I’m often asked, “What makes a great alternative fund service provider?” The response isn’t as obvious as it might first appear. The word that complicates things the most is “alternative”--without that, responding to the question for the more traditional retail fund administrator is much easier, and would largely revolve around having the right detailed processes and big enough systems to handle the huge volumes involved.
When talking about alternative fund administrators, it’s very different. Before expanding further, let’s first be clear on what we are talking about when we speak of “alternatives”, particularly in the context of Luxembourg and the members of L3A. Broadly, alternatives refer to private equity, real estate, infrastructure and private credit asset classes.
The nature of such alternative investments, often referred to as “real assets”, is for transaction sizes to be large in size and as a result, the volume of transactions relatively low. Whereas in retail funds, there may be tens or hundreds of transactions in a day, alternative funds may only see a handful of large-scale transactions in any one year as the fund invests and disposes of assets. This results in transactions which are unique to the particular investment itself, giving less opportunity to automate and process in a standard way.
Five factors
With this in mind, there are a number of factors which contribute to the efficiency and effectiveness of alternative fund service providers. These can largely be boiled down to the following:
Quality of operational team: Given the nature of the business as described above, any “great” provider will need to hire the best operational resource--people experienced in the asset class and demonstrating an in-depth understanding of the client’s business and investment operations.
Effective use of technology: Though investment asset volumes are low, the volume of data points and transactions linked to such assets is often huge in scale. This requires use of systems dedicated to the asset class and efficient in processing and recording the data needed by investment manager clients and their investors. Great providers will dedicate a significant part of their investment budget to acquiring and developing the best systems.
Access to underlying data: Increasingly over the last years, clients are looking to administrators to provide them with the data they need to satisfy their investors who have become increasingly demanding, particularly in relation to performance and risk data and reporting. The best administrators have understood the need to source and provide such data.
High-end reporting: While the asset class has been historically opaque, investment management clients are increasingly looking for more in-depth and frequent reporting which they can provide to their end investors, similar to what has been the case on retail funds for many years. Great administrators will leverage their extensive technology stack and often build bespoke reporting delivered through client dedicated web portals.
Relationship management: Finally, the complexity of the asset class and associated structures requires great administrators to assign great relationship managers to their clients, capable of closely monitoring service levels, ensuring that service potential is maximised and effectively addressing the inevitable issues that arise on assets as complex in nature as alternatives.
Alternative providers strong in all the above are, and will continue to be, the greats of the industry!
This guest contribution originally appeared in the October 2024 on private market funds and Luxembourg’s fund ecosystem.