By Alex Di Santo Group Head of Private Equity Fund Services at Crestbridge
The Covid-19 pandemic proved the strength of outsourcing as a model. With business as usual interrupted, we saw an uptick in the overall number of managers seeking to outsource, including within private debt.
By accelerating their outsourcing decisions, managers benefitted from operational efficiencies provided by their outsourced partners. These areas included operational systems, data and automation, which ensured timely and accurate reporting to their investor base, allowing managers to focus on the needs of their clients: managing portfolios and customer service.
Managers in complex asset classes like private equity and real estate, often prefer to hire a specialist administrator with prior experience in their asset class. It comes as no surprise then that private debt managers, who by the nature of the asset class have specialist needs, prefer to do the same.
In our survey of private debt fund managers, CEOs, COOs and CFOs, the vast majority (96%) of responses confirmed there was a requirement to hire a fund administrator in the near future, with managers citing regulation, reporting and technology as significant drivers.
The survey identified an overwhelming need amongst asset managers to outsource operational complexity and regulatory support to specialist fund administrators. Managers are finding that these burdens increase each year, taking up more and more time – time that they would prefer to spend on their investment strategies and core business. Investors are aware of this – and managers report that a significant proportion routinely ask to discuss outsourcing provisions. Almost 20% of asset managers said that during meetings, their investors asked them about their outsourcing provisions alongside other pressing topics.
With new milestone regulations coming into force across multiple jurisdictions on an almost annual basis, almost 40% of survey respondents stated that global regulation was the most significant challenge to their businesses and running their funds in the short term. The same proportion of asset managers (40%) reported difficulty in sourcing and retaining talent across their firms, perhaps making it more impractical to hire auxiliary staff in the back and middle office and further necessitating outsourcing.
We look at some of the differences and complexities of running a private debt fund, and how Crestbridge, as a specialist in the space, can help every step of the way.
Debt funds tend to be more price sensitive due to the fixed nature of their income, working on a steady yield basis of, for example 11%, as opposed to the outsized gains that private equity or venture capital managers can experience.
During uncertain times, outsourcing can also help managers streamline, as they will no longer be required to run a team of administrators, invest in and maintain specialist systems on an ongoing basis.
Selecting the right partner can also bring certainty of cost. Unlike many other firms in our space, Crestbridge offers clients a single, fixed-fee structure, so at the end of the month, there are absolutely no surprises.
Fund establishment: need for speed
Crestbridge is well placed to help managers domicile offshore and onshore with our offices in the United States, Luxembourg, the UK, the Channel Islands and Ireland.
Each jurisdiction and each fund category it offers will differ in respect to its regulatory treatment of the manager and fund promoter, the cost and the time it takes to establish. For this reason, we work closely with the manager and their third party advisors to ascertain what their objectives are and we are transparent with what they will need to do to get the fund up and running.
Using Jersey as an example, there are generally two main fund categories we might use for debt managers, Expert Funds and Private Funds.
The first fund category has lighter regulatory treatment and enables managers to sell to an uncapped number of investors. The investors do need to have a certain degree of sophistication, but not necessarily be institutional. Going down this route, funds could be established within a few days on a self-certification basis, though new managers could expect the process to take longer as they are unknown to the regulator.
The second fund type, Jersey Private Funds, offers a faster, 24-hour turnaround, but realistically it may be longer. It doesn’t place restrictions on fund size, borrowing or investments, but it can’t be publicly listed, and it stipulates a maximum of 50 sophisticated investors.
What generally adds more time to establishing a fund is where managers want to market. How focused do managers want their marketing to be? Taking our Jersey domicile example, if managers are targeting European investors, how many countries are they selling into? For managers looking to keep their target market as wide as possible, they will require a passport for wider permissions within the EU. Therefore they will need a Luxembourg or onshore fund as well as or in place of the Jersey fund.
Marketing: stand under our (regulatory) umbrella
Applying for regulatory licences takes time. Crestbridge’s regulatory licences and approvals are wide-ranging, which can help debt managers come under our regulatory umbrella. The result is, debt fund managers can get up and running in the jurisdiction of their choice more quickly and at a lower cost than if they chose to apply and wait for the necessary approvals themselves.
For example, Crestbridge has a Manco licence and marketing permissions to support managers with European passporting. In areas less relevant to private debt, but to demonstrate the wider point, Crestbridge is one of few managers to hold a EuVECA licence, allowing our venture capital clients to market into Europe extremely quickly.
Ongoing fund administration:
As an experienced fund administrator in the private debt space, Crestbridge is aware of the unique challenges facing managers once a fund has been set up and we assist in all areas.
- Fund accounting: Debt funds also have specific fund accounting requirements. Effectively different calculations for debt funds, we have some bespoke reporting that we’ve built computations – high volume.
- Transaction volumes: A private equity fund may only make a handful of payments through its lifecycle, deploying capital then realising gains over a number of years, before making final distributions to its investors. Debt funds on the other hand, naturally have much higher transaction volumes throughout their lifecycle, namely, drawdowns and incoming interest payments.
Keeping on top of those payments requires specialist technology, operated by sector experts who understand the nature of the business and its cashflow.
To this end, Crestbridge provides a transactional platform that quickly updates records. Speed is required partly due to a the volume of transactions and partly to enable quick reporting turnaround for managers.
- Income reporting: The nature of the income is another matter requiring specialist attention. There will be different tax or structuring aspects that go into receiving that income, which will need to be considered, established and administered. This would include creating subsidiaries in the United Kingdom, Luxembourg or other jurisdictions, depending on the specific nature of the fund, its investments and the instruments used.
- Loan administration: Loan administration may also be required, especially in cases where payments haven’t been made as expected, a matter outsourced partners will help to greater or lesser degrees.
- Winding down: Crestbridge works with managers throughout the fund lifecycle, right through to wind-down and final distribution to investors.
It has long been recognised that when the right partner is chosen, outsourcing provides time, cost and operational efficiencies to asset managers looking to bring the focus of their in-house team back to the core business at hand: protecting and growing their investors’ capital.