Nikolaos Perros
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We spoke with Nikolaos Perros, Head of Private Equity at Citco Fund Services (USA) Inc., and Kenneth Leong, COO & CFO at Axiom Asia Private Capital, about the future of private equity and fund administration in Asia amid growing industry competition, evolving LP expectations, and digital transformation
We spoke with Nikolaos Perros, Head of Private Equity at Citco Fund Services (USA) Inc., and Kenneth Leong, COO & CFO at Axiom Asia Private Capital, about the future of private equity and fund administration in Asia amid growing industry competition, evolving LP expectations, and digital transformation
Asia-Pacific is a booming market for private equity. How is private equity and fund administration evolving in this region?
Nikolaos Perros: The number of Asia-based private equity managers raising new funds targeting the region has been rising in recent years. Global investors and allocators, seeking to gain exposure to this fast growth region, have increasingly shifted their allocation interests in favor of local fund managers. Moreover, the allure of a potential competitive edge over foreign GPs due to access to unique deals and expert, on-the-ground knowledge of the local landscape will likely drive continuing future demand.
Against this backdrop, deals are also becoming more complex in Asia, while simultaneously, fund managers possess a significant amount dry powder. To overcome this demand imbalance, GPs have been forced to utilize ever more creative ways to gain exposure across the investment lifecycle. We have seen an increased use of innovative access mechanisms including credit and credit derivatives, bilateral and bespoke credit facilities, and a blurring of traditional bank-backed syndications markets. Due to this, the private credit space is also growing quickly in Asia and we are seeing rising demand for administrators to provide loan administration solutions that integrate more closely with fund administration.
With more fund managers entering the market to capture emerging investment opportunities, we expect outsourced fund administration to become more prominent in Asia. Fund managers face growing competition for capital and transactions; in the search for these, more complex operations, cost-efficiency improvements, eased regulatory burdens, better risk management, and available access to value-adding technology will be more important than ever.
In fact, the outsourcing transition has already started. Asia-based fund managers are recognizing the need to modify traditional back-office operating models away from maintaining large in-house accounting and IT teams, and are instead refocusing firm resources and energy on managing client relationships and investments. Furthermore, newly established managers are outsourcing many aspects of fund operations from the get-go, realizing the value in using a reputable fund administrator to gain credibility with investors.
Kenneth Leong: Looking at general fundraising data more recently, despite continued interest among foreign investors in Asia, private equity fundraising has trended downward since 2018. A key reason for this decline has been a tightening of regulations in China around capital flows from Chinese institutions, like domestic commercial banks, into private equity and renminbi funds – a strong source of fundraising growth in the region since the Global Financial Crisis (GFC). In addition, this year we expect COVID-19 to put further downward pressure on fundraising growth in Asia.
That said, looking only at US-dollar fundraising from institutional investors outside of Asia investing into this region, we will likely see a continued steady uptick in fundraising volume. The primary driver of this trend is a growing realization of the potential returns available on this side of the world. After years of strong performance from US and Western European buyout funds post-GFC, investors are warming to the idea of looking beyond their home countries and mature economies.
Of course, one big bright spot in Asia for private equity returns over the years has been Chinese venture capital. Returns in Asia still look very strong, so I think interest in regional venture capital opportunities will continue to grow. Even among our own investor base, LPs that have previously felt they would never look at venture capital – let alone in Asia – are starting to change their mind. Against this backdrop, without the COVID-19 outbreak, I think we would have seen a lot more fundraising being completed by both Chinese and Southeast Asian venture capital funds.
With the region maturing and more players entering the market, the PEVC landscape is becoming more competitive and complex. On the deals front, money is not as scarce as it was before, there is a lot of capital chasing deals, and private companies have more options for financing today beyond just private equity growth funds. Driving continued growth in portfolio companies and differentiating yourself as a fund manager to investors is also becoming more challenging. Foreign LPs are becoming more selective in their allocation decisions, making commitments to ‘local’ GPs with robust, long-term track records instead of just following brand names. Furthermore, investor due diligence around operational efficiency and processes is playing a bigger role in fund manager assessments – bringing closer examination of established fund administration relationships.
How do you see fund administration changing by 2025?
Kenneth Leong: LPs are increasingly sophisticated. In the past, stakeholders may have been happy to receive standardized reports from their GPs on a regular basis. Now, investors want not only more detailed information, but data available to them in a timely manner with quick turnarounds on any request. These changing needs have a knock-on effect on fund administration relationships with regard to how fast and easily they can help firms like us meet these evolving demands.
