Fund managers in Europe increasingly are turning toward outsourcing and closer collaboration with third-party service providers in order to concentrate on their core investment skills, according to the latest research from State Street, a provider of fund administration services.
The results of the global financial services firm's study among European real estate fund managers, entitled Real Estate: A New Model for Fund Managers, found that institutional investors are looking for a greater understanding of the investment strategies of their fund managers. In addition, investors want increased control over their investments, greater flexibility over entry and exit from funds and more transparency and granularity in reporting.
Simon Burgess, vice president of real estate fund services for State Street's global services business in Europe, the Middle East and Africa, said: “We are on the cusp of significant change in the way that real estate fund managers structure and operate their funds. The sector is opening up in a way never before contemplated by the industry and offering rich, diversified returns for investors.”
Where managers have established core in-house administrative functions, more than a third – 37 percent – are prepared to consider a “lift-out” of these operations to third-party providers. The interest in outsourcing these functions is being driven largely by new regulatory demands, with 55 percent of respondents stating that regulation is an important driver of outsourcing.
Of those managers that currently outsource, 82 percent named flexibility and adaptability as characteristics they demand from their service providers. Technological excellence was viewed as “very important” by 47 percent of respondents. However, the factors that can prevent managers from outsourcing include a perception of variable quality and service levels.
State Street's research paper also explored three elements of regulation that significantly affect real estate fund managers: The Alternative Investment Fund Managers (AIFM) directive, the European Market Infrastructures Regulation (EMIR) and Solvency II. Fund managers expect the biggest negative impact of AIFM to be on internal costs and operational complexity. While the precise shape of the directive is being refined, its broad impact on real estate investment funds is already clear.
In addition to affecting real estate funds, AIFM also may affect other arrangements used in the sector such as joint ventures, property investment companies and unit trusts. State Street suggested that AIFM's requirement for alternative funds to ensure independent valuation – or at the very least ring-fence the valuation function – is likely to drive the trend toward outsourcing.
Indeed, State Street has found that managers have either already outsourced, or are considering outsourcing, a number of back- and middle-office processes. The areas of outsourcing expected to grow the fastest are fund accounting and administration services, performance analytics and look-through reporting services. The latter is being driven by increasing awareness of the investment required to maintain fully up-to-date technology platforms.
“The growing demands from investors, ranging from increased flexibility to more rigorous reporting, add to the costs of doing business for fund managers, while more rigorous standards of regulatory compliance also add to complexity and cost,” Burgess said. “Real estate fund managers are becoming acutely aware of the investment required to maintain technology platforms, to support capabilities such as analytics and reporting and, in response, they increasingly are turning to service providers to access this expertise.”