Private capital funds must invest USD5.5 billion globally over next five years to meet increasing investor demand for transparency, says Intertrust Group
Private capital funds face growing demands for transparency as mainstream investors increasingly turn to the sector to chase the higher returns it offers, new research from Intertrust and Global Custodian reveals.
Intertrust Group, a specialist in providing administration services to clients in over 30 jurisdictions, estimates that around USD5.5 billion will need to be spent to meet these increasing demands worldwide over the next five years.
The report, entitled The future private capital CFO: Evolving in a digital age and created in partnership with Global Custodian, shows that CFOs at private capital funds expect their limited partners (LPs) to require data updates with increasing frequency over the next decade. Almost two thirds (64 per cent) of respondents expect their investors to be looking for access to live or daily updates on portfolio performance and 57 per cent on cybersecurity. Meanwhile 51 per cent of CFOs expect a need for daily or live updates on environmental, social and corporate governance (ESG) and 50 per cent on operational service level agreements (SLAs).
Although extensive investment will be required to meet these greater demands, they are also conflicting with private capital funds’ traditional leaning towards confidentiality. Intertrust Group warns that private capital funds must either meet these greater demands or face significant competitive disadvantages and possibly regulatory pressures.
Chitra Baskar, Chief Operating Officer and Global Head of Funds and Product at Intertrust Group, says: “Traditionally, private capital fund managers have tended towards keeping a lot of information confidential because of the nature of their deals. But more mainstream investors – who are used to having more data - are coming into the market because of the higher returns available. Their appetites for data disclosure will drive the need for the delivery of faster and more detailed reporting.
“Hedge funds have already transitioned and now private capital funds must catch up and invest in systems to meet extra reporting requirements. This willingness to give transparency may become a differentiator between funds to attract capital.”
The research, conducted in association with Global Custodian, found that 21 per cent of CFOs expect portfolio performance will be the largest draw on their resources. Other functions expected to draw on resources include operations (19 per cent); regulation (17 per cent); cyber security (16 per cent); investor demands (15 per cent); ESG (6 per cent); and diversity and inclusion (5 per cent).
One in four (25 per cent) CFOs say they will respond to the anticipated increased demands by investing in technology, while 21 per cent say they will increase the size of the in-house finance team, 20 per cent will outsource more functionality, 18 per cent will invest in distributed ledger functionality and 11 per cent will retain the existing balance between in-house and outsourcing.
Chitra adds: “In the past, several large mainstream asset managers have built in-house solutions before deciding that outsourcing was the best option because of the complexity involved and the significant drain on resources.
“Private capital funds run lean operations and given the frequent technology upgrades that will be needed as volumes of data and security measures grow in complexity, it may well make more sense for them to outsource to a provider that can ‘mutualise’ the costs by serving a broad range of clients. It is important that the service provider brings the required domain depth to address the fund’s burgeoning needs and challenges – if they also have a global network of offices, then this will be all the more attractive to LPs that invest internationally.”