In the first episode of The Fund Services Series, Ark’s Head of Sales, Bryan Botha, discusses the following topics with Fund Services Advisor, Jay Maher:
- Whether hard times ahead will force decisions on fund services technology
- The key trends in fund accounting software and IT
- The pain points found in today’s private capital tech stack
- What automation and co-sourcing look like today
Chris Gale 00:00
Welcome to Episode One of our Fund Services series. We’ve got Jay Marr and Bryan Botha to kick us off on ”Fund Administration Software in the Era of Recession.”
Jay Maher 00:18
I’m happy to be here and share my insight. My background is all fund administration for closed-end vehicles. I’m a fund accountant and I’ve built teams from the ground up for the last 29 years. I really have seen the evolution of workflow processes and technology around fund operations. Excited to be here.
Bryan Botha 00:53
Thank you, Chris. Looking forward to this discussion. I recently joined Ark as head of business development. Ark is a solution provider being adopted by fund administrators and fund managers to deliver curated investment reporting to their clients. I’ve spent my career focused on the private capital markets with one foot planted firmly in financial technology and the other in fund administration services. I’ve worked at PwC and on a number of leading fin tech platforms, which have been widely adopted by private equity and service providers in the global private capital markets.
Chris Gale 01:30
Excellent. Jay, you’re a consultant advisor in the fund services space. We have a somewhat foreboding topic today. What if we’re talking about workflows and technology in 2022? Don’t we have to acknowledge the warning lights that are blinking a lot of headlines about where inflation is going and the potential for a recession? If we have hard times ahead, is that going to force decisions on tech by fund administrators or operations?
Jay Maher 02:19
In fund operations there’s a lot of attrition. We all live in a new world now, where for the last two years technology has taken hold. We do a lot of remote working, which has caused a lot of people to question their careers and where they want to be physically and how they want to work. Technology is going to play a key role in solving that for a lot of fund managers and fund administrators. With a looming recession – with attrition, and people changing jobs – that puts more pressure on the second-largest cost in your fund operations group, which typically is technology. Fund administrators are going to focus on quality control and more efficiency, and technology that can help them scale their business, and ease of use and trainability.
Chris Gale 03:46
To make sure I’m understanding: Compensation is to keep up with inflation and, at the same time, we’re looking at a potential slowdown. So you need to get more done with potentially fewer people. You need to pay more for that talent. Does that take off the table the idea of bringing more bodies on board to handle work?
Jay Maher 04:18
The last time we went through a financial crisis, the closed-end private equity markets grew. Some articles say private equity is going to boom. We had a pretty strong second quarter for fundraising and private equity. But then I read some articles that say the recession this time could impact private markets, as it’s impacted valuations of portfolio companies. Values have been really high over the last five or 10 years. They may stabilize and come down, which could impact how funds get allocated, and investors look for opportunities. There’s going to be a lot of pressure on your technology choices and how easily you can train your staff and get them up and running on those platforms, and configure those so you can get work done for your clients. It’s the same with internal operations. A lot of the large general partners who historically have kept things in house now are willing to co-source or outsource some operations. A lot of good technologies are out there. But some are dated, especially for fund managers who are using them internally. Some are legacy systems from 15 to 20-plus years. They might be a little more clunky, and not as user-friendly.
Chris Gale 06:14
Brian, we’ve talked about technology and automation coming to fund services for quite some time. The conversations that you’re having in the last few weeks – anything different in terms of what you’re hearing?
Bryan Botha 06:35
There’s this trend toward digital transformation that’s going to most likely accelerate. Headwinds are coming to the fund managers in the space that we operate in, and those can be tailwinds for the fund administration space, when there’s limited headcount to review the hundreds of technology solutions and platforms out there. For a GP, it can be quite an ask. We’re not living in the days of one or two vendors – if you look at app stack, there’s hundreds of vendors to pick from. There’s going to be more pressure for a GP to lean on the expertise of a fund administrator, and the service providers that have expertise when it comes to technology. There’s going to be more pressure for turnkey. Too many vendor technologies take months and months to implement, and that’s really not something anybody wants to see. Another trend is overall pricing and making sure those technology costs are transparent. A lot of the costs can be somewhat hidden. You think you’re getting free support when some calls to support are charged. And custom reports that clients ask for – which are a mainstay of this industry – those aren’t going away.
Chris Gale 09:15
Jay, I come back to you. Brian has laid out some of the frustrations. Can we go on the light side for a second? Is there a hierarchy of priorities or trends in technology adoption? Are there certain things, like configuration, that are top of the list?
