9AT: Blog

8/7/2024

What Next for Private Equity and Fund Administrators?

A news story from Reuters recently suggested that buyout firm Astorg “is exploring options, including a sale, for its fund services business IQ-EQ” with a view to a sale in 2025.

Whether they sell it next year or hold it for longer remains to be seen. But what does not remain to be seen is the sheer scale of the involvement of private equity in the fund administration industry.

In June this year, trade magazine The Drawdown published its latest Fund Admin Report, which contains a table of fund administration providers, along with their ownership details; of the 30 firms listed, approximately a third are owned either outright by a buyout shop, or have a private equity minority investor.

Private equity firms love themselves a ‘platform’ investment, and fund administrators provide a natural home here due to the complimentary nature of their business with other service providers to pooled investment funds. These deals can scale quickly.

However, the good old-fashioned competitor acquisition would seem to have just as many legs.

Data collected and analyzed by 9AT suggests that, so far in 2024, 281 different firms were listed as the administrator of new private funds based on ADV filings submitted in 2024.* And while some of these private funds administrate their own funds as opposed to hiring an external provider, the long tail in the space remains a boon to buyout firms looking to either enter the space or grow their existing platform portcos.

The outlook for the market is an interesting one. Most industry players agree that generally, the fund administration industry will increase in size, but that is a misleading statement, because its size depends entirely on the AUM of the funds that they administer. Still, with global private capital AUM set to hit $18trn by 2027, there would seem to be plenty of opportunity to for admin firms to increase their AUA.

What is not certain is whether the increase in AUA will be absorbed mainly by the larger firms, or whether smaller players have a chance at closing the gap. One on hand, smaller firms might find it increasingly difficult to compete versus the larger ones as the metamorphosis of a private equity-backed fund admin provider into a diversified middle and back-office fund services business creates a greater gulf between the haves and have nots.

But on the other, smaller firms are nimbler generally, and it is not outside the realms of possibility that a well-funded start-up admin firm could take meaningful share quickly, particularly if they focus on a certain corner of the market – the underlying assets that private fund managers invest into are becoming broader, which should lead to opportunities for specialists to secure a foothold. Add to that the potential for a buyout firm to look to do a lift out of a larger firm’s fund admin team to a separate firm – the advantages which will be existing expertise, existing clients and brand name recognition – and you could see more ‘new’ firms enter the market.

Clearly, there are a few potential developments for the space, and it is unknown which way the market will go. But what is known is that private equity will remain, one way or another.

*The data used in this article comes directly from the SEC’s Form ADV filings. 9AT does not edit or override data, even when it may appear that a mistake has been made by the filer, due to data ethics and methodological considerations.

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7/10/2024

Fundraising Drought? What Fundraising Drought?

Back in April, we took at look at some of the Form ADV data to see how many times a private fund changed auditor. In case you missed it, here is the link to that one.

So, now that the first half of the year is in the books, we decided to take a look at the filings data again but this time from a different perspective – just how many private funds have filed a Form D in H1 this year and what, if anything, can we deduce about the results?

Well, the first thing to note is that, by any measure, the private funds industry seems to remain in good health.

According to 9AT data, 5,632 Form D filings were submitted to the SEC between January 1st and June 30th this year, good for a total Gross Asset Value (GAV) of $146bn.* Of those, 462 were hedge funds ($5.8bn), 1,563 were private equity funds ($76.1bn), 2,583 were venture capital funds ($27.1bn), and 1,024 were ‘other’ private funds ($37bn).

Table 1: Form D Filings, Jan-Jun 2024, Gross Asset Value, by Type

Type	Quantity	GAV
Hedge Fund	462	$ 5,835,772,494
Other	1,024	$ 36,967,567,668
Private Equity Fund	1,563	$ 76,116,296,889
Venture Capital Fund	2,583	$ 27,105,706,746

*On occasion, filers may put the same GAV on multiple filings for the same product, which can lead to double counting in certain situations

Source: 9AT

At the domicile level, naturally, the United States occupies top spot, but in terms of offshore locations, Cayman is, once again, the most common offshore jurisdiction in the Americas for Form D filings in the US, accounting for 245 of the Form D filings in the first half of the year, followed by Luxembourg (114 filings). Ireland, a popular domicile in Europe for European managers launching a UCITS vehicle, saw only 10 filings in H1.

