All stakeholders in our industry know that there is a problem with the administration of private capital and ultimately, it is investors that are paying the price. Services and capabilities are often oversold by sales teams and the provision of once straightforward services has become an impossibility.  Staff have become remote from their clients, with ever haughtier, de rigeur titles and team turnover is endemic.  Many service providers are all on-message but remain faceless and unaccountable, headline fees are accelerating without enhanced service, outdated technology no longer works, and there is less and less choice in the market.  None of this occurred in a void.

The private capital administration industry in Europe, as we understand it today, is an amalgam of four historically separate industries: banks servicing highly regulated investment products within strict control frameworks; trust companies hosting structured SPVs; niche private fund administrators supporting the bespoke needs of offshore investment clubs; and systems suppliers looking to provide a turnkey solution for their software. Each of these industries had distinct operating models adapted to their core markets.

Following the introduction of the AIFMD and the resulting proliferation of AIFs in Europe, these industries crowded into the private capital administration market, bringing with them very different approaches to client servicing.  The main beneficiaries of this convergence were the trust companies and private fund administrators because they were more agile in responding to client demands. Banking control platforms are, by design, suited to automated investment products rather than complex and fluid co-investments.  Similarly, service provision by systems suppliers is very much defined by the technology that is being sold.

The business model of trust companies and private fund administrators, insofar as these still differ, has now also become strained. The reasons are manifold.

Sometimes these reasons relate to the specific businesses, for example, where the administration service is simply a hook to capture higher value services. This model is common in offshore centres where administration businesses are bolted onto professional firms.  These businesses are sold-on and re-established at regular intervals as the professional firms evolve ensuring little continuity. Another example, is where the goodwill of a business attaches to a few key individuals rather than the product, ensuring a personal but inconsistent platform that cannot be scaled. This is particularly common in the wealth management and capital markets segments of the trust company sector and examples abound on LinkedIn.

Other times, the reasons are more generic and reflect the anachronistic nature of some of these businesses. Most trust companies and private fund administrators pre-date the complexities of international principles on fund governance, which are not well understood. Rather than appreciating the existence of an evolving fund administration product, complexity is exploited to sell incremental products and services. Similarly, these administrators are often overinvested in out-date-technology and systems that cannot possibly meet modern data demands and the solution to this bad business call, has again been to repackage the problem as a product and sell it as another bolt-on or a separately branded business.

The core business model of trust companies and private fund administrators has been lost in a wave of first horizontal consolidation, and then vertical integration, as these businesses have sought to capture a bigger share of the growing alternatives market. Consolidation has not always been scientific and in some platforms, disparate businesses from different industries have been mixed together without precision, not achieving synergies, but rather economic layering, operating tensions and conflicts with value created largely thanks to financial engineering in an erstwhile low interest rate environment.

This consolidation, however, poses much more fundamental questions. The trust company and private fund administration sectors are not subject to consolidated supervision and a unitary business model is simply not compatible with regulation across different financial centres. It is hard to argue that local managers have control and oversight of outsourced functions when this local management may have little economic interest, be frequently replaced and in terms of substance, be little more than the marzipan layer in a cake. Consolidation has also occurred at never-seen-before valuations that will have left these businesses carrying huge debts as interest rates normalise and growth cools. This strain is likely compounded by truly extravagant fixed costs incurred during the recent boom, pictures of which are again posted on social media without any recognition of the irony. The resulting financial pressure seems to be driving a toxic combination of inflationary pricing and further cost cutting, moving ever further from the regulatory rule book, as businesses desperately look to sure-up cashflows and justify projected revenues.

The market opportunity is clear and US fund administrators were quick to capitalise on it by stepping into the European market but many have failed to make an impact. This is because the commercially driven, accounting and controls-plus service provided Stateside has little in common with the complex nature of the European administration product of the same name. Navigating regulatory misinformation and establishing an effective platform may take many years, if the US management teams of these businesses can truly ever get comfortable with the legal risks attaching to hosted platforms. This is unlikely.

Palmer is different. It has been established as an independent boutique that, having taken the time to learn the lessons of industry, is better by design. With a culture geared to new technology and data capability, our administration services are provided on a logical, straightforward, efficient, and transparent basis by professionally qualified teams equipped with the right tools and structured to deliver real time support. All this will be accurately accredited.  Operational and enterprise risks will be strictly controlled to ensure a robust platform and succession is pre-planned to underpin a true professional services model and facilitate the continuity needed by long term investment funds. We hope that in raising the bar, we will pull up standards across the entire private capital administration industry.