Jay Maher 10:12
One that I’d put at the top is your implementation cost. Whether you’re a GP that’s outsourcing for the first time, or you’re with a fund administrator having poor services and want to switch to another administrator, what is that transition process? If you’re on a legacy system for 15-plus years, what does that look like, especially going back to the resource constraints that the industry is feeling throughout? How do you switch when the GPs’ feeling is: “Oh, I just have to stay with the service model I have even though I’m not happy with it.” The answer is no, you don’t. Technology solutions will allow that implementation cost to be reduced. For instance, you can bulk-move some of the data. Technology is smarter than 10 or 15 years ago for needs such as moving allocation rules, waterfall models. If you’re going to maintain the books and records for a closed-end vehicle, you can’t just take the beginning balances at a point in time and move forward – you have to bring the historical data into your system. Can I do it seamlessly? The answer is the technology is getting stronger, the process around implementations is getting a lot more intelligent. First it’s implementation: How can we get onto your system? Then: How does the technology stack? Let me scale my business? How configurable is it? If I’m a fund administrator, and I add a new client, how quickly can you deploy a web portal for me? That’s critical, because people don’t want to say: “I’m ready to fundraise. I’m fundraising. Fundraising is going well. And hey, we’re going to do a call to our new investors. And I need to the web portal up and running, because everything is done. “Almost all investor communications are done via a web portal. I can’t be backlogged by old technology that’s going to take me four or five, six weeks to get up and running. I need someone who’s more of an operations person so that I don’t have to go to a development team. The technologies are moving toward that, where it’s going to be easy. As for No. 2 in the hierarchy of needs you mentioned, I’d make that configurability, and then quality. What type of quality control does the system have? Does it have the proper checks and balances? Is it going to give me standard reports – there are a half-dozen or so standard reports, and they’re not going to change, right? Your capital statements, your scheduled investment-forward details, those types of things are not going to change. Does it allow me to configure new reports that I might want, a lot more analytics? A current firm that I advise is very big on ESG. How does the platform allow us to track more metrics and pierce through? Or sometimes technologies fail when they try to do too much. So should you be using tech platforms that are really good at very specific things, and then can be married with others that might be stronger in some of the data analytics? How do they push and pull data from one another? That’s probably the next ranking of what people are going to look for in their technology stack.
Chris Gale 14:38
So implementation, including ease and cost. Then, configuration and quality. The first two seem to be about time and speed. And everyone I’ve ever talked to in the private equity industry says there’s a certain pace, and the style of investing is not as rapid as other parts of private capital. Is there a need for configuration or agility now that didn’t exist, or an expectation that that’s changing? What could drive someone to want configuration, whereas in the past maybe it wasn’t such a big deal?
Jay Maher 15:41
That is a good point. Times have changed. Back in the day, we used to mail subscription agreements out, and then you can mail them back. Then we went to email. Now we’re going toward portals. There’s more reliance on anti-money laundering and know-your-client procedures: How do we get our KYC documents to the internal operations team or the fund administrators to do their due diligence on the investor? Speed is important. On the deal structuring side, it’s a little quicker. They’ll do a special-purpose vehicle and they want to do this deal today. And they’re going to put another fund together. But these deals are available now and we have investors that have an appetite for that specific deal. Let’s just put an SPV together for one investment, maybe 10, 15, 20, 30 investors, so we need to get that information out. And we would like to apply for those before we do a commingled fund. That picks up the speed. And that’s when it comes to quality control. Maybe specific technology does just core accounting to the portal really well. And maybe you marry it to a system that speaks really well with another system that goes deeper on data analytics of portfolio companies. That’s what people want. Some of the technologies that are trying to do everything, on one platform, have gotten really cumbersome, really hard to use, hard to configure, hard to deploy. They weren’t made for what they are trying to do with it. Open your tech stack, so they could speak to other platforms, and create a proper, efficient workflow throughout your whole ecosystem.
Chris Gale 18:12
Ryan, I’m coming to you and your fund administrator. I say I’ve got better implementation, I’ve got better configurability, I’ve got better quality. What are the things that your fund administrator might call BS on or say, “But do you have it ready?”
