Last year was an exciting one in the alternative investment industry, and all indications point to another great year in 2017. Here are 5 predictions that will dominate the industry in 2017:
1. Capital invested in private equity funds will continue to increase amidst a further decline in hedge funds
Growth in alternative investments will continue to be explosive in 2017. According to a report from Cerulli & Associates, the mean allocation of alternative investments is still less than 5% of overall assets. Depending on the industry source, the general guidance is that the ideal allocation should be in the 15% to 25% range, signifying plenty of more upside.
Nowhere has that growth been more evident than in private equity funds, which has increased dramatically over the past few years. Assets have risen from $30 billion in 1995 to around $4 trillion in 2015. This growth will continue, as 64% of limited partners plan to increase their allocation to private equity funds, which is up from 26% just 5 years ago.
Hedge funds, on the other hand, have struggled as poor performance compounded by high fees resulted in large outflows in 2016.
2. Regulatory & compliance pressures will continue to increase (even with the new administration of President Trump)
Regulatory and compliance have been dominant factors in the alternative Investment industry (and especially among hedge funds) for several years now. Despite some industry leaders having an optimistic outlook of a potential loosening of regulations driven by the new Trump administration, the trend toward more transparency will continue to grow.
Study after study shows the impact of mounting regulatory and compliance pressures. Here are two reports that paint a clear picture:
- A Longitude Research study last year showed that more than 50% of fund administrators predicted that the need to keep up with regulation would have the greatest impact on their activities over the following 3 years
- A report from Linedata showed regulatory & compliance being the chief concern facing fund administrators and fund managers alike
3. Technological capabilities will become as important as accounting capabilities for fund administrators
Fund administrators are traditionally thought of as providers of accounting services. Technology was mostly thought of as internal “plumbing”, and the decisions made about the use of technology were often left in the hands of an IT department, with little senior-level involvement.
Well, it’s safe to say that those days are over. 2017 will see the further emergence of technology as an integral capability for any fund administrator – on par with the importance of their accounting capabilities.
Fund administrators can only turn to technology to give them the data, reporting, and understanding that are needed to satisfy the evolving needs of their clients and investors. In fact, 9 out of 10 fund administrators plan to invest in technology in the next 3 years.
4. Consolidation will continue to increase in the fund administration business
Competition in the fund administration industry is intense. This is being driven by the explosion in capital being invested, the increasing demands for regulatory transparency, as well as the economies of scale needed to effectively compete in a low-margin business. No metric shows this better than the one reported by Preqin that 28% of fund administrators have been fired by their clients in the past 12 months.
The trend toward consolidation has escalated significantly in the past 2 years. While this can be good news for the largest of funds that can afford the services of the largest of fund administrators, this consolidation is likely bad news for both mid-market fund managers as well as mid-market fund administrators.
5. Fund administrators will become a bigger force in private equity & real estate funds, as well as with family offices
The use of fund administrators is pretty much a requirement for hedge funds, as evidenced by the outsourcing to fund administrators increasing from 50% in 2006 to 81% in 2013. This dynamic really started taking shape in the wake of the Bernie Madoff scandal, which showed the perils of a lack of validation & supervision within the industry.
In comparison, fund administrators are under-penetrated in private equity & real estate funds, with estimates showing fund administrator penetration at around 30% of AUM today. However, this is expected to increase 45% by 2018.
The same conditions that drove the shift to fund administrators in the hedge fund space affect private equity & real estate funds as well. Just as happened with investors in hedge funds, investors in private equity & real estate funds are demanding third party validation of assets and performance. Regulatory pressures are already having an impact on general partners of private equity & real estate funds.
Although occurring more slowly, the need to turn to fund administrators is also happening in the single & multi-family office space thanks to an increasing rate of wealth and investments in ever more complicated asset types.
About Chris Andraca & BaseVenture:
Chris Andraca is a Director at BaseVenture, with responsibility over Sales, Marketing and Client Services. BaseVenture is an award-winning software company that is helping the alternative investment industry simplify & modernize how private funds are managed and administered.
Learn more about BaseVenture at www.baseventure.com.