Table 2: Form D Filings, Jan-June 2024, Number of Filings by Domicile

Domicile	Number of Filings
United States	5,019
Cayman	245
Luxembourg	114
Canada	40
United Kingdom	29

Source: 9AT

But what most folks really want to know is who is raising money. And it’s mostly the private equity types.

Of the top 10, 5 are private equity funds, 3 ‘other’ funds, one venture capital fund and one hedge fund*. 41 funds in total are raising $1bn or more.

Table 3: Form D Filings, Jan-June 2024, Largest Filings, Type and Gross Asset Value**

Fund Name	Fund Type	GAV
Nautic Partners XI, L.P. Nautic Partners XI-A, L.P.	private equity fund	$ 3,750,000,000
Pomona Capital XI (Offshore), L.P. Pomona Capital XI, L.P.	private equity fund	$ 3,500,000,000
Stellex Capital Partners III LP Stellex Capital Partners III-A LP	private equity fund	$ 3,000,000,000
Ninety One Global Alternative Fund 2 SCSp - RAIF - Africa Credit Opportunities Fund 3A	other	$ 3,000,000,000
ARCH Venture Fund XIII, L.P.	venture capital fund	$ 3,000,000,000
Sterling Group Partners VI, L.P. Sterling Group Partners VI (Parallel), L.P.	private equity fund	$ 2,750,000,000
Bridge Workforce & Affordable Housing Fund III LP Bridge Workforce & Affordable Housing Fund III-R LP Bridge Workforce & Affordable Housing Fund III International Master LP Bridge Workforce & Affordable Housing Fund III International LP	other	$ 2,500,0000,000
Heitman Value Partners VI, L.P.	other	$ 2,000,000,000
CDOF IV Cayman Fund, L.P. CDOF IV Delaware Fund, L.P.	Hedge fund	$ 2,000,000,000
Kline Hill Partners Feeder Fund V LP Kline Hill Partners Offshore Feeder Fund V LP	Private Equity Fund	$ 1,600,000,000

Source: 9AT

*Filers select the option of their choosing; 9AT does not change the definition in its database, regardless of whether industry participants might consider the fund to be a hedge fund, real estate fund, etc.

**The GAV listed in Table 3 for some funds is an aggregate amount of one or more funds, for example, the onshore and offshore versions of the same fund. We have combined those here, where applicable.

The data is notable, especially given the significant coverage in the trade media around the current fundraising climate. Industry data tracking firms across the board are showing that a significant pull back in allocating to private funds such as hedge funds and private equity is occurring, and industry conferences are replete with panels asking when the fundraising environment might begin to pick up.

We’re not saying that there isn’t a fundraising challenge right now. The prevailing interest rate and the geopolitical environment makes allocating to more liquid fixed income strategies more appealing both in terms of an acceptable yield and a perceived safe haven, and certainly, some private asset classes are struggling to maintain an acceptable spread over the risk-free rate.

But an industry that’s raising $146bn in six months arguably doesn’t show an industry that’s struggling either. Plenty of brand name managers are out there raising capital, and there are plenty of opportunities across a range of asset classes where that capital can be deployed.

What will be interesting is whether the second half of 2024 picks up. The recent court ruling in the United States at the beginning of June, where a group of trade associations banded together to sue the SEC alleging an overreach of authority with regards to the regulator’s Private Fund Adviser rule, has been welcomed in many quarters as a win for the space. All things being equal, it might be expected that a clearer regulatory environment (and a less onerous one) should be a catalyst for managers who have been sitting on the sidelines to now file their Form D and officially get out into the market to raise money.

We’ll have to wait until January 2025 to find out how the market fares in the second half of this year.