Bryan Botha 18:37
It’s usability, transparency, flexibility, and also control. Take usability. Everybody thinks about the end user when it’s a technology firm providing, say, a portal for LPs to log into. A fund administrator needs to log into that portal to set up workflow between the GP, the fund admin and the LP. If the use case isn’t really thinking about the end user who’s at that fund administrator – who’s setting user permissions when, say, bank wire instructions coming from the LP need to be approved – then that has an impact on employee retention at the fund administration shop. Because those folks need technology that works and ease of use. Usability is key. It has to be thought through by these technology vendors – not just by one constituent, but all the other use cases in there as well. Now, on to transparency, and things like implementation costs and timing. The portal shouldn’t take months to deploy. But there are really complex pricing models out there – user-based models and entity based models. With these headwinds coming in the months and years ahead, we’re going to be looking for pricing models that allow the fund administrators and the GPs to have a budget that’s not going to get blown. When it comes to deploying technology, the support really should be free and not “extra-custom reports.” You should have an idea of how those are going to work and how you’re going to pay for those in a way that makes sense. When a new version of the software comes out that’s radically different from the last one, users should be trained by the technology vendors. There should be an ease of transition rather than another opportunity for end users to have to pay for extras. Transparency is key. So besides usability and transparency, flexibility, we talked about having the vendor and the technology platform allow their users to sit in the driver’s seat. They can avoid going back to the vendor for things they never expected to return to the vendor for. Say you’re spinning up a portal, and you’re adding a logo. If you’re the service provider to the GP, you should be able to do those things free and clear of the vendor having to get roped back into the timeline. You decrease the risk of not getting that deployed on a timely basis. And then to Jay’s point: that flexibility and control are going back to the application programming interface, with the integration of data between these parties and technology platforms, and that data can flow seamlessly from one place to the next in a secure fashion.
Chris Gale 22:17
We’ve set the table here with this first episode, in terms of what fund service leaders are looking for, the duress they’re under, and where technology is desired, but maybe falling short. For the folks who are watching, we’ll share some detailed points on this webcast. And it makes sense for us to have another set of webcasts in the series. It would be interesting to talk to someone on the fund administration side about if you do have an elimination of these pain points, for better implementation and better configurability. And then quality increasing: What does that allow you to do from an aspirational perspective and to compete? And then it might be helpful for folks to understand how to go shopping for this kind of advantage, and what are the right questions to ask to make sure you’re getting the right solution. So we would encourage folks to stay tuned for that. And I’m going to ask one pet peeve question before we close. We’ve talked about implementation fees, we’ve talked about what I might call nickel-and-diming, for things that you thought should have been included. We all want to be fair to the people that are helping us, the software vendors. But alternatively, it seems like it’s almost too easy to lean on implementation fees as another stream of revenue and extras, or complex pricing as a way to find a little additional margin. Is there a virtue to a vendor or developer that tries to build a platform that eliminates implementation fees as much as possible? They’re thereby making it economically imperative to make software that does what Jay was talking about in terms of implementation configurability. Should folks be feeding that animal, so to speak, and putting up with implementation fees?
Jay Maher 24:58
From a fund administration perspective, there are definitely the costs of the technology when we’re implementing it. What do we have to pay our vendor to help us do that? There are also resources on the fund admin side, fund accounts, that need to get involved. And that’s probably unavoidable when you’re talking about physical resources. But from a technology perspective, we don’t want to have additional tech costs because we’re going to be putting more work on the platform, and then in essence, the fees will be adjusted accordingly. It’s a long-term vision. It’s not just a one-and-done -type relationship. We really do look for minimal, zero tech costs when it comes to implementation. And the other point I want to mention is control, when fund managers are deciding on technology, specifically on these implementation costs. Thinking forward: How do I use this as a co-sourcing model for control of data? Because of all the attrition going on in industry – whether it’s internal attrition or at fund administrators – if you pick a technology that you can implement, at fairly low costs, and then can you control the data? Do I hire people internally? Do I outsource for the fund? A combination of both? I’m currently advising on several of these opportunities, where we’re talking about a proper co-source relationship.
Bryan Botha 26:35
There is absolutely a trend in the space, too, for technology to be as turnkey as possible, and getting to a point in the near future where there really isn’t much of an implementation. The three things that jumped into my head are: What is an implementation composed of? It’s getting the end users trained on the software, it’s getting the data into the software, and it’s getting the reporting setup. More and more reporting is never going to be completely standard. So you hand the keys over to the client as the end user, whether that’s the fund administrator or the fund manager. They have a user-friendly technology that allows them to customize the reporting themselves. It’s really just training rather than having older technologies, and forcing their clients or their fundamental traders to come back to get a custom report done. It’s really just putting that end client into the driver’s seat. More and more technology firms are going to be feeling the pressure to do that to get to implementations. Something that’s very turnkey. The incentives are in the space to drive that to a really good place in the near future.
Chris Gale 27:53 Thank you both very much. And folks, stay tuned for the next few episodes.