Adapting to the shifting paradigm of the fund ecosystem 

In the current market environment marked by geopolitical tensions, slower economic growth, labour issues, inflation, fears of recession and higher interest rates, fund managers focusing on alternative investments (for example real estate, private equity, venture capital and infrastructure) are facing difficulties raising capital for new funds, portfolio exits, or refinancing current investments. 

In addition, market volatility, regulatory complexities and evolving client expectations continue to impact fundraising, deal competition and investment exit timelines within the fund management space. Navigating these challenges requires a combination of strategic foresight and adaptability.

On the other side of the coin, fund administrators are impacted by the challenging environment as well. In fact, the challenges faced by fund managers shape key trends that are causing fund administrators to sit up and pay attention.

To adapt and remain relevant in today’s fund ecosystem, fund administrators find themselves needing to reposition and reengineer their approach.

This article will address how some of these challenges and trends are affecting fund managers and fund administrators.

Tackling the challenging market environment 

Considering the shifting investment paradigm and macroeconomic landscape, and the consequential shifts in the operational dynamics and day-to-day management of their current portfolios, fund managers are developing innovative practices to create value. 

These include adjusting investment strategies and portfolio management approaches as well as implementing AI and automation at both the fund and portfolio levels. These moves would stand them in good stead, as product innovation and impactful customer experience are leading drivers of growth amid the shifting business environment. With these developments in the near horizon, fund administrators will consequently need to redesign their operating systems and processes to adapt to the technological disruptions.

In addition, the effects of inflation are contributing to rising operating and maintenance costs. Fund managers must contend with the impact of interest rate fluctuations on their financing expenses and must manage declining returns on equity on their investment assets. They are currently focused on preserving cash to meet operating costs while working towards increasing revenue streams. Private equity funds are continuing to seek to drive value through operational improvements, particularly through cash management or bolt-on investment, which may enable fund managers to achieve the objectives listed above. 

Integrating Environmental, Social and Governance (ESG) considerations into investment decisions

Sustainable investing is becoming more complex and competitive as investors seek to focus on themes related to the environment and inclusive growth. With Environmental, Social and Governance (ESG) factors playing a much more important role in how companies operate and how investors select their investments, fund managers are embedding ESG considerations into every stage of their investment lifecycle, from due diligence to acquisitions and from leasing to asset management. 

Fund managers are now focusing on investor relations and investor reporting more than ever before, and fund administrators will need to provide more information to investors to enable them to make socially conscious decisions. As more ESG and climate disclosures need to be made, fund administrators will also need to have ESG offerings and in-house ESG expertise to support fund managers.

As an example, the Singapore real estate sector’s focus remains on sustainable commercial buildings. Green buildings are a primary factor for investment decisions, and the gap between green rental premiums and brown rental discounts is widening. Buildings with strong environmental performance tend to be newer and are considered premium assets, and command higher rents over comparable properties that may be less sustainable.

Key elements to raise capital: Investor relationships, levers for value creation, and investments in technology

Fund managers’ relationships with investors play a fundamental role in raising capital under the current market environment. Transparency with investors is crucial to build trust. Therefore, fund managers are forming partnerships with fund administrators to provide accurate reporting of their portfolios’ financial performance, which is fundamental for building this trust. Although investment performance is an important factor that can help drive customer satisfaction, customers’ expectations have generally grown in terms of personalisation and timeliness of interactions.

Amid the current landscape, fund managers also need to do better at finding and pulling the “levers” for value-creation that can generate organic growth. They also need to move towards an active portfolio management mindset and the development of two key qualities: resilience – to protect companies from the negative impacts of market forces; and transformative growth – to capitalise on growth opportunities and synergies as and when they arise.

Firms will need to invest in technology and associated controls even amid weak performance and margin pressures, failing which they will likely fall short of client expectations and internal efficiency goals. Technology will become a crucial component of back-office activities due to the significance of data provided by fund administrators to fund managers. As such, fund administration software needs to be enhanced to automate operations, standardise data and simplify reporting.

Fund administrators need to leverage advanced analytical tools which will enhance their ability to interpret financial trends, evaluate investment performance and provide valuable decision-making support to fund managers.  

Size, scale and global span matters

As smaller outfits grapple with headwinds brought about by the current economic landscape, some larger global fund managers shared a different perspective of their market outlook.

Their investment focus for Asia Pacific remains centred on the same geographic spread as the medium-sized global fund managers – Australia, India, Japan, and Korea. Apart from real estate, their global portfolios extend to private equity, infrastructure, renewables, and distressed assets.  

While they face similar headwinds as their smaller counterparts, their size, scale and global standing have enabled them to mitigate these challenges to refinance their assets and maintain a good level of liquidity for their operations. They have also been able to secure good credit lines from financial institutions to support their operations.

Some of the large global private equity fund managers who have undergone mergers and acquisitions share an upbeat outlook of their capital-raising capabilities. They can now plan much larger fund launches based on their established combined track records and have cultivated strong relationships with their enlarged base of existing investors.  

In view of the growing scale and size of global fund managers, fund administrators are building up their scale and operating capacity in tandem to capture such enlarged opportunities. There appears to be a growing trend of consolidation across fund administrators to grow their scale and capital to invest in technology so that data management and operations become more productive and value-efficient to support large global fund managers.

Fund administrators as strategic partners to fund managers 

Moving forward, managing the challenges of an evolving landscape will require fund managers to adopt a strategic mindset, be adaptable, and resilient, and leverage their niche strengths to develop innovative value-creation strategies for their portfolios. 

These strategies could include the introduction of AI capabilities or research within their portfolio companies to improve their EBITDA efficiency. They should also ensure that their product designs and uses remain relevant, effective, and competitively priced for the consumers in their target market segments. These products should also feature some levels of differentiation from their competitors.  

Cultivating relationships with their investors will also be key to succeed in the current market. Fund managers need to examine the quality of their investor reporting to ensure their investors are kept constantly abreast of the performance of their investments, and that a good depth and breadth of information is shared with them. Fund managers should also deploy the right level of data analytics to enable their investors to comprehend investor reports.

In essence, establishing transparent and understandable communication channels with their investors will be vital to building trust and cultivating long-term investor relationships.

For fund managers to achieve success, the importance of fund administrators should not be overlooked. They are crucial to fund managers’ operations and ensure that the right systems and technology are being used for investor and fund reporting. They can also leverage data analytics to enhance portfolio management, provide guidance on ESG reporting, and expertise on regulatory compliance.   

In a nutshell, fund administrators serve as the backbone and nucleus of the fund management industry and should be seen by fund managers as strategic partners who are vital to their success. Such strategic relationships will pave the way for fund managers to win the trust and support of their long-term investors and fulfil investors’ increasing expectations. A successful symbiotic relationship between fund managers and fund administrators will enhance their ranking and profile within the investment management sector.

Gayal Karunasena is the Business Process Solutions Leader for Deloitte Southeast Asia and Rajindar Singh is a Business Process Solutions Director at Deloitte Singapore.