COVID impact to accelerate outsourced Real Estate Fund administration
21 October 2020 - The evolution of real estate fund administration from small in-house teams within managers to larger outsourced support has been gathering pace in recent years – however, the COVID pandemic has accelerated a range of factors that will put existing in-house support under increasing pressure in the coming months.
As sophisticated institutional investors are also calling for increased outsourced support on the funds they invest in, we expect these combined forces to increase the level of outsourced administration in the real estate sector from its current level of 30-35% to approximately 60% in the next two years.
The sector’s movement from in-house administration support to external has been gathering pace since 2009, when the first ‘lift-out’ occurred: this is when a fund administrator successfully integrates a real estate fund manager’s operations into their own. As time progressed, administrators successfully built real estate capability via additional lift outs, and/or key industry expert hires, coupled with strong global fund administration platforms already in place.
This increasing shift from in-house to outsourced caught the attention of KPMG in 2018, which published a survey of 100 senior real estate professionals and highlighted the growing trend towards outsourcing as a result of this new focus at fund administrators. According to the survey, the top two factors influencing the selection of a fund administrator by a real estate manager are experience in real estate and experience with similar fund structures. Traditional outsourcing in the real estate industry had always included property accounting and tax preparation, but this latest trend brought fund accounting and administration services into the fold.
What has been driving this evolution? One could say the increased complexity in fund structures, cost of technology and availability of experienced personnel. The introduction of tax driven feeder funds, Luxembourg entities, REIT structures and other complicated fund structures – as well as detailed investor reporting needs such as ILPA – has also driven the need for larger teams of subject matter experts.
The emergence of COVID this year has made the advantages of outsourcing very clear – and will continue to in 2021: fund administrators have been able to respond accordingly, with robust BCP (Business Continuity Plans) already in place. The ability to leverage robust systems, processes and platforms, coupled with increasingly complex fund structures, has set the stage for a continued shift towards outsourcing.
For investors, this arrangement adds an additional layer of review and independence that will only grow in importance, since the fund administrator has robust controls, and generally has a SOC 1 operational audit completed. In addition, it can evolve into a more efficient and cost-effective model for the fund they are invested in.
The advantages to managers are numerous too: they can focus on their core service – investing; it provides them with scalability; and they can leverage their administrator’s investment in technology.
When evaluating a fund administrator, the manager 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, separately managed account – and investment type – real estate, infrastructure, debt and private equity.
A successful outsource arrangement will act as an extension of the manager and find opportunities to add value while supporting business as usual – which is why the arrangement will only continue to accelerate in the coming years.