abdel Hmitti, managing director and global head of funds at Vistra. Abdel joined Vistra in 2024 following 17 years at State Street and more than a decade at Investors Bank and Trust. He’s based in Luxembourg.

Could you describe your background?

My interest in private equity started when I was at university working with a professor on valuation models. This interest grew after I started my professional career, first in public accounting and later when I joined a fund administrator and custodian in Boston, where I focused primarily on hedge funds. As the clients I was supporting started to pivot to private equity, it was natural for me to make that shift as well.

In the last 20 years or so, I’ve been fortunate to work with some of the largest and most sophisticated asset managers in the world, partnering with them to develop solutions that meet their needs. I’ve worked in the accounting, custody, valuations, loan processing, strategic planning, data delivery and investor services areas, as well as product development.

Outsourcing fund administration has become popular with both large and small private equity and real estate firms. To what do you attribute outsourcing’s popularity, and how have the demands of fund managers changed in recent years?

At the most fundamental level, fund managers must maintain a laser focus on fundraising, finding opportunities to deploy capital and generating return for their investors. To avoid getting sidetracked from these core activities, they look to reliable third parties to take care of their middle- and back-office functions.

There are other reasons outsourcing has become popular. LPs [limited partners], for example, are demanding more and more reports — often ad hoc reports — and there are proliferating regulatory requirements across most jurisdictions. All of these factors increase administrative burdens for fund managers that can be lessened by outsourcing.

This brings us to the subject of technology. Today’s funds have to invest in their own technologies or outsource to a fund administrator and use their platforms to meet reporting, regulatory and client demands. Sophisticated, secure platforms also facilitate deploying capital quickly, which is particularly important for private capital managers and allocators these days. In some cases, a firm — typically an established one — may choose to make significant investments in their own technologies and outsource some or all of their fund administration to meet today’s fund management challenges.

It’s worth adding that despite ongoing geopolitical tensions and other global economic headwinds, our economy is still a global one and fund managers continue to look for value across borders. As a result, many managers need a fund administrator with a wide geographical reach and expertise across products and markets.

You’ve spent much of your career based in the United States and are now in Luxembourg, two of the top global destinations for domiciling funds. What do you see as some of the top benefits and challenges of funds expanding into new markets?

There are many benefits to new markets, but what comes to mind first is a desire on the part of fund managers to expand the pool of potential clients. More than ever, those potential clients are looking for new asset classes and diversified portfolios, so each side is in a sense looking for the other.

As you alluded to, though, fund managers who domicile in new markets do face challenges, especially related to compliance. Let’s take a fund manager looking to expand into and distribute products in Europe for the first time. They’ll have to understand and follow AIFMD rules — including the requirement for an independent depositary — as well as fulfil other obligations specific to the target jurisdiction. The EU also has fast-evolving reporting requirements related to sustainability, most prominently the SFDR [Sustainable Finance Disclosure Regulation], which mandates disclosures on both the product and entity levels.

The EU has a complex tax environment as well, and that can be difficult for a newcomer to navigate without local guidance. Finally, fund managers are often surprised by fees and charges in the EU. I’ve found that fund managers struggle in particular with the depositary requirement and associated costs. This is just one example, of course. Each jurisdiction has its own challenges, some of which are likely to surprise someone new to the market.

The private funds sector is highly regulated, and keeping up with reporting and other requirements in all jurisdictions can be challenging. How has fund compliance changed in your time?

Compliance programs have changed significantly over the last two decades, and have moved from a passive approach to a proactive one that uses large amounts of data to monitor and ensure compliance. Funds are devoting more resources to compliance, and I see this trend continuing as the volume and breadth of the regulations increase.

There has also been a mentality shift. Traditionally firms thought of compliance as simply a burden, a cost of doing business that could in some cases stop them from taking on new mandates. Most firms now believe that compliance is a critical function and an important part of corporate governance that can lower financial and reputational risks. In other words, most business leaders now regard robust compliance controls not as a drain on the bottom line but a way to protect it.

All of this must be put in the context of resources. Fund managers and others may have moved from thinking of compliance as a mere burden to something they prioritise, but resources are scarce, including the global pool of compliance experts. And funds must find a way to achieve compliance within their own budgets, which can be a real challenge given those shrinking talent pools and the rising costs of maintaining secure platforms. As I mentioned, funds must consider using in-house resources (including tech), outsourcing and even co-sourcing, which combines elements of in-house fund administration and outsourcing. Co-sourcing is becoming more popular, though I think it should be used only in limited situations.

Technology itself is always evolving, and that’s brought significant change to fund compliance in the last decade or so. We’ve seen reporting, for example, move from spreadsheets and emails to secure global platforms that provide insight into and control over funds all over the world. We’re now seeing significant advances in AI and robotics, and those solutions may provide some support in the near term, but it will take some time before they provide significant, widespread benefits.

Is there a recent regulatory, operational or other trend in private equity that is gaining momentum?

Many funds are focusing on retail investors as the next frontier. This is a little like expanding across borders to tap into a new market. Institutional investors have dominated the funds landscape, and the retail investors represent a huge untapped market — not just high-net-worth individuals but everyday investors who for example might want to add private funds to their individual retirement portfolios. Fund managers are now developing innovative structures to allow access to retail investors.

Alongside this, regulations are evolving to increase private market access to retail investors while protecting those investors. The US SEC [Securities and Exchange Commission], for example, released new rules last year, primarily to promote transparency around fees and performance. As always, funds will have to balance the promise of tapping into a new market while keeping abreast of and complying with evolving regulations in all jurisdictions.

Expanding private market access will require rethinking fund support models. Retail investors require high levels of customer service and education through detailed, clear communication. Funds will have to provide these services and develop operating models that can support high volumes and proliferating reporting requirements.

What would you say are the keys to effective fund administration in today’s private equity landscape?

Much of what we’ve already covered speaks to what makes an effective fund administrator. Fund managers want an administrator that can provide middle- and back-office services, secure and versatile platforms, and information and advice across jurisdictions and regions to support growth. Today’s fund administrators almost by definition have large global footprints and expertise that’s not only wide but deep, so they can provide advice related to tax structuring, cross-border fund establishment, SPV maintenance and more.

An effective fund administrator must also offer platforms that provide insight into and control over funds in multiple jurisdictions while meeting the most stringent data protection standards. Needless to say, that requires significant ongoing investments.

So just as fund managers have evolved in their thinking about compliance, fund administrators have moved beyond acting as only back-and middle-office service providers. Those services remain critical, but a first-class fund administrator should also act as an expert partner to the client, providing advice on everything from accounting to reporting to working with a third-party software provider to developing and implementing compliance policies.