13 May 2021 - The global economic disruption and uncertainty in capital markets caused by the COVID pandemic has done little to negatively impact the Real Assets sector; in fact, it has emerged as a haven for institutional investors seeking opportunities amid the turmoil.
A recent Investment Intentions 2021 survey from PREA, INREV and ANREV, which included 84 institutional investors and 15 Fund-of-Fund managers, highlighted that COVID has not decreased but increased investors’ appetite for real estate. Almost half (46%) of the institutional investors surveyed expect their real allocations to increase over the next two years - with Sydney, Melbourne and Tokyo as preferred investment locations - while only 7% expect it to decrease.
In addition, Preqin expects global AUM growth in alternative assets to average 9.8% per year from $10.7tn in 2020 to $17tn in 2025, despite a turbulent 2020 and start to 2021.
It is clear that the current, persistently low interest rate environment in the Asia-Pacific region in particular is attracting investors to alternative assets with the promise of outperformance, diversification and lower correlation with public markets. It is also clear that managers will need to scale their administration function to cope with this influx of assets. However, what considerations do Asia-Pacific managers need to take on board – such as the potential reputational impact of sourcing jobs overseas in a high unemployment environment – when scaling up their administration?
Outsourcing and the new normal
In light of these growth projections in coming years, managers face the decision of scaling up with an internal fund administration function to cope with the additional load - or to outsource to a service provider.
The usual considerations for outsourcing often stem from personnel and technology cost management, simplifying organizational structures and leveraging provider economies of scale. However, the impact of the global pandemic has now also inserted itself as a key consideration for managers in the Asia-Pacific region when considering outsourcing; for example, additional considerations include the ability to run the business during major disruption, and the potential optics of outsourcing to a third party where jobs could perhaps be lost or moved offshore, a concern when local unemployment concerns remain.
Before we attempt to address those concerns, let us explore what is being outsourced and whether it is still in the best interest of managers in this region to consider it:
- What do managers outsource? Managers typically outsource back office operations such as accounting, cash management, investor reporting and communications, financial statement preparation, tax reporting preparation, industry specific reporting requirements and corporate secretarial services.
- Why do managers outsource? Managers benefit from accessing fund administrators’ global talent pool and collective knowledge base, so that they can focus on core investment activities, reduce headcount related costs, take advantage of industry best-practice processes, and reduce technology spend on back and middle offices, while allocating more to front office technology.
- Should managers still consider outsourcing due to the challenges caused by the global Covid-19 pandemic? Throughout the pandemic, managers in the Asia-Pacific region have faced disruption to their operations and, in certain cases, have had to even onshore a significant number of processes that were performed offshore. This has resulted in managers having to re-evaluate their operational model and even consider bringing more activities back onshore/in-house to further control them. Furthermore, managers are also worried about the optics of outsourcing in light of major job losses in their own countries as a result of the pandemic, which could be detrimental to their reputation.
The reality of outsourced administration
Contrary to popular belief, outsourcing does not in many cases result in major job losses. Instead, it allows the manager’s existing operational team to focus on upskilling to more value-added activities and become a governance function. This provides opportunities for the manager’s operational team to grow in their own career and will allow the manager to attract more highly skilled talent - as more administrative tasks are handled by a third party. Working with an outsourced provider gives the manager a secure foundation to grow and scale sustainably.
In addition, while a manager may have only one or two locations it can work around in case of business disruptions, a global administrator can draw upon its global network to redistribute tasks and activities far quicker than most managers to mitigate any potential risk to business continuity.
What to look for in an administrator?
For those managers that are considering outsourcing, what should they look for in an administrator? When evaluating an administrator, managers should consider the breadth and depth of services they need versus the offering. They should also consider the type of funds the administrator has experience in, both structurally – open-end, closed-end and separately managed accounts – and investment type, such as real estate, infrastructure, debt and private equity. A further consideration should be the administrator’s global presence and the robustness of its Business Continuity Plan.
A successful outsourcing arrangement will act as an extension of the manager and find opportunities to add value, while supporting business as usual even through major global disruptions – which is why the arrangement will only continue to accelerate in the coming years.
By Edwin Hoi, Executive Vice President, Citco Fund Services (Singapore) Pte. Ltd.