Hybridization: The trend that’s driving demand from investors

November 09, 2021

Changes in the private credit space are strongly influencing fund structuring strategies. Learn more about this shift, the future of hybrid funds and some of the challenges being faced by administrators.

 

It seems almost anywhere you look, from conferences to industry publications, debt issuance and the economy is a recurrent theme. To gain perspective on private credit, hybridization and related trends, we interviewed Peter Mastriano, global head of product management for private equity, real estate and alternative investment funds for U.S. Bank Global Fund Services. Read his insights below.

 

What are you seeing in the private credit space now compared to five years ago?

We’ve been seeing increased demands for services around credit portfolios.

Private equity, asset managers, hedge fund managers – all fuel and drive performance based on asset classes demanded by investors, and debt is at the top of this queue. Therefore, a number of funds' structuring strategies are focused on debt and private credit in particular, along with similar types of assets.

This ongoing trend is driving service delivery for firms such as ours, especially in the following areas:

  • NAV issuance
  • Financial statement production
  • Investors’ services
  • Statementing
  • Transparency and reporting work for complex portfolios

 

Do you see the trend towards the hybridization of hedge funds and private equity funds continuing? If so, what do you think that will look like in the coming years? 

Hybridization has been a prevalent trend for several years now. However, it’s worth noting that the term hybridization means different things to different people.

From an asset manager perspective, hybridization could connote asset servicing or capital raising.

For U.S. Bank, as an administrator, hybrid means we’re seeing private equity-type investment strategies folded into hedge fund-like trading portfolios – this seems to be the direction investors are requesting.

Investment managers are trying to create scale around that type of investment strategy, and historically, private equity vehicles didn't allow for that. This is one conduit of this move towards hybrid structures, and another is from the investor servicing side. Typically, in a closed-end fund structure, you see capital account balances based on investor capital with calls and distributions. In a hedge fund, it's subscriptions and redemptions based on units and unitized funds. What we’ve been seeing is fund managers attempting to create something in between.

“As an administrator, hybrid means we’re seeing private equity-type investment strategies folded into hedge fund-like trading portfolios–this seems to be the direction investors are requesting.”

This hybridization is likely set to continue, since more institutional investors are allocating to alternatives. Specifically, they’re increasingly allocating towards closed-end capital account structures because it gives them some of the attributes of managing performance they’re unable to get in a hedge fund structure.

Then there are the funds of one, where large institutional clients want to allocate more to private equity managers because they’re chasing alpha. But since they don't want to be commingled in a fund of 150-200 others, they’re demanding these funds of one. If a large public pension fund, for example, were going to allocate $300 million, they’d want their own fund.

 

What should private equity and hedge fund managers be evaluating when considering their administrators?

We see every deal that's being presented each week for alternatives, and there’s no shortage of additional service requests that come along with many of these new proposals.

We have our standard operating model, and we have some things that are normally asked for just outside of this. Increasingly, however, we’re experiencing requests far beyond our standard servicing model.

In terms of challenges for the business, administrators are continually pushed to provide additional ad hoc and bespoke services that may not fall within their standard operating model including:

  • Investor-type reporting 
  • Financial statement production 
  • Feeding of data to data warehouses outside of a standard delivery schedule
  • Data delivery
     

We're being tasked to provide ever increasing amounts of data to investment managers so they can use it to perform downstream reporting, which typically administrators may or may not have done. This reflects what’s happening in the industry from a regulatory perspective as well. Large firms – and this is specific to the billion-dollar club – are facing challenges by Form PF, FATCA, AIFMD and other data reporting that is far different from their GAV, NAV and financial statements.

If you look at the host of requests received from clients, a large percentage of them focus on investor service reporting for several buckets. We’re continually being challenged to return calculations posted on the investor services statement and include appropriate content in the appropriate format. (E.g., How much historical data should the statement present? Are they ILPA compliant in the private equity space? etc.)

Investor servicing is an area where there's a demand from clients for us to provide more. This is, in part, because there are increasing amounts of investors who haven’t invested in PE funds before and are allocating more money. Also, they all have different asks of what they want to receive from an investor reporting perspective. We view our ability to adapt quickly to evolving client needs as a key differentiator to our service provision.

The manager needs to facilitate all these data points for this type of reporting and for other areas – Cayman Authority, Guernsey, Dublin, etc. Everybody wants transparency, and they want to know what these funds are doing within the jurisdictions in which they’re domiciled. The answer to this is data, so that reporting can be performed. Some of this is regulatory, some informational and some for the purposes of managing distribution of services. Data is king, and it’s continually being asked for by all administrators including ourselves. 

 

How is technology playing a role when it comes to managing private equity in a hedge fund administration?

Technology is important to a bank because it’s part of the business process design. It’s something that large institutions, like U.S. Bank, are investing in – first, to drive efficiency; second, because it's a necessary part of managing the business effectively. If you break this down to a more granular level, technology affects our product offering, too – and we're seeing challenges around various areas.

A good current example is in investor services reporting. There are many different tools out there to facilitate investor service reporting. Administrators use tools and drive their own technology development to build around them. Much of this comes back to data points and reporting at the investor level.

The proliferation of these strategies and the demand for the servicing to drive technology means that banks are continually pushed to invest more in the different platforms they use to service asset managers and funds. Specifically, they have to invest in investor relations, investor servicing, accountancy financial statement production and data management and mining. We are investing in each of these silos as demand continues.

 

What projects are you working on right now that will impact such managers in the foreseeable future?

We have lots of ongoing projects, but as it goes, you can only do so much at one time. A lot of what we have on the drawing board surrounds loans servicing. We’re one of the dominant players in the asset servicing space through our corporate trust group – we cover 70%-80% of this market. For us in administration, we’re constantly mining data to allow us to service complex loan portfolios continuously and efficiently.

 

Learn more about our fund services offerings by visiting our website or connecting with our team.

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