Post Summary
George Evans and Glenn Shields discuss consolidation among fund administrators, self-administered funds, specialty and digital asset funds, bolt-on services, and the outlook for 2023. Evans closes with league table growth by tier for August 2021 to August 2022.
Consolidation. He says it has highlighted the challenges of combining service models, technology, and cultures, and that managers are placing greater emphasis on quality.
Almost 30%, which he puts at roughly 30,000 to 40,000 funds in the private markets.
A client’s request for more services reflects trust, but an administrator should add a service only when it can be great at it, and deliver it at the same quality as core fund administration.
Somewhat slower activity after a strong 2022, with inflation, higher interest rates, longer fundraising cycles, and multiple closes.
Evans introduces Shields as the founder and CEO of GP Fund Solutions and notes that the firm celebrated its tenth anniversary the previous year. Shields says he started the firm in 2011 with two ideas: build a culture where employees can grow their careers and stay for a long time, and deliver high-quality service while leveraging technology.
Shields says the firm has just over 90 employees, is approaching $50 billion in assets under administration, and operates across six offices along with hybrid and remote employees. It focuses entirely on closed-end funds, serving private equity, growth equity, venture capital, and debt managers, and he describes its sweet spot as firms aspiring to raise funds of $500 million to a few billion dollars. He says more than 65% of its clients came to the firm with their first fund.
What is driving consolidation among fund administrators?
Evans says there are roughly 640 fund administrators named in SEC filings. Shields says the headline is consolidation, which has highlighted the challenges of combining service models, technology, and cultures. He says those challenges exist in any merger but are amplified in a fast-moving, high-growth private-assets market.
Shields says managers are placing greater emphasis on quality, and that bigger isn't always better. He says managers need to decide whether their priority is excellent fund administration or a firm that can provide every possible back- and middle-office service, which he says creates an opportunity for providers to be clear about where they fit.
Why are self-administered funds reconsidering outsourcing?
Evans says almost 30% of closed-end funds are still self-administered, roughly 30,000 to 40,000 funds in the private markets, and that those firms face talent shortages, remote hiring, and the challenge of keeping pace with growth. Shields says GP Fund Solutions has worked with firms that historically did everything in-house and are now exploring outsourcing to address capacity, because they have more products and investors are demanding more from the back and middle office.
Shields says the concern is whether an external administrator can deliver quality and keep up with capacity needs, and that successful transitions require careful provider selection, honesty about capabilities, and extensive planning. He describes one significant transition with a large manager that took many months and was not a simple switch-off and switch-on process.
Should every administrator serve specialty and digital asset funds?
Shields says it depends on whether the administrator's systems, processes, and technology fit the product's requirements. He says many closed-end pooled-capital vehicles and special purpose vehicles (SPVs) have similar needs, so existing procedures can be adapted and scaled. Other structures have liquidity or liquidation features and more complicated requirements, and those deserve careful evaluation.
Shields says some asset classes, including crypto, may require a specialist with direct industry expertise, because the nuances can affect income types, waterfall calculations, tax withholding, and other operations. Evans says providers often seem either fully committed to specialty areas such as special purpose acquisition companies (SPACs), SPVs, and crypto, or not involved at all.
How should administrators approach bolt-on services?
Evans says one of the biggest trends is the addition of services around core fund administration, including managed IT, cybersecurity, outsourced compliance, CFO services, and tax work. He says advisers may have vendor fatigue and prefer to buy more from a trusted administrator.
Shields says a client's request for additional services reflects trust in the relationship, but an administrator should add a service only when it can be great at it and genuinely solve problems. He says GP Fund Solutions has built some capabilities organically, including data and analytics, and that for anti-money-laundering services it may partner with a specialist, act as an intermediary for information and documentation, and white-label a solution for a client. He says the key is delivering every additional service at the same quality level as core fund administration.
Evans says some firms are acquiring capabilities to build enterprise value or prepare for an eventual sale, but still need to be good at what they offer. Shields says being independent lets him prioritize high-quality services rather than enterprise value for its own sake.
What did Shields expect for 2023?
Shields says 2022 has been great, with carryover from 2021 in both investing and harvesting activity, and that he expects 2023 to be somewhat slower. He says clients and their portfolio companies face inflation and higher interest rates, fundraising cycles may take longer, and managers accustomed to a single closing may need multiple closes, which creates additional operational work. He also names finding the right balance in hybrid work as an important issue.
