Remote work trends, rising interest rates and other factors have hit the commercial real estate industry particularly hard. Meanwhile commercial investors are demanding real-time reporting, and regulators are imposing rules to increase transparency, from the US Securities and Exchange Commission’s new rules for registered investment advisors to the International Sustainability Standards Board new standards for sustainability disclosures.
These and other emerging realities, such as increasingly complex fund structures, have made the job of the real estate fund manager more difficult than ever. We interviewed two alternative funds experts to find out how the fund administration services industry is changing to meet the new demands of fund managers everywhere.
Marlyn Ramirez is Vistra’s director of real estate fund operations and is based in New York. She has 20 years’ experience in real estate fund accounting, investor reporting, fund returns and investment management accounting systems implementation.
Peter van Opstal is head of business development for Vistra Netherlands and commercial director for the alternative investment services division. He has also worked as a tax advisor and house tax manager.
The remote work trend has affected various industries, including real estate. How is the real estate fund administration services industry changing to meet the needs of private equity real estate firms in this remote work environment?
Marlyn: The industry has been quick to adopt digital transformation in this new environment. We’re seeing enhanced cybersecurity, more cloud-based systems and remote-access platforms that ensure secure, continuous services for private equity real estate firms. In general, the industry operates more flexibly and now accounts for the distance-yet-connected work setup.
Peter: Even before the pandemic there was a shortage of skilled personnel. Fund managers have had to adapt to new expectations from professionals who want flexible work arrangements and higher compensation. And while remote work has brought the ability to source talent from a broader geographical area, it’s also made performance management more challenging.
In response to these and other pressures on fund managers — such as reporting demands from investors — fund administration services providers have invested heavily in shared service centres and experienced, tech-enabled teams.
With evolving compliance regulations in different countries, how has the real estate fund administration services industry adapted to ensure that its international clients are compliant with regulations in all countries of operation?
Marlyn: With evolving compliance regulations globally, fund administration services providers have begun using RegTech [regulatory technology] tools. These tools make compliance tasks simpler and more automated and enable real-time regulatory updates from multiple jurisdictions. They’re a great way to help fund administrators stay compliant wherever their clients operate.
Peter: Global fund administrators also maintain close connections with regulators, compliance officers and fund advisors, which keeps them abreast of current and coming changes. Along with this, they have the scale, technology and licenses to help ensure their clients are compliant. Finally, most of the large service providers have their own regulated management companies — that is, third party AIFMs [alternative investment fund managers] — with oversight responsibilities, so nothing falls through the cracks.
Outsourcing fund administration has gained popularity in recent years. What are the key factors that have contributed to this demand?
Peter: Fund administrators generally provide skillsets that complement those of general partners. Through outsourcing, a fund manager also gets access to cutting-edge infrastructure and technology while benefiting from economies of scale. As a result, managers can be more flexible and open to market opportunities because they can scale their business at a moment’s notice.
Reducing compliance risks and costs — and meeting investor reporting demands — are also critical to outsourcing’s growth. There’s tremendous market pressure on firms to deliver accurate reporting with greater transparency, and using a third-party administrator gives managers credibility and investors peace of mind.
I’d add that as regulations proliferate, and GPs increasingly seek investors based in a variety of jurisdictions, fund structures have become significantly more complex than they were just ten years ago. Third-party fund administrators can handle the demands of these structures, whereas it’s very difficult for GPs to do it on their own. Using Excel spreadsheets simply isn’t acceptable to today’s institutional investors given industry-specific accounting platforms. Using a third-party administrator with a sophisticated tech offering not only ensures secure, flexible reporting, it also provides reliable audit trails. Private equity and real estate managers can reap the benefits of these systems without the costs and time associated with implementing and maintaining the systems in-house.
Marlyn: I agree that the trend towards outsourcing fund administration services stems from several drivers. As Peter noted, the most significant factors include the mounting complexity of investment structures and increased regulatory compliance burdens, both of which require specialized expertise. This need is further underlined by a shortage of skilled accountants and resources within the industry, pushing managers to seek external help.
There’s also an urgent need for improved operational efficiency and realising economies of scale, objectives that are often more economically and efficiently met using specialised outsourcing providers.
I’ve also found that firms are increasingly acknowledging the value of external viewpoints on industry best practices and advanced analytics. Using the expertise of fund administrators not only provides these perspectives but also helps equip businesses with the tools and insights for seamless scalability, allowing them to better navigate market volatilities and focus on their core competencies. Peter and I also agree on that — and it’s a point worth reiterating!
How have the expectations and needs of real estate firms evolved over time? How does this differ from what they were looking for in the past when choosing a fund administrator?
Peter: As I touched on in the prior answer, fund managers are by necessity moving their reporting and recordkeeping from spreadsheets and other relatively low-tech methods to platforms that provide transparency and flexibility. They’re demanding these powerful tools from fund administrators because their investors — and regulators — are demanding more from them.
Marlyn: Real estate companies are now looking for providers that can demonstrate and promote transparency, stringent cybersecurity protocols, and enhanced service quality through technology. In the past, they almost exclusively prioritised cost factors and personal alliances when deciding on a fund administrator. Fund administrators have become strategic partners with fund managers rather than just vendors.
