By Joseph Latini, chief commercial officer, MUFG Investor Services
For several years, rising interest rates, inflation, and geopolitical uncertainty resulted in fewer deals, fewer exits, delayed distributions, and stalled fundraising across the private markets. Today, the alternatives industry is sitting on an unprecedented $3.9 trillion in unspent capital.
Fund managers are preparing for that wave of new investment by increasingly evaluating the most effective way to manage the operational challenges that come with the influx of new transactions and determining when to handle work internally or outsource. As part of that process, they are reaching out to trusted partners to examine their operating models—revamping systems, processes, and technology to accommodate new business and
regulatory demands.
It also means that outsourcing firms must differentiate themselves like never before and take a hard look at their own models. Will independent administrators have the scope and scale to support these funds? Will bank-backed providers, who typically focus on traditional investing strategies, play a larger role in the alternatives universe?
We’ll see many variations but almost certainly, the days of “one way or another” must evolve into a blended approach.
Any number of industry surveys conducted in the last year confirm what service providers see every day: In addition to the unspent capital waiting to be allocated, a generation of new investors is entering the alternatives market with significant fresh capital as well as unprecedented demands.
“Fund managers are preparing for that wave of new investment by increasingly evaluating the most effective way to manage the operational challenges that come with the influx of new transactions and determining when to handle work internally or outsource.”
To prepare for this generational shift, fund managers increasingly want to work with a single, trusted partner—a “one-stop shop”—on an array of their business challenges. And they have great expectations for these partners, demanding superior client service at every level.
Regulators also are making it clear that fund managers and their providers must improve performance. As outsourcing increases within the alternatives industry, trusted partners must be prepared to support a host of new disclosure and transparency regulations being adopted in jurisdictions around the globe.
MUFG Investor Services has long embraced a client-centric model that combines an intensely alternatives-focused approach, an ability to innovate with best-in-class products and embrace new technology quickly, with the extended resources of one of the world’s oldest banks. Roughly 7% of our business handles traditional investments, and our teams can tap into the bank’s balance sheet, credit rating, and wide range of products and services to support large institutional managers. With 17 offices in or near leading financial markets in North America, Europe and Asia Pacific, our “follow the sun” model enables us to serve clients where they conduct business.
Our location strategy and business approach dovetail with a client-service philosophy
that we believe reflects an evolution in the industry. Fund managers want partners who are extensions of their organizations, who fully understand what they need and can meet their critical needs—the right way, every day—and will build nimble, expert teams to help them achieve success. The best partnerships are symbiotic, long-term relationships based on frank discussions, listening, and evaluating needs.
Successful partners will use that information to develop client service models that emphasize working closely with fund managers to add value, reduce risk, and improve efficiency using their own platforms or services, and explore when fund managers may want to handle something internally. Often partners will invest in new technology that can be used to serve many client firms to improve such things as compliance reporting across multiple jurisdictions.
All those capabilities will be necessary to serve fund managers as the industry transforms and a new paradigm takes hold. Trusted partners who traditionally handled back- and middle-office responsibilities have moved into front-office functions, including client onboarding, investor reporting and KYC/AML compliance. As funds diversify into new asset classes, fund managers and their partners are reengineering operating models to accommodate new clients and capital. At the same time, they are replacing legacy technology with new automated platforms and tools—including artificial intelligence—to manage waves of new, digitized data. In some cases, fund managers and partners are exploring wholesale changes; in others, they focus on resolving specific needs or tasks.
“Trusted partners who traditionally handled back- and middle-office responsibilities have moved into front-office functions, including client onboarding, investor reporting and KYC/AML compliance.”
That work is certain to grow in the coming year—particularly in private markets—as unspent capital flows into new and existing products, and the number of deals increases. Fund managers, anxious to attract new capital, will face a delicate balance: The number of investors in the alternatives market is growing as institutional investors are joined by high-net-worth retail investors, and fund managers must have systems in place to handle the inflow of cash and effectively manage greater operational functions. A fund that once might have had 20 investors may have hundreds or thousands going forward, which poses new challenges for distribution, communications, disclosure, regulatory compliance, and a host of other functions.
Preparing for a new era in the global alternatives marketplace must be a priority for the partners who serve fund managers. We believe the most successful firms will be those who have the relationships and expertise to examine an issue, say, “We’ll find the right solution,” and then make it happen.
