The challenges of the modern fund administrator

Conor Blake

Conor Blake, Co-Head of Private Debt & Capital Markets

24 March 2017

Conor Blake, Co-Head of SANNE’s private debt and capital markets division and Stephen McKenna, Director and Head of transaction management at SANNE, take a look at the key drivers that have led to challenges and ultimately created opportunities for fund administrators.

Following the 2008 financial crisis, there is increased pressure on banks to reduce their risk of insolvency through measures such as Basel III; this has created the opportunity for alternative lending from debt funds to flourish. Further regulatory development and investors’ increased recognition and understanding of the asset class has continued to drive the evolution of the European private debt market. SANNE were well placed to be involved in some of the earliest European mezzanine funds back in 2005/6 and therefore experienced this advancement first hand.

The professional fund administrator has an increasingly important and difficult role to perform in order to comply with the growing regulatory and reporting requirements. This, however, also provides administrators with a greater opportunity to assist their clients and add value. By being specialists in investor take-on requirements, corporate governance, financial and regulatory reporting the fund administrator is able to take the burden from the investment manager and allow them to concentrate on actually managing their funds. We see the evolution being driven by the demands of investors, the industry itself and by governments and regulatory bodies who introduce standards, regulations and directives. The latter have been primarily concerned with reducing systemic risk, tax evasion and aggressive tax avoidance as well as protecting investors.

In response to various high profile collapses during and in the aftermath of the financial crisis, the Alternative Investment Fund Directive (AIFMD) was brought into law. Part of the directive is the requirement for Annex IV reporting to be delivered to European regulators, which breaks down investment portfolios, leverage ratios, exposures, risk analysis and also includes questions around liquidity and fund strategies. It can be a very involved process that takes a significant amount of time to prepare. This can be difficult for investment managers to address. A non-EU manager reporting to each EU jurisdiction where they market funds will appreciate how complicated the process can be.  Through a familiarity with the various reporting templates and a thorough understanding of the directive, a good administrator is able to streamline the process and ensure that reports are filed accurately and timely on behalf of the funds. This relieves the investment manager of a burdensome requirement and also provides an opportunity for the administrator to deepen their service offering to the client. The same applies when considering other regulatory reporting requirements such as the statistical reporting for the European Central Bank or other local reporting requirements.

Similarly, as part of the global strategy to tackle tax evasion and aggressive avoidance, the introduction of the Common Reporting Standard (CRS) has been developed in response to a G20 request and approved by the OECD Council. CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. CRS was modelled on the US equivalent FATCA, which the industry has been bedding down over the last few years. CRS has no direct legal force on its own, however, many countries throughout the world have agreed to exchange information under the CRS and have implemented bilateral agreements known as Model Competent Authority Agreements (CAAs), which either mirror or closely follow the OECD guidelines in respect of the CRS. As each CAA is negotiated between the partner jurisdictions, and given that the CRS is implemented under local law, there is the potential for differences of scope and interpretation of local laws to arise. For example, the Cayman Islands has introduced a number of new offences for providing false self-certification and where a financial institution has been found guilty of a criminal offence in relation to CRS, the directors and similar officers and members will also be guilty of an offence, unless they can show that they exercised reasonable care.

To complicate matters further, the United States has not signed up to CRS therefore FATCA agreements between the US and partner jurisdictions will run parallel with the CAAs. This results in a complex set of requirements with real consequences if they are not met.  Through robust on-boarding processes and detailed record keeping, an administrator should be able to perform the required classification and on-going reporting with minimal disruption to the investors or manager. Therefore, what could be seen as a burden by the fund’s industry is an opportunity for good administrators to assist their clients and provide peace of mind.

Another of the significant concerns for private debt managers is the imminent implementation of the Base Erosion and Profit Shifting (BEPS) framework. This has also been developed due to a political reaction to public opinion following a few high profile media stories of large multinational corporations’ aggressive cross boarder tax avoidance. Although still to be finalised, it is likely that BEPS will require a greater focus on transfer pricing methodologies with more emphasis on substance, people and “real activities”.  Administrators will need to keep working closely with advisors in order to ensure that they are prepared and adequately equipped to deal with the measures that are introduced. Providing substance in the fund jurisdiction is not new, however, BEPS will emphasise its importance, which should already be ingrained into the corporate governance procedures of any quality administrator. This would include fundamentals such as making sure that board decisions are made at quorate meetings in the appropriate jurisdiction, meetings are accurately minuted and the statutory records are well maintained and up to date. 

One important role that we do not imagine changing is the ability of an administrator to provide accurate and timely accounting and reporting services.  This includes financial accounting and bookkeeping, investor reporting, carried interest and performance fee calculation, equalisation calculation and regulatory reporting.  As the private credit asset class evolves, the complexity, variety and intricacies of the underlying assets also increases.  From a starting point of fairly vanilla assets we now see funds that include portfolios of senior loans, mezzanine, unitranche, non-performing, leveraged, real estate debt, peer to peer, infrastructure debt, trade receivables, CLOs and many more.  Therefore, in order to avoid any potential pitfalls the approach has to be to invest in the right people and systems that specialise in private debt.  Our divisional model at Sanne has allowed the team to develop an understanding of a single asset class that greatly improves the quality of the reporting produced.  Additionally, the use of accounting and loan monitoring software that can cope with the characteristics of debt instruments such as floors, caps and PIK etc.

We anticipate the private debt market continuing to grow and evolve and we believe that there are a few basic principles that will help fund administrators thrive in this environment.  Investors and, in turn, the products that are available to them are likely to continue grow in complexity and sophistication, therefore it is important that administrators are able to meet the future needs of their clients. 

In order to be a good fund administrator we believe there needs to be a genuine partnership with the client and excellent communication between the two.  The investment manager must have confidence that the administrator will act in an accurate, timely, efficient and professional manner and in the best interests of the fund and its investors.  This is achieved by recruiting and training good people, keeping them informed and aware of key developments, providing them with the best systems and operating in the right locations.

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