Real estate fund administration involves navigating complex regulations and fulfilling investor needs. How do fund administrators in today’s market best strike a balance between standardised processes and adaptability to meet the challenges faced by today’s real estate funds?
Marlyn: Fund administrators are achieving a balance between standardisation and adaptability by using tech-based solutions that standardise common aspects of processes, not every element. They offer customised services to address unique client requirements.
Peter: No matter how customised or standardised a solution, it’s key that a fund administrator’s systems can be integrated and can facilitate the secure exchange of data into general partners’ investor portals and data warehouses.
Technology plays a crucial role in fund administration. What criteria should fund managers consider when evaluating a service provider's platform, particularly in terms of integration with existing systems?
Peter: This is an important question, so I’d like to expand on a few points.
The first area a fund manager should consider is data management. A fund administrator should have the tools to handle vast volumes of data effectively, including automated data aggregation and integration tools that ensure real-time access to critical financial information and reduce manual errors and processing delays.
The second is reporting. Make sure the fund administrator’s platform provides investors with real-time access through portals that allow them to drill down into data at any time and across multiple jurisdictions with complete transparency.
You’ll also want to consider cybersecurity. Your fund administrator should be able to demonstrate that they’ve implemented and maintain robust cybersecurity safeguards to protect sensitive financial data and prevent breaches. Multi-factor authentication, encryption techniques and threat detection systems are becoming the norm in the industry. They help ensure clients remain aligned with industry best practices and compliant with regulations.
A good fund administrator should also offer cloud-based solutions, which reduce the need for physical infrastructure and promote remote collaboration.
You should also ask potential fund administrators about mobile apps, which have transformed how investors interact with their funds and administrators. Investors can now access real-time portfolio information, receive updates, and initiate transactions conveniently through secure mobile platforms.
Finally, developments in artificial Intelligence and machine learning are revolutionising all of the above areas. AI has enhanced the handling of complex tasks, such as risk assessment, fraud detection and compliance monitoring. This is a rapidly developing area, but if you’re performing due diligence when vetting fund administrators, you should ask how they’re incorporating AI and ML into their systems and processes.
Marlyn: Technology does play an integral role in fund administration, and it has fundamentally altered the benchmarks for evaluating a service provider’s operating platform. To ensure seamless integration with existing systems, fund managers need to consider a few key factors.
One, the platform should offer effortless integration capabilities that minimise disruptions to current operations. And to re-emphasise one of Peter’s points, it’s important to consider the strength and reliability of the platform's data security measures, given the sensitivity and critical value of the data involved.
Automation is another prime factor. A platform with robust automation capabilities can streamline operations and cut down on manual errors, which translates to increased efficiency.
Finally, it is important to gauge the platform's adaptability, for example, its capacity to align with future demands and anticipated growth. This will ensure the platform remains a valuable, scalable tool in the long run.
ESG-related pressures are increasing in the real estate sector. How are these pressures affecting real estate fund administration?
Marlyn: Real estate fund administration providers are integrating ESG metrics into their routine reporting, conducting ESG risk assessments, and providing advice on ESG regulatory compliance. Many fund administrators are partnering with third-party ESG experts to ensure they’re keeping up with regulatory changes, policy trends and best practices.
Peter: Fund administrators have a significant role to play in the ESG space given their expertise in working with complex assets across multiple jurisdictions. As ESG strategies become fully integrated into portfolios, investors require a transparent view of a portfolio’s impact measurement and management strategy. Investors want to see the impact that each underlying investment is making and how this can be attributed to ESG credentials.
Given this demand, investment managers need effective systems that cover reporting, accounting and administration for their global ESG investments. Fund administrators and custodians are well-placed to provide investment managers with fresh thinking and solutions around data aggregation, ESG reporting and benchmarking.
What are the major data-related challenges faced by real estate fund managers? Can you provide examples of how technology has improved the efficiency and accuracy of data management in fund administration?
Marlyn: Data challenges include maintaining data accuracy and security and ensuring accessibility and regulatory compliance. Platform integration is also a critical area due to the advent of different applications in operational areas. For example, there’s a distinct software to manage properties, while fund and investor services use their own applications. These different applications can affect the accuracy and timeliness of reporting.
Fortunately, advances in cloud platforms, accounting systems, AI and machine learning have made data management more efficient. These technologies help automate cumbersome tasks, enhance overall data security, and facilitate more informed decision-making through data analytics.
Fund managers are trying to optimise costs more than ever. How is the fund administration services industry addressing the specific challenges and opportunities presented by volatile market conditions?
Peter: The sector is consolidating, creating economies of scale and cost reductions. It’s investing heavily in technology and automation, and increasingly implementing near- and off-shoring solutions.
Marlyn: Fund administration providers are ultimately striving for operational efficiency, using automated systems to streamline processes and reduce costs. They’re also making changes to their fee structures — such as shifting from fixed to variable cost models — in response to market dynamics.
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The contents of this article are intended for informational purposes only. The article should not be relied on as legal or other professional advice. Neither Vistra Group Holding S.A. nor any of its group companies, subsidiaries or affiliates accept responsibility for any loss occasioned by actions taken or refrained from as a result of reading or otherwise consuming this article. For details, read our Legal and Regulatory notice at: http://www.vistra.com/notices . Copyright © 2023 by Vistra Group Holdings SA. All Rights Reserved.
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