As always, the challenges facing fund administrators continue to change in line with the evolution of the global asset management industry. The Luxembourg fund administration market has been dominated by the retail funds sector, driven by the historical success of retail mutual funds, specifically those arising from the UCITS regulations of the mid-1980s. As with any new strategy, those initial challenges of managing the UCITS segment of the market have been solved through the deployment of highly automated, integrated, global platforms, together with associated industrialised operational processes.
Today, we find ourselves in the same position, with the growth of the non-retail funds, i.e., AIFM-style funds. The evolution of these alternative funds requires new technology approaches to manage this market segment efficiently, including to tackle the following challenges:
The complexity associated with AIFMstyle funds distinguishes them from those of UCITS funds. This includes managing potentially large numbers of entities required to provide support by jurisdiction, tax, investor class, etc. in seamless manner, thus providing support for transactional allocations with increased or more complex reporting requirements. In addition, depending on the asset class, there are further associated complexity challenges around the nature of the investments, particularly for those firms who have branched out into different asset classes from where they originally focussed, for example, mezzanine players who are now into private equity, or private equity firms who are now into private or syndicated debt, or infrastructure or real estate, etc.
Low volume of investors
For UCITS funds, it is partly the retail-driven nature of their higher volumes that, when efficiently managed, helps generate revenues, hence profits. For non-retail funds, though volumes of investors (hence volumes of transactions), as well as volumes of investments, are typically much lower, that isn’t necessarily a positive because simple scaling-up strategies aren’t able to create efficient/profitable operating models. Indeed, for complex funds, the opportunities for scaling are pretty limited because that complexity further reduces the scalable volume.
Lux GAAP accounting
Within the Lux funds market, a particular challenge is associated with the need to create, manage, and then report on funds in their required accounting form, i.e. IFRS, US GAAP, etc, as well as needing the same in parallel in Lux GAAP form. The additional work might seem like a small point, but if it needs to be done outside the main fund accounting system, it represents a significant, often manual, increase in workload.
Digitalised economy As we’re all aware, virtually everything outside fund administration in the financial services world has now been digitalised in one form or another. Hence, there is an opportunity to improve efficiency by building real-time processes with data models that support the quest for so-called ‘golden sources’ for every data point.
Some examples of this challenge for a Lux fund administrator include the opportunity to interface with the following:
- The Lux regulator (CSSF), including in relation to submitting Lux GAAP returns.
- KYC/AML platforms, including managing sanction screenings, adverse media reporting, periodic risk reviews, etc.
- Banking interface platforms, where the leading providers have already solved the downstream integration to 1000s of banks across the world, including for the managing of Cashflow/FX treasury needs.
- ERP platforms, for managing all other aspects of the business, including accounts payable, accounts receivable, HR, payroll, etc.
- CRM systems, for managing the sales prospecting pipeline.
- Document management systems.
- The list goes on...
Fund administrators are often part of larger financial services groups or banks with multiple other business lines. Some of those other business lines have wider accounting or administrative processes similar to a fund administrator’s. There is, therefore, a natural opportunity to exploit the functionalising of operating models across business lines to gain potential synergies. Some examples of business lines that fall into the area of potential opportunities for fund administrators to exploit include:
- Wealth managers, who typically look after high or ultra-high-wealth individuals, who have complex structures and related complex accounting needs.
- Family offices or multi-family offices, both of whom have many similarities to fund administration operational processes/accounting, including fund structures that are complemented by individual holdings.
- Corporate services businesses, who usually need to support a subset of the fund administration range of processes alongside their specialist CoSec services.
- Hybrid open-ended style funds are probably the best case in point in terms of similarities with AIMF-style funds, with many aspects being identical, while others, such as NAV-centric processes or investor-level performance fee equalisation, being variants of common themes, hence where synergy opportunities are widely available.
Arguably, one of the biggest challenges any fund administrator faces is managing the plethora of Excel workbook workarounds forced into existence by the shortcomings of legacy fund administration systems. Particular concerns around this challenge are the need for more security or auditability in the unmanageable world of offline Excel solutions.
These shortcomings are one of the most common root causes of operational inefficiency, with the endless manual up/downloading of data, which is also one of the most typical causes of costly errors.
Part of the case for having an integrated portal aligned to the needs of the fund administration business is that it is a natural part of the digitalisation of the world we’ve become accustomed to; indeed, it is now expected. The other part of the case for reporting via a portal is to combat one of the curses of the digitalised world, namely phishing or other hacking attacks, where stories abound of fraudsters targeting those still relying on unencrypted email communications (or worse!). Portals also offer the potential for more than only reporting, i.e. value-added services such as data analysis services to search for additional insights.
Legacy fund accounting solutions
The root cause of many, perhaps almost all, the above challenges has been the failure of the software market to provide systems that have been able to keep up with the evolution of the needs of the non-retail fund industry – many of those legacy systems are now more than 20 years old so incapable of ever catching up because their fundamental architecture locks them into ways of working which will never meet the challenges of today.
Overcoming these issues requires a deep insight into the specific market challenges, the technical understanding to translate the business requirements, and the ability to utilise modern technology.
The team at LemonEdge, many of whom have come from industry and hence who have battled with the challenges outlined above, now have a shared desire – to transform the capabilities available in the market. Working with local Luxembourg clients, alongside other global administrators and global managers, the LemonEdge fund accounting solution is proving it can overcome these issues to provide a strong base on which to manage non-retail fund structures now and into the future.