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16 January 2024 - Citco is a pioneer in independent fund administration for the alternative investment industry, offering scalable and innovative solutions to meet the specific needs of its clients. Tim Harvey, Head of Private Equity – North America, Citco Fund Services (USA) Inc., chats to Private Equity Wire about some of the current challenges and opportunities in sector, including the biggest risks facing the business and its clients…

What has been the most significant change you’ve observed in the private equity industry in the past 12 months? ​

In an environment where we saw high interest rates and heightened economic and geopolitical uncertainty, the private equity industry was characterised by slower growth and lower expected returns – at least than what the industry has been accustomed to in the last decade.

In turn, stock markets showed decreased appetite for IPOs leading to challenges with a traditional investment exit strategy for private equity fund investments, a drop in asset valuations and a subsequent slowdown in fundraising due to liquidity challenges.

As a result, we have seen increased client demand to digitalise and automate to help support diversification across new asset-classes. With GPs devoting more of their resources to value-add activities that support their investment teams, clients are increasingly relying on strategic partners to provide the technology and operational infrastructure to enable them to keep pace with increasing demands.

The hunt to manage and streamline operational processes aren’t unique to this year as such, but it has become more of a focus as private market firms become more accustomed to the benefits outsourcing can deliver – and this is where asset servicers with a global presence, who have knowledge of best practices, can really support managers and add value.

Which are the most significant challenges in the private equity industry right now and how can they be best mitigated? ​

As the private markets industry scales and industrialises, operating models now more than ever need to adopt more automation to generate greater amounts of higher quality real time data to improve investor experiences. This hunt to manage and streamline operational processes will be key going forward.

An asset servicer with a global presence and widespread, multi asset class expertise can provide knowledge of best practices beyond a manager’s traditional focus, enabling them to focus on what they do best – generate growth.

Can you outline the most impactful drivers of client demand in the coming year?

Historically, private equity GPs have preferred to retain operational expertise in-house rather than to outsource, however unforeseen events over recent years – including the pandemic-induced adoption of new technology across the industry, the high interest rate environment and a significant slowdown in fundraising – have led firms to search for transformative ways to innovate their value creation framework and improve returns.

The business of buying, managing and selling assets has become unprecedentedly difficult, so a consequence of such changes are that GPs are devoting more of their resources to value-add activities to back up their investment teams and, in turn, increasingly relying on strategic partners to provide the technology and the operational infrastructure needed to support their teams to keep pace with the increasing demands to scale and ever evolving regulatory landscape.

Our proprietary Waterfall tool, for example, replaces manual, time-consuming carried interest and investor distribution scenarios with an automated solution – helping GPs to make profitable, real time decisions. A recent add-on to Waterfall enables Citco’s clients to calculate forward-looking investors’ distribution and carried interest projections on demand, allowing what-if scenarios to be run.

In 2024, we foresee this trend to continue.

What have been the biggest drivers of growth within your business? ​

Since the global finance crisis in 2008, private market strategies have gone through an extraordinary period of growth.

As a privately-owned provider of asset servicing solutions to the alternatives investment industry, Citco had the independence to adapt its business – including building innovative and industry leading tech – and to cater swiftly to the inflow of capital seen into private markets since the global financial crisis of 2008.

In turn, our private equity, private credit and real assets lines have been our fastest growing vertical with a year-on-year growth average of 15% over the last decade or so. At present, Citco services over $1.8tn in alternatives assets, and we expect the momentum experienced to date with private markets to continue over the coming years.

What are the greatest risks facing both your business and your clients at present?

Achieving scale coupled with the search for digitisation/automation are absolutely key to both private equity and private capital firms as they look to support diversification across asset classes.

The evolving regulatory landscape meanwhile, is also going to become a challenge that many firms have not had to tackle previously.

This article was originally published in Private Equity Wire