This article is sponsored by Vistra
The pandemic impact on real estate has been felt for months globally. Managers are more cost-conscious, which has speeded up growing demand for the outsourcing of fund administration on the back of investors requiring deeper levels of reporting and data.
Vistra’s Onno Bouwmeister, global sector head private equity, and Tania Green, global real estate platform director, explain why outsourcing is in vogue and the crucial role technology plays.
How is covid-19 impacting private equity real estate and what demands are being placed on the asset class?
Onno Bouwmeister: The pandemic has transitioned all of us into the new normal. We are all working remotely while a year ago most businesses were not able or capable of doing so or were really pushing back against it. There are now so many questions around how the office lease market is going to function or how retail and hospitality are going to operate. The predictions and the models that we had in place need to be revisited.
For example, we are now seeing more needs around data validation for property managers. Nobody can travel now, so if you are a UK manager investing in Germany in five different cities, you are dependent even more on your property manager on the ground, to manage the asset, provide the dataset back to the manager in the most efficient way, which highlights the importance of processes, data and technology.
There is also another element we are seeing on the operational real estate side, particularly in the hospitality sector, where performance is down. Because of that, there is more demand for advice and support on restructuring from a human capital perspective.
Outsourcing had been picking up steam in recent years. How has the pandemic impacted demand for it?
OB: If you look at the last couple of years, outsourcing was already on the rise. If you compare it to the hedge fund sector, where 89 percent of fund administration is outsourced, real estate was already following that trend. It is now at the heart of priorities.
here is uncertainty in the market, so real estate companies need to control costs, which is one of the reasons why there is higher demand for outsourcing today. In that sense, the pandemic has been an accelerator of existing demand for outsourcing.
Overall, investors are driving the outsourcing trend. They want to see checks and balances between capital assignments and commitment to funds and a fund manager, as well as the administration and control of data.
When it comes to technology, you see increased demand from investors for readily available data. If you then link that to the cost component of an internal team and systems, this is a massive additional cost for managers. That is driving them to specialist providers.
For example, we invest over $60 million in technology on an annual basis, so we are able to provide the required data on demand. Otherwise we have competition – we need to invest to be on our toes and ahead of the market.
Now more than ever, managers want to focus their resources on the investment side rather than the administrative side of the equation. We, on the contrary, want to take on the administration side, as this is our bread and butter.
We focus on expertise and many of our people have already worked for fund managers, law firms or accountancy firms and they deliberately chose the administrative side of the business. We invest on the regulatory side, on the accounting side, the technology side. We bring experts to the table who do this job on a daily basis. Rather than having a manager doing a side job, outsourcing allows managers to fully focus on their core: investment, strategies and analysis.
Tania Green: Clients expect us to have the right skill set not only on the administration side, but from the technology perspective as well. That is sometimes lacking and I have found it quite common of late with clients that they do not necessarily invest in the system specific SME’s so there is an expectation that the service provider or the outsourcer needs to have that skill set within to be able to support them.
What are clients asking of you in today’s market?
TG: We are finding that clients want everything in one place. They do not want their special purpose vehicle accounting sitting in one system and their fund accounting and their investors sitting in another. We use Yardi Voyager as our real estate platform, which enables everything to be put into one place.
We are seeing more of that requirement, because of the efficiencies and the time it takes to get your data. If you have it all in one place you are going to be able to make much better decisions. We are aiming to offer that as a product. In this case, having all your eggs in one basket – and not spread out across multiple systems – really works well.
There is also a need around automation and the system to be as flexible as it possibly can be to adapt to quick changing requirements. Yardi Voyager allows us to automate all the recurring processes away so managers can save time, take a step back and add value.
By automating as many recurring processes as possible, managers are free to focus on the quality of their output. If you are just plowing away on Excel spreadsheets, you are not going to have the time to do that, because you will be too busy just reporting to the clients and the investors.
Given market complexity and differing client demands, how do you balance standardization against flexibility?
OB: We are going for standardization and the usage of an integrated platform because we believe that is needed in the market to enhance the real estate industry from an administration perspective. It is a highly complex process because every structure is set up in a different way.
Specifically, with the number of service providers in the private equity real estate value chain, I believe you need to have an average of 13 or 14 different service providers all putting in data in their own pockets. That is why standardization and the usage of one integrated platform makes so much sense.
Our target operating model is 80 percent standardization and 20 percent flexibility. We first design and execute the processes and then we add the technology to achieve automation and make our processes more efficient. The last step is to fine-tune with our clients.
I often refer to the VW and the Porsche analogy, both German. You have the VW, and with the clients, that is our starting point. Then we ask them, ‘What else do you want?’ We all want to have a Porsche, but there are just a happy few that drive a Porsche, so let’s be practical. What is your objective? What do you want to get to? Everything is possible but it comes to a cost.
What role is technology playing in fund administration?
TG: Technology is key to everything in fund administration and having the right system is crucial. In the past, you could get an off the shelf system that was capable of getting you from A to B, but you can now get a system like Yardi Voyager that is more flexible and more adaptable. I think that leads to the 20 percent of our system that is tailor made.
We build in those standard procedures, but we want to make sure we have that 20 percent of our tailor making to be able to adapt the technology to our clients and give them what they want. It may come at a cost, but we make sure that we are meeting their requirements. Each client is different and each system is different, so it is about making sure we have that capacity and resource to be able to adapt quite quickly on that 20 percent tailor made.
OB: Technology brings transparency, control and data in a centralized place. If a manager has technology that is all interlinked in a value chain, then they can very easily get access to the data they need on demand. What technology brings is an efficiency game – the enhancement of control and oversight for managers and investors who get access to data on demand. Everything is more transparent.
Multi-jurisdictional complexity has been a theme in the market for several years. How do you ensure service capabilities in multiple jurisdictions?
TG: From a technology point of view, it is important to have a system that is able to adapt and accommodate to different jurisdictional requirements. It is also key to have a strong relationship with the system supplier, to make sure they stay up to date with the development of the system and, when jurisdictional requirements change, be able to work with them to make sure our system is as up to date as possible.
The whole point is to try and get away from manual intervention and Excel spreadsheets and the like. You want your system to be able to do as much of the work as possible and use that system to its full potential.
OB: The processes are extremely important to bring technology to the table. For pan-European structures, which are very common, it is crucial to get your processes right to facilitate an easier rollout across multiple jurisdictions. Technology can help here, but without standardized processes, technology will not do what you want to do.