What these quick and complex information exchanges mean from an operational perspective is a growing reliance on technology integration for both GPs and fund administrators in the future. Basic things – even waterfall charts that used to be done manually on Excel spreadsheets – just won’t cut it anymore.
In our own experience, Axiom deals with a lot of data every day from a variety of sources and in various forms. To improve the real-time usability of this information, and to enable its efficient dissemination across stakeholders, we are developing our own internal technology platforms, as well as leveraging digital solutions for investor reporting. Similarly, we see fund administrators equally investing in upgrading their own systems and capabilities to keep up with industry trends. Fund administrators are sitting on a lot of data; their ability to elevate these resources beyond traditional fund accounting to offer value-adding insights for fund managers to make better decisions or improve transparency is just starting to gain momentum. Fund administration will need to evolve with the needs of its clients to stay relevant in a digital world.
Nikolaos Perros: In the past two years, we have seen a huge change in how the entire private capital industry views technology. There is a new belief that technology can bring significant differentiation to many parts of a manager’s operating model: from deal-sourcing and analysis using machine learning, through to automated AML/KYC platforms and digital board meetings on iPads. This paradigm shift has resulted in fund administrators being expected to drive forward a technology-led operating model. This applies both internally in our own operation, and also in how we interact with managers. In 2020 we are at the beginning of this journey, but by 2025 a digital-first operating model will be the standard across all top-tier managers and administrators.
In Asia, managers are beginning to seek digitally knowledgable partners as they embark on their digital transformation journey and data becomes increasingly important to their operations. GPs are looking for solutions that give them greater access to fund, asset, and investor data for their own analytics and reporting. Part of this rise in demand is being driven by the changing requirements of LPs around the world toward greater transparency and oversight in their GP relationships, which is gaining momentum in Asia. In fact, there has been a marked rise in demand for reporting based on the standards of the Institutional Limited Partner Association (ILPA) in the region over the past 12-18 months – indicating a widespread transition toward transparency.
With technology playing a bigger role in fund administration, operational vulnerabilities are changing, driving fund administrators and GPs toward a more holistic understanding of the evolving risks. Cybersecurity concerns, for example, are now top of mind and will be into the foreseeable future. This has spurred significant attention toward secure online transmission of investor documents across investor portals, as well as rising demand for greater independence from GPs in cash custody and payment processing. Asia-based fund managers realize they may not be as well equipped to deal with rising cybersecurity threats, where traditional sources of communication, such as email, are increasingly a target for hacking and phishing activity.
What factors are driving these trends across the private equity industry?
Nikolaos Perros: Improving operational efficiency has always been an important factor supporting the growth of fund administration, but digitizing an operating model brings much more than that. Investors and managers have understood how important data is to their decision-making processes. For example, if investors wish to compare the costs and performance of their holdings, they need consistent clean data from their managers. If managers want to understand and forecast the carry generated by their investments, they need digital tools with accurate data too. This demand for access to insightful information is the primary force driving the industry forward. As more managers and administrators move to data-led operating models, it will become the price of entry to the market.
Additionally, there is a more utilitarian force at work. The private equity industry is more global than ever. Operating in the old face-to-face, wet-ink manner is impractical for today’s fund managers. This is increasing the appetite across the board for digital tools. Digital document signing, virtual meetings, virtual board packs, cloud document storage, and much more, are all now a standard part of operational toolkits. COVID-19 has also accelerated the digitalization of the private equity industry: fund managers have revamped operating models and embraced technology solutions at a record pace. In our experience, once organizations adopt these new technologies they tend never to go back to the old ways of working.
Kenneth Leong: Besides competition on the deals and fundraising front, stakeholders are looking for improved efficiency in their relationships with GPs. Possessing robust, streamlined operational processes that can cope with more complex business requirements is something that can set you apart from peers. In addition, leveraging technology as part of this process allows you to take advantage of data in value-accretive ways that were just not possible before, whether to improve transparency or cost-effectiveness.
Another driver is the increasing regulatory pressure facing GPs. For example, GPs are leaning more on fund administrators to improve Know Your Customer (KYC) and Anti-Money Laundering (AML) processes to cope effectively with tightening requirements. How quickly and painlessly you can onboard new clients can also be a source of unique competitive advantage. Finding fund administrators that are attuned to the needs of both investors and GPs, who can work with you to adhere to strict compliance procedures while also being flexible enough to be client centric, is very valuable.
