There is an increased focus on private equity operational efficiency, with 88 per cent of private equity firms saying they are more operationally focused today compared to three years ago, according to a study by SS&C Technologies.
The reasons behind this are varied, but ultimately map back to protecting investor interests. Governance and controls (62 per cent), increased demands for transparency (53 per cent), and a strong management team (85 per cent) are all cited as leading factors for why limited partners would select a general partner.
The research was conducted by polling SS&C private equity customers as well as attendees at the 2017 SuperReturn International conference in Berlin.
The top reasons respondents cited for being more operationally focused include demands from limited partners (33 per cent) and enhanced reporting requirements (22 per cent). Investors are seeking separation of duties and built-in transparency to the accounting and reporting process. This helps to protect investors' interests within the framework of the limited partnership agreement and allows private equity firms to focus on their core competencies – the effective management of investments and safeguarding of capital.
Transparency will continue to be a focus for general partners due to increasing regulatory pressures. Governing bodies such as the IRS and SEC continue to keep a close eye on the industry and FACTA, OEC, and CRS guidelines ensure investors are not overcharged inappropriate fees or expenses. Nearly half of respondents (47 per cent) ranked regulatory changes as the top factor expected to most impact private equity within the next year. While acknowledging the burden of these mandatory reporting requirements, only 17 per cent of respondents cited changing regulations as the driver behind their increased focus on operations.
As asset classes continue to grow, 40 per cent of respondents predict that credit and 35 per cent of respondents predict that buyout/VC will be the top investment strategies spurring private equity growth in the year ahead. With an influx of capital lifting the overall assets under management, firms will require significant investment in people and technology to stay competitive. However, just 18 per cent of respondents anticipate human capital management will have a major impact on the future of private equity in the year ahead. For small managers, an investment in human capital can be a major impediment to further growth; whereas, outsourcing this work to an administrator can provide immediate scalability. Equally, larger managers are also recognising the virtues of outsourcing to administrators as their organisations become increasingly complex and diverse. A number of these managers are beginning to adopt hedge, credit, and other new strategies – something that is leading to blurred lines between asset classes.
While private equity continues to evolve towards using third party fund administration, SS&C is seeing a significant uptick in adoption – especially as investors and regulators look for additional independence of fund accounting and reporting activities.
"These survey results confirm what we are seeing in the marketplace. A growing number of private equity organisations look to third parties such as SS&C to procure fund administration, operational, performance, investor reporting, regulatory, and other services," says Joe Patellaro (pictured), managing director, SS&C GlobeOp Private Equity Services. "As the world's largest fund administrator, we offer a unique combination of world-class service, expertise, and technology to meet this growing demand for complex solutions. We are well positioned to be a long term partner for the industry's continuously evolving needs."