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eturn pressures and the
ascendency of attractive
passive fund products, which
are tempting investors with
cut-rate fees relative to active
management charges, have been the
main factors behind the diversification drive at hedge funds and
long-only managers. Diversification is also a common feature
now in private equity, where LPs and GPs have finally accepted
that the industry’s strong returns are looking increasingly brittle
amid the excessive buyout valuations and the growing levels of
uninvested cash.
Coming up with credible responses to these challenges has not
been straightforward for asset managers, many of whom initially
implemented kneejerk cost-cutting exercises and curtailed staff
and service provider remuneration. Conscious such piecemeal
measures do not provide longer-term fixes, the industry is now
developing new products that adopt investment approaches
which depart significantly from their flagship funds’ core offer-
ings.
More traditional fund houses are now setting up hedge fund,
private capital and real estate products as they look to increase
the ratio of institutional mandates relative to their core retail
investor base. Conversely, the alternatives industry is also trying
to reduce its dependency on institutions and focus more on
retail by launching UCITS or 40 Act funds. “Managers see diver-
sification as a way to tap into new distribution networks,” says
Gavin Tobin, global head of private equity and real estate fund
administration at JP Morgan.
Illiquidity is in
The differences between the various subclasses of alternative
asset managers are becoming less obvious. Hedge funds have
been acquiring private equity properties, and the same holds
true vice versa. “We are also seeing more hedge funds and pri-
vate equity firms going into infrastructure, real estate, venture
“Managers see diversification as a way to tap into new
distribution networks.”
GAVIN TOBIN, GLOBAL HEAD OF PRIVATE EQUITY AND REAL
ESTATE FUND ADMINISTRATION, JP MORGAN
38
Global Custodian
Fall 2018
capitals and loans. The primary motivator
behind these shifts is definitely the yields
on offer at these illiquid products,” says
Peter Sanchez, head of North America al-
ternative fund services at Northern Trust.
Shashikala Suryanarayanan, vice presi-
dent, fund services at Viteos, says private
equity managers have far fewer deals to
choose from, which is leading some firms
to seek investment opportunities else-
where in private capital outside of lever-
aged buyouts. “A number of managers are
launching private capital funds primarily
because the returns are superior, attract-
ing investors seeking higher returns. With
the longer investment horizons there is
less worry about reallocation of capital
and the due diligence associated with
every new deal,” she explains.
Most experts agree that it is the private
debt strategies which are seeing the most
interest from private equity and hedge
funds. “We have seen a significant growth
in managers pursuing private debt and
lending strategies as banks reduce their
balance sheets,” comments Ian Lynch,
global head of alternative investors at
BNP Paribas Securities Services.
Hedge and private equity managers are
making a play in real estate too, an asset
class whose AUM ballooned by 12% in
2017 and now stands at $2.8 trillion glob-
ally. “A lot of hedge fund managers are
scoping out real estate on both the equity
and debt sides. Many hedge funds see real
estate as an effective tool to attract and
lock in long-term investors. Private equity
is also shifting into real estate,” explains
Bhagesh Malde, global head of real assets
at SS&C Technologies.
Infrastructure is also benefiting from
greater fund manager interest with the
sector running approximately $425
billion at March 2017. “Demand from
long term asset owners for infrastructure
investing is growing, attracted by the
illiquidity premium available on some
of the longer-term projects,” highlights
Sarbjit Panesar, global head of business
development – Asset Managers, at Societe
Generale Securities Services.
The shift into illiquid strategies is more
straightforward for private equity than
it is for daily dealing fund managers or
hedge funds. “The transition for private
equity managers into other illiquid strat-