Director of Private Equity, Intertrust Group Jersey
Expect an uptick in activity as fund managers rush to deploy dry powder.
The start of 2023 is the calm before the storm.
In private equity, valuations are down and deal-making remains sluggish. Asset managers are keeping their powder dry for the right moment—and there’s a lot of dry powder around.
2021 was a record year for global buyouts. 2022 managed to beat each year between 2017 and 2020, despite activity declining steeply the end of its second quarter.
This slowdown will not last forever. Sooner or later, valuations will drop to a more enticing level and the rebound will begin.
When that happens, deals will be rushed through the door as managers compete to deploy stockpiles of capital in the most effective way. Managers will be keen to focus on this investment activity and not back-office administration—so now is the time for them to address any lingering administrative issues.
The sprinters are in the blocks and waiting for the starting gun. With that in mind, here are five predictions for fund management in 2023.
1. Economic uncertainty means growing complexity
When the starting gun fires, deal-making and fundraising will explode into life.
With so much dry power around, the competition will be fierce. That will lead to innovation in asset classes and the targeting of new investor groups (with family offices receiving increasing attention).
Private equity is an increasingly regulated space, so this drive towards novelty will create complexity for managers and administrators.
Bespoke contracts and structures will bring opportunity at the expense of simplicity. I expect the burden on back offices to grow significantly.
2. Regulatory compliance will focus on the bigger picture
Regulators will be keeping a close eye on developments as private equity funds extend their fundraising reach. But for now, they appear comfortable with existing safeguards.
Regulators continue to be focused on anti-money laundering (AML) and the proceeds of crime. We certainly see that in Jersey, where the local regulator is broadening the scope of anti-money laundering regulation and has increased the number of financial services businesses that come under its scrutiny.
Jersey is acting ahead of an expected Moneyval review that will take place in Q3 of 2023—but the focus on AML compliance is global.
The landscape for managers is increasingly complex. They are having to deal with increasing AML, CFT (combating the financing of terrorism), _CW (countering proliferation), and sanctions requirements; asset-specific complexities such as increasing state controls on microchip manufacturers; and the relaxation of state aid rules in Europe for green energy.
3. The people problem isn’t going away
Administrators have been competing to recruit talent since the start of the pandemic. Most have exhausted obvious initiatives such as flexible working models and—where possible—increased pay.
And yet the problem remains. The answer may be the wider implementation of automated processes that remove the burden of basic but labour-intensive tasks from hard-pressed teams.
But it is no magic bullet. Automation requires a skilled workforce that can run those systems and manipulate the data they produce. It needs people who can spot errors and fix them quickly.
Automation can lead to efficiencies and allow funds to do more without adding alarmingly to wage bills. But it has to be accompanied by a corresponding sharpening of skills. Automation with education will be a key theme in 2023.
4. The flight to quality is on the runway
With fund administration, you really do get what you pay for. Despite a well-documented squeeze on fees, we predict a flight to quality in 2023 as managers and investors see the value in skilled and well-resourced back-office teams.
Without skilled and well-motivated staff, back-office processes are slower and more error-prone. Under-resourced operations teams don’t have the capacity to anticipate problems before they arise or find extra insight in complex data.
Fund administration can drive better decision-making and reduce business and regulatory risk, but not at bargain basement prices. More new managers will see that for themselves in 2023.
5. There will be an increased focus on the back office
All of these themes coalesce into one obvious trend: a greater focus on the back office.
When economies thrive, businesses tend to focus on revenue and profit. In a downturn, forward-thinking funds focus on creating efficiencies.
In 2023, fund administration will be at the heart of that. Managers increasingly accept that an efficient back office can drive funds forward without piling on cost.
The administrative burden is growing in private equity. This year will be about equipping teams to meet that challenge in a cost-effective way.
Why Intertrust Group?
- CSC completed its acquisition of Intertrust Group in November 2022. Together we offer a global solution for subsidiary governance, fund strategies, and capital markets transactions, and navigate the ever-changing compliance and regulatory environment that our clients face. With capabilities in more than 140 jurisdictions, we are capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve.
- As a strategic partner, our proprietary innovative technologies are combined with global knowledge and experience to deliver a wide range of added-value services.
- Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations, and portfolio management.
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