With US private equity managers contending with record high valuations in US markets, seeking out attractive yield opportunities has become a considerable challenge.
Granted, last year saw a number of significant fund launches. The most notable were Apollo Global Management’s USD24.7 billion Apollo Investment Fund IX – the largest PE fund in history – and CVC Capital Partners’ seventh fund vintage (CVC Capital Partners VII), which closed with USD16 billion. But these are outliers. And whilst the majority of mid-sized PE managers were able to raise capital, putting it to work has been the bigger challenge.
This has pushed US managers to find higher yielding opportunities in Europe and Asia Pacific; a trend that Anastasia Williams (pictured), Vice President of Sales, TMF Group, believes will continue in 2018.
“US managers are considering UCITS funds and Luxembourg limited partnerships to attract European capital, because the demand is so strong,” says Williams. “Private equity groups are becoming more creative in terms of the structures they use, the liquidity terms, to attract more investors from Europe. We see a growing trend for hybrid funds that blend mutual fund characteristics with offshore fund characteristics.”
With respect to Asia Pacific, Williams, who is based in TMF Group’s San Francisco office, notes that there was quite a bit of activity among US clients in 2017, especially in China, Japan, South Korea and Australia. TMF Group has global experience in providing administration services to SPV structures as well as funds and this has put it in a strong position to support the expansion activities of its US client base.
“We have integrated best-of-breed technology to service those funds so we are well placed to support this growth trend of US managers operating and investing in Asia Pacific. Among the larger PE shops that are engaged in M&A activity in the region, we’ve seen them doing joint ventures with China asset managers and consulting firms to invest in a range of underlying portfolio companies: anything from cosmetics companies to robotics and packaging companies,” confirms Williams.
She notes that from a European perspective, there is strong interest among US real estate groups as they seek out attractive valuation deals in markets such as Spain, from where a number of large deals have originated. With its plug and play solution, TMF Group is able to get involved with US managers at the incorporation stage, using its local network expertise to bring global support to those who may lack on-the-ground legal and regulatory specialists, when navigating the nuances of European markets.
“We start from incorporation and support our clients throughout the lifecycle of the deal,” says Williams. “We have a footprint in almost every European market and we coordinate with our European colleagues in such a way that allows US managers to liaise with our New York, Texas or San Francisco offices. We work with local deal teams in London, in Spain, etc., to keep on top of all the little details of maintaining the infrastructure to facilitate the investment. US managers have the reassurance they are staying in compliance in local markets. A vital step to consider because non-compliance might create problems when they come to exiting a deal.”
US managers have, for many years, invested in Europe and have far more experience in this mature market than they do in emerging markets. Newer markets like Chile, Peru and Colombia are a different challenge, as is Brazil in respect of its regulations and licenses that are needed.
“However, US managers need to be in these markets, they need the investments, and we are there on the ground. We’ve been in Brazil for quite some time,” adds Williams.
The upside to expanding into new markets and creating new fund products – which might include UCITS funds, Luxembourg special limited partnerships, Asian SPVs – is that US managers can attract a global investor base. The downside is that the more multi-jurisdictional products they bring to market, the more complex their operating model becomes.
As Williams points out, US managers now have to contend with global reporting, most notably Common Reporting Standards. But unlike the name suggests, there is nothing common about it.
“CRS reporting has to be for each specific country. If you have one German investor, you must comply with German CRS, in France it’ll be a slightly different requirement, and so on. Managers can choose to connect and file with each individual local regulator but they might end up dealing with 20 different file formats. The alternative is to outsource all of this to the fund administrator who handles these requirements day in day out.
“We have the infrastructure in place to remove the burden for managers, allowing them to focus on the investment management process,” comments Williams.
This is helping to perpetuate the trend of fund administration outsourcing as managers and investors alike recognise the futility of keeping everything in-house, without any demonstrable benefit to doing so.
Williams says that investors are becoming more flexible with terms, even if it means having to accept additional costs as a result of outsourcing.
“It shows they are more open to the idea of managers going down the outsourced route. ILPA templates are becoming an expected standard now and as unique as each PERE manager is, there is still an expectation among LPs to receive all of their investment fund information on a quarterly basis.
“Institutional pension plans, endowments and SWFs have standardised how they absorb fund information. They require general partners to give them certain information in a certain file format. If they get this from one manager, who uses a third party fund administrator, they expect the same quality of reporting from every other manager; they don’t want a manager doing it internally, using a different file format and presenting information that isn’t considered industry standard,” opines Williams.
Over the last five years, closed-ended funds have represented the biggest growth area for fund administrators. Administrators have done a good job updating their platforms and technology to best serve these funds that use complex capital structures. Previously, the fund administration space wasn’t ready or equipped to handle custom waterfalls, distribution calls, but they are now.
“There are tools for automating waterfalls, communicating with investment teams and investors, and the industry is evolving.
“That said, I’d say it’s still 50/50 in terms of the number of managers who keep administration in-house versus those who outsource. Five years ago, it was 80/20 but I think in five years’ time, it will have moved to 80/20 in favour of outsourcing,” states Williams.
She says that for 2018 and beyond, TMF Group will continue to build out deep relationships with US managers, leveraging the expertise it has gained working globally with SPVs and closed-ended fund vehicles.
“The more complex a fund manager’s operations become, the more simple they will want their vendor relationships to be. It might be sustainable to have two or three vendor relationships in two or three countries but beyond that it can be difficult to manage,” concludes Williams.
