Fundraising in emerging markets has exploded. In 2003, just US$3.5 billion was committed to funds operating in emerging private equity markets, according to figures compiled by the Emerging Markets Private Equity Association (EMPEA); by 2007, that figure had shot up to nearly US$60 billion. It’s an incredible success story, and one that has gone far from unnoticed by private equity fund administrators seeking growth in new markets.
The Way Things Were
Not so long ago, fund administration was pretty much limited to servicing clients in the more established markets of the US and Europe from offices in offshore jurisdictions like Bermuda and the Channel Islands, plus London and the US. Smaller and mid-sized funds operating in emerging markets had little choice but to build their own back office operations and report to their limited partners themselves. Larger funds setting up in new regions either already had back offices from which they could do their reporting on activity in emerging markets or they used their existing fund administrator operating from one of their offices.
But increasingly, fund administrators, particularly the larger and more institutional ones, are seeing their business as a global one. Citi Private Equity Services, which was previously independent player Bisys, is one administrator taking a global view. “We have five offices; four in the US and one in Hong Kong, which we opened in December 2006, but our reach is far broader than that now that we are part of the Citi network,” says Joe Patellaro, managing director of Citi Fund Services. “We have been able to work with our Citi colleagues in Latin America, the Middle East and Asia to service clients in those regions.”
JPMorgan Fund Services is also set for expansion into newer markets. Spawned from the back office of JPMorgan’s own private equity investment arm in 2005, the business has grown rapidly.
“JPMorgan Private Equity Fund Services was born of JPMorgan Partners, a top-tier private equity firm with 20 years of experience,” says James Hutter, global head of JPMorgan Fund Services. “In the past two years, we have been doing fund administration for third parties and have grown to service over 200 funds. We started in the US and have moved into Europe, Asia, Australia and the Middle East. We are in six locations including Europe, Middle East and Africa and Asia Pacific, but we are looking at expanding our footprint.”
But it’s not just the fund administration arms of the investment banks that are seeking global expansion. Five years ago, private equity specialist Mourant was present only in the Channel Islands.
Since then, it has established offices in New York, San Francisco, Hong Kong and Singapore and has recently set up a sales and marketing operation in Dubai with a view to providing full services at some point in the future.
“Our expansion into Asia is part of Mourant’s strategy of growing into all the world’s major financial jurisdictions,” explains Tim Mann, head of Asia fund administration at Mourant. “We set up in both Singapore and Hong Kong because we felt that if we wanted to come to Asia in a compelling form then we had to be in both places. Asia is such a large market in which the countries each have different dynamics and quirks that you have to have good coverage to service clients’ needs appropriately.”
There are also some smaller, niche players setting up in emerging markets. Skye Fund Services is one example. Established in 2007, the firm is present in Hong Kong and Singapore and services private equity and hedge funds in Asia. A smaller operation, it emphasises its independence and focus on providing just fund services rather than attempting to cross-sell other products.
The First Step
Asia is undoubtedly the market of choice for most of the administrators, with most of them establishing their first presence in emerging markets there, followed by the Middle East. Hardly surprising, considering the massive amount of capital that Asian funds have raised over recent times. EMPEA puts Asian emerging market fundraising at nearly US$28 billion in 2007 and over US$19 billion in 2006; that’s up from just US$2.2 billion in 2003. There’s clearly a lot of fund administration business to be done in the region. And those figures don’t take into account many of the pan-Asian and developed Asian market funds, which puts total Asian fundraising far higher.
The Asian Private Equity & Venture Capital Report for 2007 (published in January this year) shows that, despite the impact of the global credit crunch on private equity in Europe and North America, total Asian Pacific private equity assets under management closed on US$200 billion, up by almost 14% over the year to US$190.7 billion, from US$167.3 billion in 2006. Furthermore, funds raised for Asia Pacific during 2007 stand at US$50.9 billion, up 23% from US$41.2 billion in 2006, and mark the first time ever that more than US$50 billion has been raised.
Not surprisingly then that Mann says: “We see Asia as a massive opportunity. The majority of the work we are taking on now is for new clients and it will be that way for some time. But we also want to be able to support clients with their growth plans. We can partner with them to set up in Asia.”
Patellaro agrees: “We like what we’re seeing in Asia. The market is becoming more mature and some of the larger players have opened up there, yet there is still a lot of opportunity and commitments going to mid-market funds.”
HSBC Fund Services has been in the Asian market for some time, but has only recently committed to private equity in a big way; it focused mainly on hedge funds previously. Its head of business development in Asia Pacific, Colin Lunn, has seen competition come into Asia. “The market for fund administration has become more competitive here over the last 12 months as we’ve seen some of the niche players set up bases in Asia,” he says. “There are also more institutional names here. It gives clients more choice, but we think that we can offer them services that others can’t from the broader HSBC group activities, such as deal flow and financing.”
