New models, new scenarios: private real estate and outsourcing, part I
Is outsourcing becoming more common within the real estate fund world? Will we start to move towards a model closer to other asset classes, such as hedge funds, where it is more widespread?
I see an inland, non-internationalised situation where historically it has been completely insourced. There was no outsourced service, so clients would go to banks for asset lending or for complex cash movements and that would be it. They would go to a selection of accounting firms for some SPV structures, but a real, formal outsourcing of the internal fund administration has not always been the rule.
The second situation, one that is a little more advanced, is when those managers go to international fund centres where they tend to start looking at the possibility of outsourcing, or are forced by local regulation setting strong fund administration requirements to consider outsourcing some of the administration components that they would traditionally do internally.
Compared with hedge funds, however, or other fund types, outsourcing is only at the very upper level of the fund structure, as a feeder, or occasionally, the master fund, and they would only be using someone to aggregate the figures received from different intermediary companies. The accounting of HoldCos, PropCos, and FinCos would be done by the client themselves or a provider they already use – a ‘Big Four’ provider or a combination of local specialists – and they would then pass the book over to the fund administrator to just finalise the accounts which could even have been consolidated internally. On occasion, they also deal with investor activity in terms of capital calls, distributions, subscriptions and redemptions, depending on the organisational form of the fund. While this second situation leans more towards outsourcing, it is not true outsourcing. Even in this situation, it is still only at a level where the hedge fund industry was 10 years ago and where the UCITS industry was more than 20 years ago.
There is movement, however, and we see more and more clients wanting to talk about true fund administration outsourcing. The difficulty is the definition of that outsourcing, the decision of what should be outsourced and what should be retained within their organisation. Fund administration for them may mean something different than for fund administrators in the private equity or hedge fund world. It really means managing two types of information: financial, but also qualitative and quantitative information related to managing buildings, such as energy consumption, maintenance indicators or tenant information (such as types of leases in place, expiry dates and occupancy rates).
These are indicators that fund administrators are not used to managing at all, not enabling them to address all the requirements, which equally may not be that well defined by the managers themselves.
What we see today are managers seeking our advice on what they could outsource. They talk to us because we have the fund experience, the experience of major on-boarding of clients investing in complex systems, in communications, and a culture of very strict control environments. The other groups they might go to are the hardcore real estate providers. These firms specialise in property management, asset management and administration of their own structures and they may wish to offer those services to third-party clients.
These discussions are happening more often and we have seen a few deals for outsourcing, but the difficulty is that clients want to retain strong control over the data, the quality of data, and outsourcing arrangements are raising a number of day-to-day challenges for them.
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