Comment: Private markets boom sparks uptick in demand for asset servicing

By Claudia Bertolino, head of private equity and private credit at Citco Fund Services

The unprecedented growth in private markets during the last few years has caused a subsequent boom in demand for asset servicers to assist private equity general partners/managers with their increased and more complex asset servicing needs.

Historically, private equity managers have preferred to perform servicing in-house rather than to outsource services, instead choosing to adapt to growth and changing needs by increasing their own internal headcount. However, the new norm for the leading managers is outsourcing commoditised work to administrators that have built tech models fit for 2023. The majority of fund administration work in private markets is now relatively consistent across the industry, so class-leading technology must be deployed to keep pace with the leaders. This allows managers’ operations teams to move focus from standard deliverables to adding value. No more reviewing trial balances – now, it’s overseeing vendors; no more ticking and tying partner capital statements – it’s now analysing investor performance to prepare for fundraising meetings. No more IRRs in Excel – it’s now presenting relative deal performance to internal management teams; and no more waterfall calculation shadowing – it’s now about future hypothetical fund performance modelling.

To move to this new world, private equity managers are placing higher expectations on the level of accuracy and speed that asset servicers provide. The need for the right technology and expertise from asset servicers, not to mention working with a trusted partner, has never been greater.

As ever, much of this has been powered by accelerated innovation in the industry. Huge progress has been made on the digitalisation journey, as all parties are starting to see the benefits. Automated data transmission, data gathering tools, market data creation and private equity-specific deal management tools are all areas that have taken giant leaps in the last few years. Here, technology and innovation delivered by asset servicers as best of breed and tailored for private market funds can bring immediate and tangible benefit to clients far beyond their in-house capabilities, and at a lower cost to the manager than developing technology solutions in-house or buying them individually from vendors.

Another driver behind the shift to outsourcing comes from the deep, specialised knowledge base that asset servicers can bring to managers. As the sector is evolving, we are seeing a proliferation of fund structures, wider choice of domiciles, and increasing complexity of waterfall calculations, cash management and reporting requirements. Navigating such complexity can pose a significant challenge to even the most established managers.

In addition, asset servicers that have a global presence – alongside widespread expertise across multiple asset classes – can provide knowledge of what is best practice from outside of a manager’s traditional focus. As PE firms have grown, many have diversified into asset classes where they have less experience, so an asset servicer with a broader perspective can be invaluable.

The final theme that underscores the boom in asset servicing is around the partnership between an asset servicer and manager. The ultimate goal of any asset servicer is to help their clients grow, which means not only meeting their current needs, but also having the ability to adapt quickly and offer the solutions to enable their clients to meet the demands of investors. Whether that is adopting new reporting standards, preparing for regulatory changes, or developing new products and strategies, the most valuable relationships between a servicer and manager are where there is a true partnership focused on delivering future growth and the manager does not view the asset servicer as a ‘servicer’ at all, but rather an extension of their own in-house team – a true partnership.

As demand for better investor experiences continues, we look forward to supporting our clients to ensure they can focus on what matters most – their growth and success.

This article was produced in association with Citco