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6/11/2024

Artificial Intelligence Increasingly Important for Private Fund Managers’ Middle and Back Office

Artificial intelligence (AI) has long been deployed by asset managers in their investment strategy, particularly those that invest in and trade the public equity markets. The sheer volume of price history alone, for example, lends itself well to a technology that can analyse and determine patterns in minutes, as opposed to the weeks it would take a human to perform the same task.

Until the past few years, spending money on AI technology in the middle and back office has been less of a focus for asset managers. After all, it’s the less ‘sexy’ part of the business and has historically played second fiddle to the ‘rockstars’ of the front office.

That’s changing, however. And for a few reasons.

First is the continued fee compression seen in the private markets. As more firms and funds launch, competition increases, driving down costs - classic demand and supply forces. Asset managers need to find ways to lower their own costs so that they can deploy more capital (or maintain the spend) into the investment function. AI is a perfect use case for this; automating tasks previously done manually and speeding up other processes, both of which can save money.

Second is the ‘FOMO’ (fear of missing out) created by the recent explosion in the use of generative content tools like ChatGPT. These tools – which are improving seemingly by the week – can support an asset management firm with producing investor letters and notifying the appropriate people about any potential cybersecurity issues, are just two of many use cases for this technology.

Third is the increasing regulatory burden placed on asset managers in the market. Costs in the compliance function continue to increase due to the ever longer reach of the regulators. These costs aren’t purely hard currency costs; the time costs of compliance impact investment firms here as well. AI can save time and money supporting the compliance function, whether internal or outsourced, with both analysis and reporting.

Fourth is in trade reconciliation. While this is more specific to hedge funds than illiquid private fund categories, the recent move to T+1 settlement in the United States, Canada and Mexico has placed even more emphasis on the need for swift trade matching, and AI’s ability to analyse extensive data sets in order to match trades accurately is a clear use case here.

These themes are all medium to long term, structural trends, which are not going away. A quote often attributed to Bill Gates goes something like this: “If your business is not on the internet, then your business will be out of business.” The asset management version of this would seemingly be,

“If your asset management business is not using AI in the middle and back office, your asset management business will be out of business.”

AI is already an established tool for the portfolio manager to effectively implement their investment strategy. Now, it’s an essential tool for the middle and back office, too.

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5/8/2024

The Importance of Getting In at the Start for Hedge Fund Technology Service Providers

Despite the enormous amounts of money that they control, most hedge fund firms are ‘small’ companies: small in the sense of the number of people they employ.

And those that they do employ are busy. Not only is that because all small firms, regardless of industry, tend to exhibit more freneticism on a day-to-day basis than their larger counterparts; it’s because everyone, not just the investment professionals, are watching the markets alongside doing their actual job.

Certainly, they are usually too busy to proactively source new technology suppliers. Most hedge fund firms change their tech when something goes wrong with their existing one or prices rise to what they consider to be an unacceptable level. But they will tolerate price rises to a degree, and the odd glitch or display of poor customer support now and then, because changing providers requires not only sourcing a new one but onboarding it and learning a new system. There are no cost problems in business, only revenue ones, as the saying goes. Ergo, displacing tech competitors is difficult in hedge fund world.

That is why it’s important to get in at the beginning.

According to Form D data collected by 9AT, 299 hedge fund filings were submitted to the SEC in the first four months of this year. Of course, not all of those are emerging or start-up managers, so those existing firms launching new funds will have a tech infrastructure in place already. But plenty enough will be, and the data referenced here is only for the period January – April this year, which means eight more months of filings – and therefore, new hedge funds - coming to market in the remainder of 2024 for sales reps at tech firms to get excited about.

Of course, most of these new firms and funds will have used certain providers at a previous job and will already have their favorites. But it is also true that many of these firms will want to establish their own identity, taking a greenfield implementation approach to how they build their technology infrastructure. And they are often cost-conscious as well, meaning that firms with a more competitive price point have a better chance of success with the newer and emerging manager cohort.

And for firms that have technology that can be applied to many other silos in the alternative investment industry, there is an even larger audience to target. According to Form D data collected by 9AT, there were 998 Form D private equity filings in the first four months of this year, and 1,714 Form D venture capital filings, many more than in the hedge fund space.

