Europe’s private asset explosion puts technology infrastructures in the firing line

By Nakis Efstathiou
28 September 2022

Assets under management in Europe-focused private capital funds are set to more than double over the next four years, according to the latest Preqin figures. Having soared from €1.3 trillion in 2015 to €2.2 trillion by 2021, Preqin analysts predict private capital AUM in Europe will hit €4.9 trillion by the end of 2026, a 14% compound annual growth rate (CAGR).

Strong performance has brought many new investors to these markets, Preqin noted, resulting in significant capital allocations “to funds focused on the region to access private capital opportunities.”

Private equity is expected to remain by far the largest alternative asset class (reaching €2.1 trillion in 2026), with infrastructure (24% CAGR) and private debt (19%) forecast to see the strongest AUM growth between 2021 and 2026.

“As alternative asset classes continue to grow and embed within global capital markets, their role in Europe is of increasing importance to the delivery of economic growth and resilience against mounting challenges,” added Alex Murray, VP, Research Insights at Preqin.

Meeting investor demands

Institutional investors in particular have been ramping up their private equity and private debt exposures in the hunt for higher returns, steady income streams and diversification. Institutional investors though bring institutional servicing demands.

Passing rigorous investment due diligence examinations, while crucial to attracting capital flows, is no longer sufficient. Private capital managers’ ability to meet allocators’ stringent operational standards is increasingly part of the equation. That is putting the breadth, depth and quality of support managers get from their internal teams and third-party fund administrators in the spotlight. Having expert support staff is one prerequisite. Sophisticated systems capabilities are another.

Ensure your systems pass muster

So what does a fit-for-purpose technology infrastructure look like in practice?

The objective is end-to-end automation across all asset classes. Automation streamlines processes and eliminates errors, slashing operational risk and delivering significant efficiencies to boost profitability. It provides the scalability firms need to support the surge in private capital assets and investors. Replacing manually-intensive tasks with automated ones also frees staff to focus on more high-value client servicing and business growth activities—the sorts of roles that bolster job satisfaction, and help attract and retain staff.

As our parent company SS&C observed in the latest Global Custodian Private Equity Fund Administration Survey: “With the fight for talent as the backdrop, firms are optimising their business processes and consolidating and upgrading their tech stacks to reduce reliance on key performers and to ensure the focus of human capital can be alpha generation.”

Functionality imperatives

Automating the full sweep of private equity and private debt-related processes though takes some specific functionality.

The liquidity profile of private equity, private debt and real estate means assets need to be held in the right vehicle—typically a closed-end or hybrid fund, or separately managed account. Ensuring the integrity and timeliness of accounting data in open and closed periods, and accurately allocating profits, losses, expenses and tax impacts among every investor over the lifetime of a fund are a major challenge.

Generating accurate fee calculations demands detailed look-throughs from investors to the investments—requiring complex investment accounting that feeds into the investor accounting. Investors similarly want detailed look-throughs to the underlying assets so they can see where the manager invests their money, and the XIRR by investor and investment.

Private equity funds typically engage in multiple investment rounds too. Whenever new investors come in, the fund must rebalance its profit and loss since inception, and the capital calls and distributions to investors. Calculating and allocating the different tiers in the fund’s distribution schedule, especially where distributions are heavily customized, can be a real headache without a sophisticated waterfall calculator.

In the case of private debt, nuances are commonplace. For instance, interest accruals may be left as payables, with loans only repaid at the end or with ad hoc repayments. Private debt is often rolled up with equity-type arrangements as well, requiring the equity and debt to be tied together from an accounting and reporting perspective.

Automate to accumulate

Relying on a mix of spreadsheets, in-house built technology and legacy vendor systems to support their private capital books—as many investment firms have tended to do—will no longer cut it. Investors and regulators expect greater transparency, better data accuracy and more granularity. They want control and efficiency.

Professional systems able to process capital calls and distributions, track investor notional balances, calculate management fees on multiple bases, produce waterfall calculations, calculate and report on investor and fund XIRR, track and account for investor opt-ins/opt-outs, and process multiple subsequent closes are the only solution.