Clearly, the rush to go global is giving fund managers in emerging markets a level of choice about fund administrators that just didn’t exist three or four years ago. But they have to be open to the idea in the first place, and not all are. “In emerging markets, it’s possible to put together in-house teams relatively cheaply. Outsourcing is definitely a more expensive option for them,” says Andrew Bentley of Campbell Lutyens, which has raised funds for firms based in Asia and the Middle East as well as Europe and the US. “But it’s about more than money. It’s a big strategic issue and many struggle with the concept of losing closeness and control over a vital part of their business: investor relations.”
“It’s easy to see the rationale for using a fund administrator, but there are a lot of reasons not to,” he adds. “If you’re a successful fund growing your asset base quickly, you might feel you don’t have time to hand over to a third party. It’s quite an intrusive process. Also, a lot of players in some markets are captive groups and they already have client relationship teams that are able to turn their hand to fund reporting.”
This reticence about using a third party in what is a key role for private equity firms is understandable, given the fact that fund managers just haven’t had the option previously.
But, say the administrators, there are very good reasons to consider outsourcing, such as ensuring that firms can concentrate on their core skills of investing in, managing and exiting portfolio companies. This is especially true of the smaller and mid-sized players. “On the boutique side, there are a lot of good quality managers with a small back office, but as they do more deals and start managing more money, they need fund administrators to take the strain; we can provide them with additional resources,” argues Mann.
Another is technology. All administrators seem to have their own anecdotes about private equity firms running out of rows and columns on their Excel spreadsheets as their investments and funds under management have increased. They argue that it’s hard to maintain professionalism and accuracy without the right tools for the job. “Unless you have a huge budget, keeping technology up to date becomes difficult,” says Patellaro. “People do still use Excel, but when we take on a new client and convert their spreadsheets, we usually find errors, particularly in waterfall calculations. The right technology provides investors with the transparency they need for their own purposes and to gain comfort about investing in an emerging market fund. To put this into context, our annual technology spend is in the region of US$600 million.”
Yet there are some more compelling arguments for funds in emerging markets in particular to consider using a fund administrator. Good governance is one. “If groups are accessing institutional LPs, they will be under pressure to produce high quality, standard reporting,” says Patellaro. “LPs expect the same levels of transparency whether a fund is in a developed or an emerging market; you could argue they expect better standards in emerging markets to compensate for the potentially higher risk they are taking in a new market.” It’s a view shared by Mann. “Outsourcing is increasingly being seen as good practice,” he says. “Private equity is generally not regulated, but it will move towards greater regulation and getting an external party to carry out reporting points to good governance.”
And, say the institutional players, having an administrator with a well-known and respected name behind it can be attractive for LPs. “As part of JPMorgan, we are a regulated public company and so that provides comfort to LPs of funds that use us,” says Hutter. “Fund investors are interested that the processes, controls and data security are all in place and it’s even more important for funds in emerging markets to show that a third party is doing the accounting and reporting.”
Getting the right people is another issue for funds in emerging markets, where the pool of experienced people from which to draw may not be very large. “There is a strong argument for funds in emerging markets to use an administrator and that’s why we’re seeing more firms moving to an outsourced model,” says Hutter. “For many, it’s hard to find staff with the right expertise. You need people with very specific skills and these aren’t often present in less developed private equity markets. Even if you find them, you have to be able to offer them good career prospects and training. That’s not easy within a private equity fund environment, particularly a small one. We, on the other hand, can attract the best people and retain them with excellent career options and development.”
Today’s uncertain economic climate may play into the hands of the administrators, too, especially for new private equity operations. “One major source of work for us is the institutions that have been in finance and investment for many years but who are new to private equity,” says Mann. “Putting together a back office from scratch is hard at any point in the cycle, but particularly at the moment any attempt to increase headcount is tough. A decision to outsource can be a good one politically, but it also means they can leverage our knowledge, systems and infrastructure to ensure they are reporting effectively.”
Private equity fund administration has only really taken off in a big way in developed markets over the last five or so years. But it looks as though it could take off rather quicker in emerging markets as fund administrators increasingly adopt global strategies. Hutter says: “Our vision is to be there as emerging markets grow. Fund administration is at a very early stage in many of these locations and so I see this as a big opportunity for us.”
This article first appeared in emerging Private Equity’s July/August 2008 issue. For more information, please visit http://www.emergingpe.com/.