Against a backdrop of extensive regulatory change and an increasingly sophisticated investor base that is demanding greater transparency, investment managers globally are under pressure to deliver the information necessary to meet these requirements. However, as investment managers take the steps necessary to provide this level of data and investors take the steps necessary to gather this data, they are undoubtedly presented with greater technological and operational challenges.
At a recent seminar event in Boston, jointly hosted by Maples Fund Services and Imagineer Technology, panelists sought to shed light on the myriad external factors impacting the industry and the importance of having the right processes and infrastructure in place to succeed in this evolving environment.
Investors have played a significant role in driving the shift towards improved transparency and regulators and various industry bodies have taken measures to address these demands. Examples include CA Assembly Bill 2883 requiring specified disclosures regarding fees and expenses in connection with limited partner agreements, the Institutional Limited Partners Association’s Fee Transparency Initiative and general enhanced SEC oversight of the private equity industry. As such, regulation has unquestionably become one of the top concerns for managers with EY’s 2017 Global Private Equity Survey noting that regulation is the most significant driver of operational complexity.
Compliance with these mandates requires the aggregation, calculation, maintenance, reconciliation and submission of extensive data sets to multiple stakeholders, including regulatory bodies, on a regular basis. This is an arduous process that can only be accomplished with an investment of significant time, effort and resources to implement stringent processes and advanced technological systems. In addition, a deep understanding of specific requirements and output requires a team intimately familiar with the regulatory landscape and its nuances. The compliance function has been estimated to represent approximately 4 percent of revenue with costs expected to more than double over the next five years1. In addition, there has been a notable increase in oversight with the SEC and other regulatory bodies increasingly taking action and imposing fines against managers who have not made compliance a key priority.
Investors have increasingly adopted sophisticated alternative investment strategies to provide consistent returns and meet their investment objectives. These structures have enabled investors to capitalize on opportunities but their inherent complexity has prompted investors and regulators to demand greater visibility and enhanced reporting that can provide the full scope of managers’ investment decisions, exposures, performance, fees and expenses at a more granular level. While this shift toward greater transparency is a largely positive development for the industry as a whole, it places an increased burden on managers and indeed investors who may not have the operational infrastructure needed to support the delivery of this information.
The outsourcing of both fundamental and complex operational and administrative tasks is a trend that has gained traction recently and will continue as managers and investors grapple with how to be dynamic in responding to evolving regulatory and operational demands. In addition to delivering the enhanced transparency, high quality and timely information and tighter operational controls, this can provide managers and investors with access to new technologies and new skill sets. In addition, outsourcing can contribute to a significant reduction in overall compliance costs.
Maples Fund Services has evolved its service offering to investment managers and institutional investors through innovation inspired by our clients' needs. We leverage our technology and professional expertise in regulatory compliance, investor servicing, fund accounting and investment operations to partner with our clients to provide comprehensive and customizable solutions that provide the insight and information they need to enhance their risk management and governance practices and operational processes. Ultimately, this supports the investment decision-making process and enables investors to better understand the sophisticated alternative strategies to which they have allocated capital.
1Financial News. Compliance costs to more than double by 2022. 27 April 2017.