Evans says some administrators are heavily dependent on asset-based fees and may find the cycle difficult, particularly if they are also dealing with acquisition integration and fee compression. Shields agrees those pressures could compound for firms that recently completed transactions.
How did the four service-provider markets grow from August 2021 to August 2022?
After the interview, Evans reviews league table growth for administrators, auditors, custodians, and prime brokers. At the start of the episode he says there are over 600 fund administrators, over 500 audit firms, over 300 prime brokers, and over 1,400 custodians in the marketplace.
The figures below are as Evans states them, rounded or approximate. He measures assets for administrators, auditors, and custodians, and funds for prime brokers.
League table growth by tier, August 2021 to August 2022, as stated by George Evans
Evans says the takeaway is substantial growth in different tiers of the market, with an interesting distribution across the rankings, and that Convergence will continue to examine these trends each month. These are 2022 figures; Convergence's current league tables are published in its monthly league tables post.
Topics Covered
Key Points
What did Shields say about consolidation and quality?
- Consolidation is the headline. Shields says there has been a lot of consolidation among service providers, which has highlighted the challenges of combining service models, technology, and cultures.
- The challenges are amplified in private assets. He says they exist in any merger but are greater in a fast-moving, high-growth private-assets market.
- Managers are emphasizing quality. Shields says bigger isn’t always better and that managers must decide between excellent fund administration and a firm that offers every back- and middle-office service.
- Providers can be clear about fit. He says this creates an opportunity for providers to state where they fit.
- Scale of the market. Evans says roughly 640 fund administrators are named in SEC filings.
What did Evans and Shields say about self-administered funds?
- The size of the group. Evans says almost 30% of closed-end funds are self-administered, roughly 30,000 to 40,000 funds.
- The pressures. Evans cites talent shortages, remote hiring, and the challenge of keeping pace with growth.
- Why firms are exploring outsourcing. Shields says some firms that did everything in-house are exploring it for capacity, because they have more products and investors demand more from the back and middle office.
- The concern. He says firms worry that an external administrator may not deliver quality or keep up, which would only move the same problem outside their walls.
What makes transitions work. Careful provider selection, honesty about capabilities, and extensive planning, as in one significant transition that took many months.
How did they discuss specialty funds and bolt-on services?
- Specialty funds depend on fit. Shields says it depends on whether the administrator’s systems, processes, and technology fit the product’s requirements.
- Crypto may need a specialist. He says nuances can affect income types, waterfall calculations, and tax withholding.
- Bolt-on services are a trend. Evans lists managed IT, cybersecurity, outsourced compliance, CFO services, and tax work, and notes advisers may have vendor fatigue.
- The quality standard. Shields says to add a service only when the firm can be great at it, and to deliver it at the same quality as core fund administration.
- How GP Fund Solutions adds capabilities. He cites data and analytics built organically, and anti-money-laundering services delivered through a specialist partner under a white-label arrangement.
What did Shields expect for 2023, and what did Evans add about fees?
- 2022 was strong. Shields says there was carryover from 2021 in both investing and harvesting activity.
- 2023 is expected to be slower. He cites inflation and higher interest rates for clients and their portfolio companies.
- Fundraising may change. He says cycles may take longer and managers used to a single closing may need multiple closes.
- Hybrid work. He names finding the right balance as an important issue.
- Fee exposure. Evans says administrators heavily dependent on asset-based fees may find the cycle difficult, especially with acquisition integration and fee compression, and Shields agrees the pressures could compound.
What did the August 2021 to August 2022 league tables show?
- Fund administration. Assets declined almost 2% overall; administrators ranked 6-10 grew 13%, those ranked 11-25 grew almost 8%, and those ranked 26 and below declined almost 15%.
- Audit. Assets and funds audited grew approximately 10%; the Big Four grew almost 13%, auditors ranked 5-10 nearly 24%, and auditors ranked 11-25 almost 47%.
- Custody. Assets grew about 13%; custodians ranked 1-10 grew roughly 8%, those ranked 11-25 almost 15%, and those ranked 26 and below about 27%.
- Prime brokerage. Funds grew about 13%; prime brokers ranked 1-10 grew about 5%, those ranked 11-25 about 7%, and the remainder about 11%.
- Evans’s takeaway. Substantial growth in different tiers, with an interesting distribution across the rankings.