Investments are pouring into Private Equity and Real Estate funds driven by increased investor demand for products, strong returns on investment portfolios and changes in investment and redemption processes.
Fueled by an infusion of new capital, managers are looking to diversify into new asset classes, geographies and products. But it’s not as simple as identifying the best investment opportunities or new markets. Successful expansion requires the right operational support to ensure investment manager and investor transparency, and that reporting requirements are addressed, among other issues. This has many managers asking: Do I have the operational framework I need to expand my business?
In this regard, these are unprecedented times for managers. Through June 2017, driven by record fundraising, the industry expanded by 9.6% and total assets under management for the private equity industry grew to $2.38 trillion, according to Preqin’s 2018 Global Private Equity Report. This continues nine consecutive years of expansion in the wake of the global financial crisis. The ongoing combination of low interest rates and high valuations have continued to fuel allocations to private equity, with investors seeking return premiums associated with longer-term investing. Real estate funds are anticipating increased allocations as well. 56% of global investors plan to increase their exposure to real estate, targeting an average 10.2% of total capital allocation, according to data from the Global Investment Intentions Survey 2018, published by INREV, ANREV and PREA.
To accommodate the flow of new allocations, investments in people, technology and data—and finding the right operational partner to ensure implementation—will be crucial to the future success of Private Equity and Real Estate funds. Done right, a fund can achieve the scale and operational excellence required to meet market and investor demand. Conversely, failing to address these needs and implementation at the front end could end in disaster for the fund. Underinvestment in any area could lead to problems such as faulty investor reporting, legacy systems incapable of supporting new investment types and the lack of properly trained people or sufficient staffing to meet increased investor demands. These are the critical factors to examine in each area to maximize the fund expansion opportunity.
People
Technology and data investments enable firms to scale rapidly but with scale comes resourcing constraints, and most firms are not set up to significantly increase headcount quickly. Despite the advancement of technology, these businesses are still very people oriented at the core. Establishing the right team is the first step to ensuring operational excellence. A well-chosen operational partner is crucial to providing PE/RE firms external expertise for the needed skill sets, specialist perspectives, and to build versatile teams. This enables investment firms to deploy internal resources on higher-value tasks, such as relationship management, sales, and investment management. This frees human capital from core processing. The value-added functions also place a greater emphasis on hiring the resources to create higher investment return to the benefit of investors.
Technology
Technology is playing a major role in operational improvements and cost reduction. With the arrival of automation, new analytical tools and artificial intelligence, the cost of running many functions in a typical firm—from the front to back office—can be reduced. State-of-the-art technology empowers firms to grow faster and diversify more easily. From seamless APIs to streamlined systems, the right technology can bring much-needed scale combined with the financial benefits of IT efficiency. Further, institutional investors increasingly want more control over investment direction and fees, as well as more transparency into where their money is going, according to BNY Mellon’s survey conducted in partnership with FT Remark. Managers are listening—98% of managers say that investor demands are leading them to focus on how technology infrastructure can help support operational efficiencies. It’s essential that firms remain flexible to change and innovation, taking advantage of industry disruptions instead of fearing them. One challenge has been to strike the balance between the high upfront cost of implementation against the long-term benefits. Platform models, which share infrastructure across multiple providers, with their own segregated data and investment platforms, can provide economies of scale difficult to achieve from a single source.
Data
Growth and diversification has led to a proliferation of data—both financial and non-financial. Firms are increasingly challenged with managing the volume and diversity of data, and consolidating and consuming that data. When involving multiple parties and providers, controlling and standardizing data further becomes an issue. It has now become critical to establish data requirements and work with partners that can help manage data both internally and externally. Increasing and more varied investor demands on data reporting have also made it difficult for Private Equity and Real Estate managers to handle requests. The consequences of inaction or delays in updating data systems have the potential for loss of investment as investors move to more technologically advanced firms. To avoid this concern, managers need to invest in systems that unite investment data inputs with investor reporting, to create operational harmonization across the data framework.
In the current low-interest environment where returns are hard to come by, yield-hungry institutional investors are expanding their allocations to Private Equity and Real Estate. Now is the time for fund managers to make the necessary investments to capitalize on inflows and take advantage of investor interest. The key to capitalizing on this interest and scaling fund operations is building an operational framework for growth. Where any one of these initiatives could be a massive investment and undertaking for a Private Equity and Real Estate fund, the right operations partner brings cutting edge technology, data and people to address issues of scale for investment funds today and in the future. Free of the constraints associated with scaling operations, fund managers can focus on creating more value for investors through investment decisions and portfolio return.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. Products and services may be provided under various brand names and in various countries by subsidiaries, affiliates, and joint ventures of The Bank of New York Mellon Corporation where authorised and regulated as required within each jurisdiction, and may include The Bank of New York Mellon, at 225 Liberty St, NY, NY 10286, USA, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, UK, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, Belgium, authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and a subsidiary of The Bank of New York Mellon. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, UK, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. The Bank of New York Mellon and its subsidiaries and affiliates have various branches and representative offices in the Asia-Pacific Region which are subject to regulation by the relevant local regulator in that jurisdiction. Details about the extent of our regulation and applicable regulators in the Asia-Pacific Region are available from us on request. Not all products and services are offered at all locations. The material contained in this document, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. The contents may not be comprehensive or up-to-date, and BNY Mellon will not be responsible for updating any information contained within this document. If distributed in the UK or EMEA, this document is a financial promotion. This document and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. Similarly, this document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The information contained in this document is for use by wholesale clients only and is not to be relied upon by retail clients. Trademarks, service marks and logos belong to their respective owners.
© 2018 The Bank of New York Mellon Corporation. All rights reserved.
