Kai Braun is PwC’s alternatives advisory leader in Luxembourg. He spoke with Delano about private market fund service provider challenges during Q4 2022. Photo: Matic Zorman / Maison Moderne

Kai Braun is PwC’s alternatives advisory leader in Luxembourg. He spoke with Delano about private market fund service provider challenges during Q4 2022. Photo: Matic Zorman / Maison Moderne

Staff, technology and margin concerns will weigh on alternative fund service providers in 2023, says Kai Braun, consulting partner at PwC Luxembourg.

Aaron Grunwald: What are the main challenges that service providers in the alternatives space will be facing in the next year?

Kai Braun: Probably, had you asked me a few months ago, I would have said the sheer growth that they have to continuously deal with, like over the last two years. I’m not saying that’s not the point, it will remain a growth year, because a lot of funds have been raised and they need to be deployed. There will also be new opportunities. But obviously, the world has changed a little bit. There’s a slowdown in transactions. Due to that, we probably will come into a crisis mode in the next few months, and then we need to see how long that will take. That means that asset servicers have to take stock of where they stand, take good care of their clients and really focus on quality delivery of their services.

The past couple of years, margin pressure has been one of the main challenges facing service providers. The economic slowdown and inflationary environment probably won’t help margins very much, will it?

Spot on there. I think margin pressure has already happened, fees have drastically gone down, both on the depositary side and the administration side. When speaking to some providers, I hear that in RFPs, work really is being given away nearly for free, which is an issue in itself because it means that some providers are, maybe, trying to buy market share. And those prices are going to stick.

You mentioned inflation. Obviously that’s going to be difficult in Luxembourg, where people to deliver the services are still difficult to find, are expensive. In Luxembourg, we’re still in an environment where salaries are rising. So that needs to be coupled with the delivery of good quality. I think the main focus that asset servicers should put on right now is everything around technology and data. I’ve been blowing that horn for a long time. But it’s really the time now.

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I think it’s time to not continuously throw bodies at problems, but really have systematic solutions. Because I think that, in general, the industry has to grow up. If I compare the alternatives industry to the banking industry, for example, banking is much more advanced when it comes to processes, organisation, rigour, and therefore also technology and data. And then in alternatives, we always have got the excuse, ‘but it doesn’t quite work like this in alternatives, because we’re all different, every transaction is different, etc.’ And yes, that’s true to a certain extent. But especially the asset servicers can find solutions and can build out additional solutions to make things more automated. And there are really good examples out there, which are being used by some administrators. But not across the board. And especially not across all client segments and clients.

Could that translate into a slowdown in hiring? Maybe the focus will have to be more on retention and less on recruitment?

Definitely the focus needs to be retention. The people that the admins and depositories have in their teams already today know that firm, know those clients, know how to work with them. It’s always easier to work with those people. So retention is key, for sure. But, nevertheless, recruitment has to continue as well, because I know for a fact that a lot of those actors currently use temps, third-party providers, etc. That’s not sustainable either. It’s very costly. Ultimately, you want to have your own people. Therefore, recruitment is still very, very high on the agenda.