Investor interest opens door to opportunities for fund administrators
Fund administrators are expanding into infrastructure as asset owners move more money into the asset class.
Sources said the potential for huge amounts of institutional assets to be invested in infrastructure — currently handled with private equity investment administration — could make it possible for the asset class to be handled in a stand-alone administration business, much like in private securities, hedge funds and real estate.
“Without a doubt, the stars have lined up,” said Cesar Estrada, senior managing director, head of private equity, directs and hybrids, North America, at State Street Alternative Investment Solutions, New York. “There's a demographic shift, more interest in yield, investor sophistication — all of that is coming together. Ultimately, more successful managers must make a choice to build their (infrastructure) business, and that gives new opportunities for fund administrators in this space.”
Infrastructure is “the next big thing. It's being developed as we speak,” added Jack McDonald, president and CEO at third-party fund administrator Conifer Financial Services, San Francisco. Mr. McDonald said he can see a separate infrastructure fund administration business happening in the future.
“(President-elect Donald) Trump's signaling of new infrastructure projects signaled a bellwether that a lot of assets are going to be going into infrastructure over the next several years,” he said. “A lot of discussions are happening now in fund administration that didn't happen a year ago.”
Conifer, with $115 billion in assets under administration, is being acquired by software developer and third-party administration provider SS&C Technologies Holdings Inc. Windsor, Conn., in a deal announced in December. SS&C has plans to leverage Conifer's expertise in private equity to broaden its infrastructure capabilities in fund administration as well as in software development, said Rahul Kanwar, SS&C senior vice president, managing director of alternative assets.
“We want to create infrastructure technology services that can process through cloud-based tools and are agnostic as to how the client uses them,” said Mr. Kanwar. “We also have systems on the fund administration side to process these investments, using experts in the field in private equity to apply to infrastructure assets. Conifer helps in this strategy.” He said SS&C is “creating a dedicated group” for infrastructure fund administration, both with software development for money managers and asset owners, and with a dedicated fund administration business that has $1.1 trillion in overall assets under administration.
“There is some overlap with other businesses, but there are more unique qualities with infrastructure,” Mr. Kanwar said. “For one thing, there are the nuances of the assets themselves, their complexity. There are the different forms or structure of making infrastructure investments, from direct to a club-type situation akin to private equity co-investment opportunities, to traditional commingled funds.”
State Street's Mr. Estrada said what makes infrastructure administration unique is “the underlying asset. The fund structures and client base are similar to other alternatives. There's been a pickup in activity from years ago with specialist managers, and with new markets they've sought fund administration that has jurisdictional expertise. That's why, as infrastructure managers have diversified, that has targeted more need for fund administration.”
Yet another unique quality of infrastructure investing, Mr. Estrada said, is “the difference between administration of infrastructure debt apart from infrastructure equity, things needed for project funding and construction. Now, infrastructure funds are taking over with things like infrastructure private credit. You need expertise with this through the scope of an administration service. It's not all that different from custody because of the accounting and financial reporting.”
He said while most infrastructure fund structures are similar to those in private equity structures, terms of funds “are longer than a traditional buyout fund. ... They behave differently, more like high-yield fixed income, in that they create income. You need to be able to process that like a credit portfolio.”
State Street does not have a “siloed infrastructure fund administration unit” although it does administer for infrastructure managers as part of the company's overall $28 trillion in assets under custody and administration, Mr. Estrada said. “Right now we think a separate business would not be synergistic with our overall business, but anything can happen,” he said. “It might grow enough so our view might change. But now the best way to grow is to build scale and take advantage of our existing expertise in our entire alternative investment services business.”
While some administrators are looking into separating their infrastructure business from private equity, Linda McDonald, vice president, alternatives investments, at Segal Rogerscasey, Dublin, said the similarities of the two asset classes make it less likely there will be separate units for each at most firms.
“There are some similarities with other asset classes ... that are operationally similar to private equity, and those firms just add infrastructure as another sleeve to private equity,” Ms. McDonald said. “I think, too, for funds in the infrastructure space that they would be drawn more easily to fund administrators that have experience in private equity.”
She said larger infrastructure money managers, “mostly open-ended funds, stay within themselves” for fund administration. “Typically, other closed-end funds without the big backing, those smaller funds use third-party administration.” Ms. McDonald said she knows of knows of no third-party administrators that focus solely on infrastructure.
Conifer's Mr. McDonald said starting infrastructure fund administration from scratch would be difficult. “I don't necessarily see a need for that today,” said Mr. McDonald. “It'd be really hard to do a startup in that investment space. Hedge fund administration has been done for years, and private equity and real estate are still in the early innings. But infrastructure would be a really tall order because you'd be taking in information from the broadest possible spectrum of investment,” with both equity and debt as subcategories. “There's nothing off the shelf that could serve this area.”
Private equity fund administrators are capable of working with infrastructure managers but do need the specific expertise that asset class requires, said Michael Cowell, chief operating officer at Basalt Infrastructure Partners LLP, London, which manages more than $1 billion in assets for institutional clients. “I think fund administration is a business that's transferable among different sectors of the alternative asset class,” Mr. Cowell said. “I'd question whether there is an opportunity to focus solely on the provision of fund administration to the infrastructure asset class. I do think that fund administrators will target infrastructure, particularly those with private equity experience, but I see infrastructure becoming supplementary to their existing business.”
Basalt this past fall hired Aztec Group, Guernsey, Channel Islands, as third-party administrator, because “they're focused on alternative assets, including infrastructure private equity, and demonstrated a partnership solution offering in our key jurisdictions,” Mr. Cowell said.
This article originally appeared in the January 9, 2017 print issue as, "Firms boost focus on infrastructure administration".