Cost Drives Equity Fund Managers to Make Changes
When managers of private equity funds changed service providers this year, cost, quality and increased portfolio complexity were typically behind the decision.
Preqin, a leading source of data and analytics about the alternative assets industry, says this year’s unusually challenging environment is prompting fund managers to more intensely evaluate their service providers. The relationship between cost and quality of service is being scrutinized especially closely.
“Managers,” Preqin comments, “Want service providers that can make a difference, whether that’s through streamlined processes, increased efficiency, or the adoption of innovative and value-add technologies.”
In a report out last week, Preqin discusses the results of its analysis and survey of fund managers. The short version is that among those changing law firms or accountants cost was the leading reason. Or, as Preqin described it, “Cost is king.
“Half of all fund managers surveyed cited cost as a reason for swapping their fund formation law firm, followed by 44% and 40% for transactional law firms and accountants respectively.”
Cost wasn’t the only reason. Portfolio complexity was mentioned as often as cost for changing fund formation law firms. And it was second behind cost as the reason for changing accountants.
Quality of service factored into the decision, though it was less of a driver than cost and complexity. However, among the 26% of private capital fund managers that changed administrators, the quality of service was a deciding factor. 53% mentioned that as a reason for making a change. Only one in five managers mentioned cost.
Preqin sees the issue for administrators as one of technology.
“From due diligence to investment monitoring and real-time reporting to LPs, processes across the alternatives universe will be streamlined and improved. Those service providers that fail to embrace emerging technologies will fall behind,” says Preqin.
In a sponsored Q&A with Tim Toska, global head of private equity at service provider Alter Domus, he talks about some of the unprecedented challenges private equity managers confronted this year, not the least of which was trying to build relationships remotely. Working remotely has demonstrated the critical importance of technology to fund managers.
“If you're working remotely, you're not able to handle everything, so having a strong service provider allows private equity managers to really focus more on the critical areas of their business,” he says.
In a second sponsored Q&A, this one with Nikolaos Perros, head of private equity at Citco Group, he makes the argument that after weighing the need to invest heavily in technology, many fund managers have chosen to partner with administrators that have already done that.
Cybersecurity, data conveyance and access to a digital portal to replace paper-based processes are the capabilities fund managers most need. “To deliver on these three aspects, as well as help firms evolve in a digitally driven world going forward,” Perros says, “Intimate technology expertise is a must for fund administrators.”
Image by Lorenzo Cafaro