Despite the remarkable growth of evergreen or perpetual life funds in the U.S. private wealth management channel, the challenges of client adoption and building a successful distribution model continue to be significant. We have previously addressed several important areas an investment manager should consider to broaden client adoption, including access to wealth managers, sales and education support, portfolio construction and ease-of-use. However, these hurdles are just one part of a multifaceted series of issues and decisions an investment manager must examine when building out an evergreen fund business. Other challenges include operational management and scaling to meet the demands of larger trade volumes than is typical of a traditional drawdown fund, a topic we explore in this edition of our “Road to Mass Adoption” series.
Offering an alternative investment strategy in an evergreen fund structure is not a simple exercise. Decisions made on the appropriate structure, key features and offering terms create unique distribution and operational challenges that must be carefully considered. Indeed, the oftentimes daunting demands associated with offering an evergreen fund can be easily underestimated, especially in the case of a traditional alternative investment manager not accustomed to their complexity. For example, in the case of a registered fund, subscriptions can be made on a regular basis, daily if it is an interval fund. As a result, the investment manager of an evergreen fund must have an excellent understanding of cash flows and an investment process that quickly puts subscriptions to work to avoid performance drag due to large amounts of uninvested cash. Similarly, the semi-liquid nature or intermittent liquidity feature of evergreen funds means investment managers must carefully manage the portfolio to ensure they can meet redemption requests without sacrificing performance.
Operational complexity resulting from a reliance on legacy platforms, which can struggle with the unique requirements of evergreen funds, and a mix of internal teams and outsourced service providers, can culminate in a situation in which the evergreen fund’s underlying infrastructure is unable to successfully scale. This makes choosing the right partners, those who can leverage technology to drive efficiency and growth, key to the success of any investment manager contemplating an evergreen fund. Fortunately, a range of industry participants are developing a comprehensive and systematic end-to-end ecosystem which will simplify record keeping, data storage and performance reporting. This is an incremental process, but ultimately one that should put trade activity and valuations in one location, greatly improving operational efficiency and reliability.
Three key areas to address product operations
1. Fund Lifecycle Management
For investment managers, efficiently managing the fund lifecycle is essential to delivering a positive experience. Legacy systems able to meet the needs of traditional private funds with a small investor base are now being utilized to fulfill tasks for which they are frequently ill-suited. As a result, many investment managers use various point solutions such as document digitization tools, out-of-the-box service provider investment reporting, and data files sourced from multiple parties. These solutions often require significant manual intervention for tasks like subscription document completion, communicating to wealth managers and investors, trade tracking and reconciliation as well as management and notification of tender or repurchase windows.
In addition, the lack of internal tools to handle these essential tasks forces investment managers to rely more heavily on multiple external service providers. This can result in delayed troubleshooting, increased time spent on client issues, and slower responses, not to mention investor inconsistencies if they subscribe to multiple products being serviced by different external parties with varied processes. To leverage the progress in investor adoption of evergreen fund structures, investment managers would benefit from an industry-integrated operating system to manage trades more efficiently across the fund lifecycle. As an example, we are working with major transfer agents, fund administrators and custodians to create an iCapital solution that will enable wealth managers to seamlessly originate and view a subscription or redemption activity from start to finish and to streamline the onerous and manual Anti-Money Laundering (AML) and Know Your Client (KYC) processes that today create client onboarding friction.
2. Ecosystem Connectivity
Evergreen funds have numerous touchpoints which increase the potential for errors and miscommunication. Trade activity, ownership transfers, and account changes all require uninterrupted connectivity to ensure accuracy and reconciliation across multiple platforms and industry participants, including investment managers, wealth managers, transfer agents, fund administrators, and custodians. A lack of connectivity can result in investment managers spending time and resources to manage a process that might be better spent raising fund assets.
Modern APIs and technologies such as Distributed Ledger can enhance data connectivity and investment managers should thoughtfully evaluate how to best integrate these tools to support their operational requirements. iCapital has made a significant investment in an evergreen fund solution powered by deep integrations with key industry participants in which all transactions and valuations are captured, structured in a consistent manner and can be used to feed external systems.
3. Transparency
Due to differences and inconsistencies in trade reporting across various sources, it can be challenging for investment managers to maintain the real time visibility they need to quickly follow-up on and accurately action all activities for a particular period across disparate sets of reports and platforms. Consider a few examples of the “musts” for investment managers that touch on different types of activity:
- Subscriptions – ensure all potential investors have completed requirements (including funding) before any mandated deadlines while simultaneously reducing back-and-forth communication between parties to correct avoidable errors
- Transfers and account changes – know what each investor has requested, ensure they are eligible to make such changes and be certain requests are properly made across systems and for future reporting
- Tenders and repurchases – understand the full scope of participation for a period to manage portfolio liquidity
A Future State
Fund lifecycle management, ecosystem connectivity and transparency are the interconnected and foundational elements underlying an investment manager’s ability to successfully scale operations. Without the support of technology to streamline the complexities associated with evergreen funds, managing the many activities required to succeed becomes time consuming, error prone and costly. Fortunately, a new wave of transformative technology solutions is aiding the industry’s efforts to address some of the challenges that have arisen because of rapidly growing demand. When fully developed these solutions will enable investment managers to stay focused on their core competency—investment management —as they strive to achieve success:
- Expanding distribution reach in the private wealth channel
- Keeping pace with industry standards and innovation
- Delivering a seamless and positive wealth manager and client experience
- Seeking to comply with the current and evolving regulatory landscape
Simplifying operational management and addressing the challenges of a rapidly changing business environment requires comprehensive solutions to save time and financial resources. While not exhaustive, this article has hopefully addressed some of the important operational concerns an investment manager should consider. Whether it is increased valuation frequency or the demands of regulatory reporting, managing an evergreen fund is a complex task. With careful planning and the right infrastructure and partners, managing and growing an evergreen fund business becomes much less daunting.
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