European Union: Encouraging Fund Administration Trends In Europe

With global Private Equity (PE) groups continuing to outsource a number of standard accounting and administrative tasks for funds and SPVs, TMF Group sees a huge opportunity going forward.

As Bruno Bagnouls, Managing Director for TMF Luxembourg and Global Head of Alternative Investments, explains: "In Europe, Private Equity and Real Estate (PERE) clients are looking to simplify the outsourcing model, which relates both to the contractual agreements they have with service providers but also limiting the actual number of service providers they partner with. Part of the reason for this is there's a clear trend, even among mid-sized managers, to have standardised but also more specific reportings.

"We try to offer as much of a standardised approach as possible in the contracting arrangement, which is the same in all the countries we cover. We want to have the right relationship management initiatives and abilities in place to give our PERE clients the most effective solutions, including standardised financial reporting."

Bagnouls says that when discussing specific reporting needs with clients, "you need to understand their valuation methodology, what calculations they use to price the assets. We build specific operating models for them, aside from any other additional reporting they might need".

In his view, these managers want to outsource to a specialist organisation, not one that uses a standard approach to reporting.

"The complexity comes from the fact that our approach is to have a vertically integrated model from the fund to the intermediate SPV holdings in Luxembourg, the Netherlands, Jersey, all the way down to the individual operating companies," states Bagnouls.

There is only so much standardisation one can expect to do for PERE funds given the idiosyncrasies of how each fund management group operates. Still, there are a number of processes that TMF Group is looking to develop using cutting-edge technologies such as Robotic Process Automation, which it hopes will help improve the automation of the funds they service in different geographies.

"Another element of technology we are developing is how to have full access to all the data and how we could build specific reporting.

"The next step in the evolution of our business will relate to how one accesses fund data and documents through a client portal so that managers can pull up any information they require on the fund holdings, SPVs and on specific LPs for the entities that we provide accounting and financial reporting services to" explains Bagnouls.

The outsourcing trend in Europe among PE managers still has plenty of room for growth. It is, in many ways, unavoidable because LPs are demanding greater levels of transparency from all of their underlying managers: be they long-only, hedge funds or illiquid PERE funds. There is a certain expectation.

"In our privates lives we have more and more access to information when and where we want and of course – it is natural that investors want to apply this to their business lives as well, especially as it relates to illiquid fund structures where fund information, up until now, has been more limited," says Bagnouls.

PERE managers have this in mind when selecting trusted partners to work with. They want to ensure that the outsourced fund administrator has the capability to support them in their reporting needs, as and when needed. That is why new solutions such as the client portal Bagnouls refers to are being conceived; administrators are the repository of the fund's data so why not give GPs the ability to create their own reports, ad hoc, when LPs require them?

Instead of just doing canned reports that service the majority of a manager's LP base, the most sophisticated managers are figuring out how to get a data model in place that services 100 per cent of their LPs' needs. The logical extension of this is to put the power in the LPs' hands and make the reporting experience more customisable, dynamic and enjoyable.

"I agree. It has to be clear as well, from the GP's perspective, what sort of information they need to make available to their LPs. This requires two-way communication," says Bagnouls.

Another clear trend that has been developing in Europe is an increasing number of non-EU managers deciding to set up new fund vehicles in jurisdictions such as Luxembourg, as they look to take advantage of favourable market conditions in the region.

Bagnouls notes that previously, some GPs only used Luxembourg for holding companies but are now considering establishing fund vehicles there. The recently introduced Reserved Alternative Investment Fund (RAIF), which offers quick speed to market does contribute to the attractiveness of the jurisdiction.

This is proving advantageous for TMF Group because anyone wishing to establish an EU AIF is required to appoint a depositary under the Alternative Investment Fund Managers Directive (AIFMD).
The role of the depositary under AIFMD is fourfold: to track and monitor cash flows within the AIF, asset verification, safekeeping, and oversight. A non-bank administrator, such as TMF Group, is able to provide such a service, which is commonly referred to as 'depositary lite' even though it is still a fully compliant role under the Directive.

"Unlike a bank, our core business is fund administration and accounting on these illiquid assets held in PERE funds," remarks Bagnouls.

The benefit to this is that when outsourcing, the manager can appoint TMF Group to provide both fund administration and depositary services in a single counterparty relationship, making for a more manageable and cost-efficient solution.

PE managers who do not have their own AIFM license in Europe are also required to appoint a third party AIFM. Some administrators also offer this service as part of an overall turnkey solution but TMF Group made a conscious choice not to apply this for its own AIFM license.

As Bagnouls states: "We want to stick to our core activity of fund administration and back-office accounting and administration for SPVs. We prefer to partner with specialist third party ManCo providers in Luxembourg (and other jurisdictions) as opposed to setting up our own entity."

TMF Group can provide assistance with respect to fund formation and works with numerous legal advisors and tax advisors across Europe to determine the most appropriate infrastructure for a client's European business, whether they need to appoint an AIFM, what the best location would be for their holding companies and so on.

"The trend is very much towards having all of this in one location like Luxembourg. We do a lot of work helping PERE managers at the pre-launch stage, getting the right pieces of the puzzle in place for their European fund business.

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