Regulation, regulation… and tax
Private real estate fund management firms need to stay a step ahead of a tidal wave of jurisdiction, regional and global regulation and tax changes. The OECD’s Base Erosion and Profit-Sharing and the EU’s General Data Protection Regulation and AIFMD II are a drop in the ocean of the many keeping legal and compliance teams on their toes. As they can be challenging to navigate, some managers are turning to third-party fund administrators for support. “Managers may well have dealt with such things in-house in the past, but now are seeing value is asking the fund administrator to assist in these kinds of areas,” says SANNE director Simon Vardon.
Technology and big data
The sector has been slow to embrace technology and utilize big data, but this is changing fast. In the last couple of years, managers have woken up to the fact both are now vital components to achieving operational efficiencies, reporting back to investors on fund and asset-level performance, maintaining good relationships with investors and staying competitive in this late-stage cycle.
But building and maintaining in-house IT systems is an expensive business, especially for smaller to mid-size firms. So it comes of little surprise that when a recent PERE survey asked managers where they were most likely to increase outsourcing levels in the coming year, technology came out top choice followed by data management.
And this is not a part of the fund management business likely to stand still. “The next decade of evolution will be even more profound than the prior 10 years,” predicts Chandra Dhandapani, CBRE’s chief digital and technology officer, so managers’ need for external skills, expertise and support is likely to drive them further into the arms of third-party fund administrators.
With added pressures on managers, the staff behind the scenes keeping the firm functioning like a well-oiled machine are busier and more in demand than ever. Outsourcing services to third-party administrators might help ease their burden, but seeking the best staff in-house and holding on to talented C-level executives remains critical over the long term, particularly in an age when investors expect greater access to scrutinize that part of the business. Executive search firm Bohill Partners’ founder Emily Bohill imparts her advice to CEOs on how best to do this: keep them challenged, recognize their contribution to the firm and make sure they are fully involved in “big conversations” with the front-facing investment teams.
A key consideration when it comes to launching a new fund is which jurisdiction to opt for as a domicile. And in these times of flux and political and economic uncertainty, stability matters more than ever.
Joe Moynihan, CEO of Jersey Finance, highlights that it is “precisely because of Jersey’s economic, regulatory and fiscal stability that managers and their investors continue more than ever to put their faith in Jersey…”
While managers are undoubtedly looking at new domicile locations for new funds, our PERE manager survey shows that Delaware remains the favored go-to with 50 percent of respondents, followed by Luxembourg and Cayman Islands.
For all of the reasons cited here, outsourcing is on the rise across the alternative fund management business, including private real estate. Managers are taking advantage of the practice in an effort to optimize their operations, manage risks and business disruptions like tech and data proliferation and free up time to focus on their core business of raising funds and investing. For a deeper dive on the trend, turn to our special feature on p. 22.
As alluded to above, institutional investors in private real estate have become increasingly inquisitive and demanding of the fund managers to whom they allocate capital.
Investors are no longer simply interested in IRRs; they are beginning to dig far deeper into a much broader range of data points, such as managers’ sustainability commitment and gender pay equality. This, in turn, is helping drive demand for the support of third-party administration services.
The darker side of the reliance on data and technology are concerns around data privacy and cyber-attacks. And it is an issue on the minds of C-level executives responsible for the operational and finance functions that keep the fund management firm ticking along. With more and more data now available, and critically in the cloud rather than on-premises storage facilities, investors are increasingly scrutinizing managers’ security systems. LaSalle’s UK and Europe COO Jamie Lyon highlights cybersecurity as increasingly a “point of inquiry from investors.” And Chandra Dhandapani, CBRE’s chief digital and technology officer, says “cybersecurity is always top of mind.”
But with outsourcing of data management on the up, the onus is also on fund administrators to ensure the highest standards of security with both managers and investors keeping a watchful eye on the security credentials of service providers.