Administrators of private equity funds have developed rapidly during their average 12 years of history, according to the first European private equity fund administration survey by Ernst & Young.
The survey revealed that the service offering of administrators can be described as close to fully fledged and covers a wide range from accounting, company secretarial services, investor register up to reporting.
However, services in the early stage of the PE fund cycle, such as assistance in the fund set-up, are not often provided. Also, tax services are not yet on the list of many of the respondents to this survey, but it is an area of future development for many administrators.
When analysing the pricing of services, a high degree of flexibility is currently applied. Sixty per cent of administrators operate more than one fee model as part of tailoring their service offering. Fee models range from charging basis points on committed or invested capital up to hourly charge rates for time spent effectively on a certain task.
Most of the funds serviced by third party administrators are in the category EUR100m to EUR500m (over 50 per cent). Average funds of less than EUR100m comprise an additional one third. This highlights that the majority of PE houses with the major buy-out funds continue to perform fund administration in-house.
Seventy per cent of respondents are structured as local organisations, offering a full range of services in each location. This is most probably based on the nature of the PE model which requires higher manual input than traditional mutual funds. Nevertheless, some of the bank-owned institutions lead the way in centralization of key services such as accounting or reporting in one central location.
No matter which organisational model is applied by the different administrators, having skilled staff is key. Of all the people currently employed by the 30 survey participants, over 50 per cent have more than three years of experience in PE and only 13 per cent were new to the industry, with less than one year of experience. The skill of people is also demonstrated when it comes to financial reporting where 70 per cent of respondents agreed that their accounting staff were able to keep up to date with developments on the financial reporting landscape.
With regards to information technology support, the survey demonstrates a clear commitment of the market to move away from spreadsheet-based support towards dedicated PE systems. Over 75 per cent of respondents have implemented specialised software (or are currently in implementation) to support their administration business. Ernst & Young says the next step should be the discontinuance of legacy systems, as this results in duplication of data and thus greater effort and costs.
The survey also captured insights into the largest strategic changes as well as challenges confronting the PE fund administration industry over the next 18 months. The most significant changes planned for the future were:
• Expand geographical presence (67 per cent)
• Formalise processes and controls environment through a SAS 70 report (over 50 per cent)
• Enhance efficiency through a robust and scalable IT infrastructure while managing operational risk (over 50 per cent)
For those administrators planning geographic expansions, the main target destinations are Luxembourg (47 per cent), Asia and Far East (40 per cent) as well as the Channel Islands (27 per cent).
The most significant challenge identified today was compliance with the draft proposal for the Directive on Alternative Investment Fund Managers issued by the European Commission. Most administrators believe that they will face increased client demands in response to regulation, and admit that compliance with regulation will become increasingly important for their industry over the coming years.
Alain Kinsch, head of private equity at Ernst & Young Luxembourg and EMEIA private equity fund practice leader, says: “We are happy to be the first firm having analysed the broader European PE fund administration market. As we are currently entering times of increased regulation and investor requirements, administrators need to focus on keeping themselves informed and rapidly implementing the right measures in order to comply with new demand. Only those administrators who manage to satisfy regulators, investors and thereby general partners will manage to survive this challenging period and come out of it as a winner.”
