The fund administration landscape for illiquid assets such as private equity and real estate is undergoing profound and far-reaching change.

Since the 2008 financial crisis, there has been rising pressure from regulators and an accompanying raft of new regulations is impacting the industry. At the same time, technological advancements have changed investors' expectations and the digitalisation of products and processes is in full swing.

Amidst these changes, TMF Group has witnessed first-hand the substantial growth in private equity and real estate (PERE) assets over the past decade. In fact, PERE assets have more than doubled from EUR 3 tr to EUR 6 tr since December 2007 - and many forecasts suggest this number will rise to over EUR 9 tr by 2020.

We have identified four key trends that are driving developments in global closed end fund administration.

Evolving investor behaviour

Much of the growth in PERE assets can be explained by changing investor behaviour. In the post-crisis world, a persistent low interest rate environment and weak returns in other asset classes has led investors to increase their allocation to less liquid investments.

For the most sophisticated and experienced investors, there is a growing appetite to invest directly, or focus on co-investments with general partner (GP) or joint venture structures rather than traditional commingled fund structures.

Investors want greater ownership of their investments, and with that comes a whole array of issues that need to be carefully considered. These include questions around how to structure the investment, how to administer it, what gets done in-house and what is better to delegate to a third party.

There are significant regional differences between the US and European markets. The European market is highly regulated, with all European managers subject to Alternative Investment Fund Managers Directive (AIFMD) regulation - and therefore having a wide range of reporting and regulatory compliance requirements to adhere to. As a result, many are already working with specialist partners to delegate their back-office functions.

In the US, most GPs still do a lot of the work in-house. There is a huge slice of the US private equity market that is yet to change their business model and seek external support, but this is slowly beginning to change. The same can be said of the real estate market.

Technology is driving transparency

Technology is helping to 'democratise' access. It is also shaping the way that investment activities are conducted. As alternative fund managers use more, higher quality data, it allows them to improve their decision-making skills.

The sophistication of cloud platforms and applications has been a game changer for fund managers. The Internet of Things has, for example, started to revolutionise how real estate investment managers monitor the efficiency of properties. Technology systems are now being deployed within buildings to measure CO2 emissions.

Such is the precision of these analytical tools that a real estate manager can detect, in advance, when a heating system might be about to fail and need replacing. Digital technology is giving managers and their end investors a fascinating insight into building performance, just as one might examine the performance of an equities portfolio.

Whether it is a private equity fund or a real estate fund, investors demand the ability to analyse their investments with as much precision as possible. This is not just to monitor investment performance. They also want transparency on the amount of leverage being used in the fund, and how fees and expenses are being calculated.

Greater back-office due diligence

Although a well-established process in hedge fund investing, operational due diligence (ODD) is still a relatively new discipline in the closed-ended space.

It's evolving rapidly as PERE managers of all sizes realise they need to prepare themselves to deal with greater investor queries. As such queries, and indeed on-site visits from a more engaged investor base, increase, they need to have a heightened awareness of their overall control environment, operating model and third-party service providers they use.

In the PERE space, the back office of GP's is still a very manual oriented function compared to the hedge fund industry, which has seen automation of both the manager's back office and its service providers.

Some of the questions that are important for investors to consider might include: How is the firm structured organisationally? What is the governance framework and how are decisions made? How is staff aligned with investors and how are they incentivised? How do the non-investment functions of the manager operate (Operations, Finance, Legal, Compliance, IT) and are there sufficient controls in place to monitor the fund's service providers and help the manager to implement the investment strategy?

Investors are allocating capital and locking it up for long periods of time. So it therefore makes sense that sufficient due diligence is carried out across different disciplines, to get a clear sense of the total risk (both investment and operational) and who that investor is going to be partnering with and whether there is a correct alignment of interests in place with the manager.

Fund managers are looking to new jurisdictions

The global flow of real estate investments cross border is holding up in search of yield.

There is a clear diversification trend, across commercial segments, residential, logistics and real estate private debt. This trend extends to greater geographical diversification - not only US and Western European countries but across fractured markets in continental Europe, BRIC markets and other emerging markets.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.