Summary

Institutional investors have increasingly turned to alternatives as a means to improve performance and diversify their portfolios. The subsequent demand for institutional quality infrastructure and the imposition of new regulatory regimes have required a renewed emphasis on operational accuracy and efficiency. Fund administrators have stepped into this environment as key partners to asset managers’ continued success.

The survey represents the current state of the global alternative fund administration industry. We draw from conversations with a variety of firms across size and location to provide a comprehensive assessment of the industry.

Highlights

  • Participants reported alternative assets under fund administration of USD 7.64 trillion and assets under portfolio administration of USD 1.75 trillion.
  • Aggregate asset growth was most robust in the private equity space compared to other asset classes. Asset growth in the funds of hedge funds space remained muted.
  • Respondents have become optimistic about growth prospects in Asia-Pacific, Latin America, and Africa while expectations for European business declined over the year.
  • M&A in the fund administration industry was robust in the past year and is expected to continue. The need for broader geographic footprints and for expanding product expertise drove much of the activity.

Introduction

The eVestment Alternative Fund Administration Survey represents the current state of the global alternative investment fund administration industry and includes information from firms across the spectrum of size and services offered.

Institutional investors have increasingly turned to alternatives as a means to improve performance and diversify their portfolios. The subsequent demand for institutional quality infrastructure and the imposition of new regulatory requirements has translated into an added emphasis on, and technological advances in, operational accuracy and timeliness. In this environment, administrators have stepped into the role of partner, assisting clients with

valuation, risk analysis and regulatorycompliance, as well as with investor due diligence and reporting functions. The constant improvement in service offerings has made administrators key players in the ongoing health of the alternative investment industry.

At eVestment, we continue our commitment to cast a spotlight on the alternative fund administration industry by publishing our survey results. The 2017 administrator survey, the 17th edition to date, is one of many sources of industry intelligence offered by eVestment. Our Research Divisionproduces reports and commentary on industry performance, investor flows and structural changes across the global investment management space. eVestment maintains the industry’s leading global database of traditional and alternative investment products distributed through a flexible suite of cloud-based solutions. We help investors and their consultants select investment managers, enable asset managers to successfully market their funds, and assist clients in identifying and capitalizing on global investment trends.

eVestment looks forward to continuing our relationship with the fund administration industry and we thank all of the firms and individuals who have shared their valuable time and knowledge for this survey.

Industry Overview –M&A Remains Robust

Participating fund administrators provided assets under administration (AUA) for hedge funds, private equity, real assets, funds of funds, and liquid alternatives. Reported alternative fund AUA totaled USD 7.64 trillion, increasing 14.15% compared to the prior year’s results. Participants also reported USD 1.75 trillion in assets under portfolio administration (AUPA) for services provided to asset owners. Third party administration (TPA) continued to gain traction in the private equity and real assets space as evidenced by the increase in assets and number of funds administered by participating firms. Overall, growth rates were largely positive, but varied considerably across firms, asset classes, and regions.

Alternative Assets Under Fund Administration

Mergers and acquisitions in the fund administration space continued apace through 2016. The rationales for consolidation in the industry, local footprints, product expertise, and economies of scale remained intact. Expanding geographic presence was cited multiple times from firms with an acquisition history during the past two years. The majority of respondents expected further M&A activity, but the balance of those expecting net firm exits versus entries going forward was more symmetric than in surveys past. Many participants anticipate a bifurcated alternative fund administration market in the near future, one consisting of a greater concentration of assets overall and of niche firms in specific markets. We note that even with the spate of M&A over the past decade, the industry remains relatively unconcentratedas measured by the Herfindahl-Hirschman index, ranging from 0.11 and 0.14 across the four main asset classes –not taking into account geographic diversity which would provide further dilution.

Although some participants signaled that the industry’s increasing sophistication would be a barrier to entry, this message was tempered by mentions of the fluidity within the alternative
investmentlandscape and the challenge facing incumbents to keep pace.

“We foresee net firm entries to the alternative fund administration industry, particularly focused around private equity, real estate, and niche product support. I would expect M&A activity to continue as larger firms evaluate service oriented businesses against their strategic offerings.” – Mid-size U.S.-based Administrator

Industry Overview – Shifting Regional Expectations

In terms of anticipated business growth by geography, the ranked order of the various regions stayed the same as last year with the exception of Africa overtaking the Middle East for fifth place. Asia-Pacific and Latin America also rose noticeably in the rankings, while perceived prospects for Europe declined. While administrators did not unanimously cite any specific regulatory regime as having an adverse impact on fund formation, the implementation of AIFMD was frequently mentioned as a serious consideration for those looking to raise assets.

Alternative Assets Under Fund Administration

“Within private equity and real asset strategies, the main regulation driving the business is AIFMD. We see increased interest in Europe-domiciled funds from U.S. asset managers to leverage AIFMD compliant funds. Reverse solicitation is no longer the preferred distribution model for non-EU managers to attract European capital.” – Large Europe Focused Administrator

The Common Reporting Standard (CRS) was also frequently cited as being impactful to fund clients. However,given its nature vis-à-vis FATCA, and administrators’ general acclimation to the global regulatory environment, most respondents saw both AIFMD and CRS as an opportunity. Compliance and regulatory consulting, while costly to build out, has turned out to be an important source of value-add, particularly for administrators with a multi-national client base.

Alternative Assets Under Fund Administration

Across asset classes, private equity fund administration again ranked highest for anticipated business growth. Looking at firms’ regional focuses, we did not see much deviation from the group average on bullishness toward private equity TPA. On average, perceived prospects dipped for real assets and rose for funds of hedge funds over the course of the year. Expectations for the hedge funds and liquid alternatives stayed roughly flat compared to our survey conducted in the prior period.

Alternative Assets Under Fund Administration

Hedge Funds – AUA Growth Improved Over Prior Year

Participating administrators reported USD 3.92 trillion in hedge fund assets under administration at the end of 2016. This compares favorably to the USD 3.73 trillion reported to end 2015, for an increase of 5.18% year-over-year. Growth across firms was generally positive, with the median firm posting 10.70% growth in hedge fund AUA.

Twenty-three firms representing 59% of current hedge fund AUA reported regional breakdowns for both YE 2015 and YE 2016. Across geographies asset growth was

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