Managers are increasingly looking to their service provider, especially the fund administrator, to offer value-add services, says Kavitha Ramachandran of Maitland.
Allocations to alternative asset classes have been on the rise. This trend began in the aftermath of the global financial crisis and has also been driven by investors’ need to diversify and seek alpha. In recent times, investors have been increasingly nervous about the course of equity markets and constantly evaluating their asset allocation strategies as a result.
Those increasing their allocation to alternative asset classes include institutional investors, especially pension funds, as well as family offices and “qualified investors”.
So, which asset classes are affected?
Private equity and real estate have traditionally topped alternative asset class allocations. However, the past few years have seen the emergence of private debt as a popular asset class with a significant increase in the number of debt-focused funds. A recent study undertaken by KPMG on behalf of ALFI, the Association of the Luxembourg Fund Industry, reveals that as at mid-2018, assets under management of Luxembourg loan funds had increased by 23.5% on the mid-2017 figure.
This is a significant increase year on year considering that the increase in this asset class matched increases in private equity and real estate and in a relatively short time.
The pace of increase has been set by initiatives like the EU’s Capital Markets Union, strengthening the case for alternative lending strategies, SME lending and the emergence of alternate financing. The popularity of non-performing loans (NPLs) in fund portfolios and securitised vehicles adds flavour to the asset class. Additionally, regulators have worked hard in streamlining NPLs.
Following in the footsteps of debt fund strategies, the increase in popularity of another asset class in fund structures is trade finance and supply chain finance with more managers setting up fund structures to provide access to institutional and high-net-worth investors.
The impact on service providers
As the market drives managers to refine investing in existing and new asset classes, such as the trend towards debt funds, this has an impact on service providers like management companies and administrators. These asset classes give rise to a new dynamic of services like loan servicing, loan administration, trade finance and supply chain activities. Whilst the trend so far has been for fund managers to provide these services themselves, there is an increasing trend of managers looking to their service provider, especially the fund administrator, to provide such services so that they can concentrate on their core activity of asset selection. For service providers, this brings both opportunities and challenges, for example in ensuring that they have the necessary skillset and resources.
The opportunities – and challenges – are only increasing with growing pressures from regulatory changes and political uncertainties like Brexit. In keeping up with the trends in asset allocation and associated services, service providers need to continue reinventing themselves as they look to distinguish themselves and support managers by way of upskilling, providing value-add services and investing in automation and digitalisation.
Kavitha Ramachandran is senior manager, business development & client management, at global advisory, administration and family office firm Maitland
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