Going forward these trends will only accelerate for both GPs and fund administrators, forcing both to evolve together.
What are the biggest challenges facing the future of fund administration?
Nikolaos Perros: There are two key challenges facing fund administrators in this digital future.
The first is data access. All of the advantages technology can bring are dependent on accurate and timely data being available to all participants. This means administrators must learn to deliver data quickly and digitally, directly into managers’ toolkits. In the past this was somewhat solved by having administrators use manager systems, but this negates the value of an outsourcing arrangement. A much more effective approach is for a manager’s vendors to deliver their data to a central repository or data lake that a manager can then use to create insightful reporting and data-led processes.
The second challenge is associated with the question: as technology enables more straight-through processing and less reliance on people, how will administrators react and stay valuable to managers? The answer here is that administrators must become providers of insight. It will no longer be of value to run a waterfall model in Excel; it will be valuable to run scenario modeling to help managers forecast their income. It will no longer be valuable to send investors a PDF capital statement; it will be valuable to help a manager deliver the data straight into an LP’s system. Administrators will need to become solvers of business problems – true partners to their GPs.
Kenneth Leong: As fast and accurate data becomes more valuable to fund managers, throughout various aspects of our businesses, fund administration will need to evolve with us to adapt to the changing needs of LPs and GPs. Fund administration as an industry will need to evolve to better understand the dynamic needs of their clients that go far beyond the traditional services of standard fund accounting. Technology will continue to play a growing role in fund operations – inevitable to keep up with the informational demands of today.
Going forward, improving system integration between GPs and fund administrators will become more important as data increasingly needs to move seamlessly and quickly between platforms. GPs, like ourselves, are increasingly technologically skilled, building better digital solutions in house. Fund administrators will likely need to offer more technology platforms that are open-ended, allow for better interfacing with differentiated systems, and enable straight-through processing of information in a secure manner. That said, accessing sources of clean data in different formats will remain a big challenge. Addressing these pain points could allow for advancements in automation and facilitate their application in fund operations.
I still think regulatory issues in general – including KYC and AML considerations – will continue to place pressure on GPs and fund administrators. Compliance requirements are increasing and investors are facing new demands when allocating to fund managers. The challenge in this case for fund administrators will be helping GPs strike an effective balance between compliance and the unique circumstances of international investors.
In this environment, will fund administrator relationships become more important?
Nikolaos Perros: An administrator can help a manager create operational differentiation or operational alpha to help them stand out and become more resilient in times of uncertainty. They can also deliver better information to a GP’s deal teams, their investors, and their management team to enhance a firm’s value-adding capabilities. In short, this allows managers to focus on their core competencies while knowing they are developing the most robust operating platform possible. This collaborative relationship between fund managers and fund administrators will definitely become more important.
Kenneth Leong: Finding the right partner who is aligned with your needs and has the unique expertise to achieve your outcomes will become more important. At the end of the day, fund managers may not have all the necessary expertise and scale in house to tackle every fast-moving problem we face – especially on the technology front. Fund administrators that understand the need to evolve with you on your own operational journey will be key. This relationship is increasingly a two-way street today, where constructive feedback and adjustment allow both parties to ultimately arrive at a process that delivers real value-add.
About Citco Group
With over $1tn in assets under administration and over 7,000 staff deployed across 40 countries, the Citco Group of Companies (Citco) is a leading provider of asset servicing solutions to the global alternative investment industry. With more than $300bn of private equity committed capital under administration, serviced by a global team of more than 800 professionals, Citco’s dedicated Private Equity teams provide a full range of fund and SPV services, including Citco Waterfall™, a proprietary waterfall payments calculation tool; and Æxeo®Treasury, a proprietary treasury system covering SWIFT payments, cash management, and invoice management.
About Axiom Asia
Axiom Asia Private Capital (Axiom Asia) is an independent fund management firm focused on investing in the Asia-Pacific region. Established in 2006, Axiom Asia currently manages six private equity funds of funds, with total commitments of over $5bn. Axiom offers investors access to top-tier mid-market private equity funds diversified across buyout, growth, and venture capital. Our diverse investor base include endowments, foundations, family offices, pensions, and financial institutions, spanning the globe.
For more predictions and projections from Preqin on the future of the alternatives industry, visit our Future of Alternatives 2025 Content Hub.