There are, of course, many more hurdles for technology companies to negotiate on the route to new customer acquisition success. Tailoring the pitch to the fund’s strategy being one; back in the hedge fund space, it is well documented that equity hedge strategies comprise the preponderance of new launches overall, but not all of them will want the latest and greatest in public-equity related tech. And compliance being another – the SEC’s pending cybersecurity regulations for fund managers means that these firms will be more focused on whether new tech firms can reach a higher compliance bar.

Those hurdles are high – it’s not easy selling tech to a hedge fund. But those technology service providers that do get into new hedge fund firms at the ground level could, in time, enjoy the same competitive advantage that incumbent providers enjoy at the more established firms.

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4/10/2024

Just How Common is Changing Auditors for Private Funds?

The first quarter of the year is a busy one for Registered Investment Advisers: those with a financial year end of December 31st are required to file an updated Form ADV within 90 days, so for those watching the private fund industry, there is plenty of information that can be gleaned from looking at this data.

Plenty of firms look at the data to see which firms and their affiliated private funds have changed service providers. Of course, private funds and their advisers changing service providers is nothing new. A range of factors drive the decision; costs, quality of the offering and the customer service function, to name a few.

But one service provider change raises more eyebrows than any other: Auditors.

Reasons that a private fund might change auditors include those listed above. But a change of auditor may suggest potential accounting issues or a breakdown in trust between the fund and the previous auditor. Neither of those reasons receive a green check mark on a due diligence questionnaire and almost always call for a deeper dive by the investor (and can even be a cause for redemptions for those that are at the ‘very averse’ end of the risk spectrum).

So, it perhaps comes as a surprise that, according to data collected by 9AT by aggregating Form ADV filings in the US, 2,346 private funds changed audit firm in the year to March 31st, 2024.

That seems like a high number on the surface. But looking at that in percentage terms, there were 75,468 funds outstanding at the start of the period, so at a macro level, only 3.1% changed auditors.

The SEC splits funds into sub-categories and the manager selects what they think is the most appropriate label for their fund when they file. Figure 1 below shows the breakdown of the number and percentage of funds that changed auditor in the period April 1, 2023 – March 31, 2024, based on the SEC filing category.

Figure 1: Private Funds that changed auditor, April 1, 2023 – March 31, 2024

Fund Type	Number of Funds Changed	Total Number	%
Private Equity	874	13,745	6.4
Venture Capital	543	15,505	3.5
Hedge Fund	458	29,705	1.5
‘Other’	269	7,750	3.5
Real Estate	172	5,770	0.3
Securitized Asset	28	2,895	1.0
Liquidity	2	98	2.0

Source: 9AT

Whether the percentage figures above are high, low, or in the middle is a question for the individual, given its subjectivity.

It is perhaps little surprise which audit firms comprise the top five of the ‘competitor displacement’ table. Figure 2 below shows the top five firms, sorted by most to least, that have replaced a previous auditor. So, Deloitte has replaced the previous auditor most often overall; RSM has replaced the auditor most often in the private equity category, PwC in the real estate category, and so on.

Figure 2: Private Funds that changed auditor, April 1, 2023 – March 31, 2024, Ranked by Auditor and Category

Rank	Overall	Private Equity	Venture Capital	Hedge Fund	Other	Real Estate	Securitized Asset*
1	Deloitte	RSM	Frank, Rimerman & Co	Deloitte	Deloitte	PwC	Deloitte
2	KPMG	Grant Thornton	KPMG	KPMG	PwC	Grant Thornton	KPMG
3	PwC	PwC	Moss Adams	Richey May	Baker Tilly	EY	EY
4	RSM	KPMG	Deloitte	PwC	RSM	Citrin Cooperman	Weaver
5	EY	Deloitte	BDO	EY	Wolf & Co	RSM	Citrin Cooperman

Source: 9AT

Note: The Liquidity Funds category only had two auditor changes in its entirety the time period analyzed so was excluded from the table and analysis
* The Securitized Asset category saw only five audit firms complete a competitor displacement in the time period analyzed

Interestingly, we see non-Big Four audit firms take up a significant number of spots (14) in the top five across the six fund categories. Indeed, in the Private Equity category, which saw the most auditor changes both from an absolute and relative perspective, the top two, RSM and Grant Thornton, are non-Big Four. In the Venture Capital category, which saw the second most changes from an absolute perspective and relative perspective, two non-Big Four names (Frank, Rimerman & Co and Moss Adams) appear in the top three.

