Investment Funds 2021: In the search for funds model efficiency, Real Estate’s potential has come into focus
As asset managers navigate the more competitive and volatile market of 2020, there has been an enhanced focus on operational models, with consideration of the further gains to be achieved from outsourcing, and, along with that the opportunities to obtain access for investors to previously hard to access asset classes like real estate. ROSS McCANN, head of fund services at Alter Domus, Ireland spoke to Finance Dublin about the particular opportunities around that asset class.

Real estate asset managers have used lockdowns to review their operating models, leading many to issue requests for proposal (RFPs) that herald a quest for greater efficiency.

Real estate is one of the most complex asset classes to manage, so it’s no wonder that fund managers have been debating how to simplify operating models for years. Margins are fine and efficiency is key. Now the time for talk appears over, as the coronavirus pandemic has spurred many firms to focus on the adequacy of their technology, and how to enhance their operating models.
Ross McCann: 'Ireland is no different, with ICAVs, SPVs and, soon, Investment Limited Partnerships, forming part of both global investment fund structures and<br />
local stand-alone structures.'
Ross McCann: 'Ireland is no different, with ICAVs, SPVs and, soon, Investment Limited Partnerships, forming part of both global investment fund structures and
local stand-alone structures.'

When the pandemic struck, asset managers moved to a virtual model overnight. Broadly speaking, they did so without mishaps. From there it has proved just a short step to turn the crisis into an opportunity, using it as a catalyst for improvement.

Some real estate managers are now engaging consultants to define their most appropriate operating model, technology architecture and data strategy. Yet others have been planning changes for some time but have been stirred into action and are issuing RFPs to specialist third-party service providers.

Many firms have spent time reflecting on how to operate. The crisis forced them to invest in enhancing connectivity, digital solutions and technology more generally speaking. In a recent survey conducted by Alter Domus, 45% of respondents were 'very' or 'somewhat' concerned about their technology infrastructure.

“Lockdown and people working from home, not traveling anymore and embracing technology, created confidence that we do not need to go back to where we were pre-Covid-19,” explains Ross McCann, Head of Fund Services Ireland at Alter Domus. “Let us try to build on that and take a step further. It has accelerated the thought process and for some it will accelerate decisions on data strategy, tech platforms or outsourcing.”

Simplifying complex models
Even before the pandemic, there was a trend towards more outsourcing for well-rehearsed reasons. Real estate managers’ operations are often highly complex, stretching across international borders. They involve multiple layers of special purpose vehicles as well as different parties; and reporting must be consolidated across multiple jurisdictions, often with their own currency, accounting standards and regulatory compliance requirements.

“Ireland is no different,” McCann adds, “with ICAVs, SPVs and, soon, Investment Limited Partnerships forming part of both global investment fund structures and local stand-alone structures.” On the ground, such funds are helping transform towns and cities through the delivery of signature commercial buildings, apartments, housing and infrastructure, as well as vital investment in warehousing and logistics.

Administering large regional or global investment structures therefore requires substantial resources. Middle and back offices have grown fairly large, to the point where they absorb a lot of management time and risk, taking focus away from fund managers’ primary objective: excelling as asset or investment managers. Additionally, they depend on robust multi-layered technology platforms that straddle all of a firm’s international entities, consolidating data and reporting. Then there is the challenge of complying with regulations all over the world.

Within Europe, some of the mid-sized to larger managers have issued RFPs seeking an outsourced model. Europe characterises complexity, given the patchwork of nation states. Signs of this are starting to be seen in the US market as well, and McCann expects US managers to follow – if not accelerate – that same trend.

Firms are asking themselves several questions. Should we outsource all the back office tasks – investor servicing, reporting, and compliance – with partial or full lift-out of staff? What kind of technology platform do we need? What’s our data strategy?

“Covid-19 has accentuated the thought process around these questions,” says McCann. “That does not mean that everyone will now embark on a transformational journey, but it has allowed people to take a step back and think about what to do. Whilst these projects may have been aspirational pre-pandemic, they are now often put into action with a ‘let’s do it’ mind set.”

A turning point for outsourcing, tech and data
Ireland and indeed Europe’s real estate managers already outsource a lot of their back office functions, although at times in a piecemeal fashion. Those already outsourcing are now seeking more comprehensive solutions including additional parts of the middle office, while others are on the brink of outsourcing for the first time. In the US, by comparison, there is relatively little outsourcing, due in part to a historic lack of administrators with solid asset class expertise and technology, but this is changing and outsourced models are on the rise and expected to grow increasingly popular.

Turning to technology, Covid-19 has highlighted the importance of a robust, versatile platform. For instance, cloud-based solutions smoothed the move to working from home. The larger managers in particular need a global, integrated platform, which can be hosted in-house, although at a cost. “As a manager do you want to bear that cost?” asks McCann. “Not just the cost of developing but the maintenance, support and updates.”

Data strategy is also being reviewed, especially as investors, or limited partners (LPs), request more data sets to carry out reporting or manager oversight. Reporting is becoming more sophisticated; not just on financial performance but also increasingly on asset or portfolio level metrics around things such as ESG, risk indicators, exposure to different types of markets and so on.

“The solution many are aiming for is a self-service portal based off of a data warehouse or a data lake that enables managers and LPs alike to slice and dice the numbers themselves,”says McCann. “Among the prerequisites for that is however the ability to standardise the data in order for the reports to be meaningful.”
Whether it be outsourcing, technology or data, the game is changing. As the current market buzz words and the RFPs being issued show, the pandemic is likely to prove a turning point for operating models.

Ross McCann is Head of Fund Services in Alter Domus, Ireland.