Changing auditors isn’t for the faint of heart; transitioning to a new auditor involves a lot of coordination and document exchange. This can disrupt internal processes and be a drain on resources, especially for smaller funds, so regardless of the fund category, those that decided to take the plunge in the past 12 months clearly had what they felt were compelling reasons to do so. And when they did, there wasn’t necessarily a beeline straight to the Big Four.

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3/6/2024

How Well Do You Know Your Manager’s Service Providers?

Asset managers are spending more time and money on building out a more robust middle and back-office function than ever before. That’s partly because of regulatory changes, which make more demands of an asset manager from a compliance perspective. And it’s partly because they are realizing that this can provide a competitive advantage, helping them to differentiate themselves from their competitors and peers (as this article by Gen II Fund Services explains).

And it’s also partly because allocators / LPs are digging ever deeper into the nooks and crannies of an investment manager’s middle and back office as part of their decision-making process around an allocation.

The operational due diligence (ODD) effort of an investor was not always so intense. In years gone by, asset managers simply wanted to know that the manager had certain service providers in place – and that these providers existed. Less attention was paid to the ins and outs of the provider. Today, however, allocators / LPs want to know why a manager uses a specific service provider, what the terms of the agreements are, whether they have changed service providers, any conflicts of interest, and whether those service providers have been in the news in the past few years (in a good way or a bad way – but mostly bad).

Until recently, investors had to compile the information they wanted relating to their asset manager’s key service providers – auditors, custodians, prime brokers in the hedge fund space, and fund administrators – manually. But technology is helping them to not only maintain this data but get ahead of the curve in terms of the ODD process by analyzing the Form ADV data to help build a picture of an asset manager ahead of an ODD meeting.

Data collected by 9AT tracks more than 2,000 service providers to private fund advisers in the US. This enables an ODD person / team at a fund of funds, a pension plan, endowment, insurance company or foundation to ask better questions during the ODD meeting. They are using it to confirm that the service providers in the PPM are those on the Form ADV, and if not, asking what has changed; they can see if there has been a change in auditor over time, which many consider something of a red flag; they can ask why a smaller, newer manager may be using brand-name service providers, which are sometimes more costly, when a different provider will be sufficient; and they can even conduct their own risk analysis on service providers from a diversification point of view, in the sense that they may have too much exposure to a certain service provider if that provider is used by many of the investor’s underlying fund managers.

Portfolio analytics technology has been around for many years, allowing allocators and LPs to build a comprehensive picture of the underlying exposures of the private funds in their stable, in turn enabling their investment due diligence (IDD) function to identify areas where they have too much risk exposure, or not enough. Now, finally, technology is providing the ODD practitioners with better tools to support what is an increasingly important part of the overall due diligence effort, enabling them to not only be better at being reactive, but more importantly, be proactive.

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Platform and Industry updates

8/7/2024

What Next for Private Equity and Fund Administrators?

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7/10/2024

Fundraising Drought? What Fundraising Drought?

Table 1: Form D Filings, Jan-Jun 2024, Gross Asset Value, by Type

Table 2: Form D Filings, Jan-June 2024, Number of Filings by Domicile

Table 3: Form D Filings, Jan-June 2024, Largest Filings, Type and Gross Asset Value**

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6/11/2024

Artificial Intelligence Increasingly Important for Private Fund Managers’ Middle and Back Office

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5/8/2024

The Importance of Getting In at the Start for Hedge Fund Technology Service Providers

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4/10/2024

Just How Common is Changing Auditors for Private Funds?

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3/6/2024

How Well Do You Know Your Manager’s Service Providers?

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