LatAm fund industry: the benefits of outsourcing
The Latin American investor market is evolving. Looking at markets from Miami to São Paulo, advisers, wealth managers, fund selectors and institutional investors are all witnessing the same change: Latin American investors are opening up to new investment opportunities and approaches as regional GDP continues to rise, with the IMF predicting 1.9% growth in 2018 and 2.6% in 2019. While Brazil, Colombia and Mexico rank among Latin American countries with robust infrastructure development programs, however, uncertainty in the wider economic and political scenario persists for investors. Volatility is a way of life for many of these investors and in the region’s burgeoning financial sector, funds and manager selectors are playing an increasingly important role in their hunt for returns. Borders are being broken down across the continent as investors seek better means to diversify their assets. The region’s fund professionals are now at the forefront of tackling change as they attempt to break their investors’ long-held obsession with local fixed income markets.
According to a recent article on Citywire, assets under management (AUM) in Latin America surged by 17% last year, positioning the region as second only to China in terms of its growth rate. Latin American money increased from about $1.5 trillion in 2016 to $1.8 trillion in 2017, according to The Boston Consulting Group (BCG)’s 2018 Global Asset Management report.
Commentators looking at how Latin America’s fund shops are winning over global investors have noted that Credicorp Capital, a $9.4 billion investment management group, features on the growing list of Latin American asset managers working to export their funds and regional expertise to overseas investors, particularly those in developed markets. This initiative is in part an attempt to capitalize on the appeal of Latin American assets as a form of diversification for foreign investors’ portfolios, while also boosting returns in a low-yield environment. More importantly, many Latin American asset managers have reached a scale and level of sophistication that makes their strategies attractive to global institutions and family offices, leading a number of them to venture beyond Latin America.
Moreover, industry experts have highlighted that Chilean pension funds, for example, had allocated more than $2.5 billion to the Latin American equities fund of UK manager Aberdeen Standard Investments as of February, according to a report by research and financial services firm HMC Capital. But now investment products have started moving in the other direction too. Latin American groups have developed their investment capabilities and leveraged their deep knowledge of the region to offer their local strategies abroad.
The growth of the sector is encouraging more and more fund managers to outsource their back-office due to political pressures and constant regulatory changes, with the current increase in compliance demands, and the lack of agility of fund managers to respond to such quick evolutions of market and business needs. As a consequence of the changing regulatory landscape, fund managers are under pressure to deliver greater transparency in their processes and more clarity and depth in their reporting to investors. A webinar by Private Equity Wire showed that 96% present found outsourcing to be advantageous and that administrators are more than providers, but are like partners. This concept is now broadly accepted. Small managers find it challenging and expensive to scale up to accommodate their own administration.
Outsourcing can provide an effective solution in terms of delivering real benefits of immediate scalability and continuity for fund managers and GPs since it can cater for a quick increase and decrease of AUM. There are also investor demands and standards have become high in terms of detailed due diligence and reviews of funds’ operating practices. Furthermore, it should be noted that the cost of the outsourcing provider is typically charged to the fund, rather than to the GP, thereby allowing the GP more room to negotiate on its fees, should that be necessary.
So how can outsourcing help in Latin America at a time of growth in the funds industry? The outsourcing of back-office services can bring benefits in a number of ways. Fund managers get to focus on the core activities of the business and to redirect their time and key resources to such core functions of their business. They can concentrate on their strengths and priorities such as maximising investment returns. It is cost-efficient: overhead costs and other related costs, such as internal infrastructure, are reduced. There is no need to invest in required complex updated technology and software, which would be too costly for fund managers individually. It has an easier acceleration of migration and access to the latest technology.
It also brings a high level of expertise from a large pool of skilled resources. Specialist fund administrators such as SGG have the required skills and experience: they are knowledgeable in relevant law and regulatory requirements, know the best financial reporting practices and are flexible, especially when it comes to sudden regulatory changes, which can be implemented effectively and quickly. This also removes the burden of recruitment and training, as well as problems of talent shortages in-house. It also ensures that managers are able to meet investors’ demands effectively and keep up with the expected standards and pressure in the industry.
Outsourcing further supports strengthened risk management, with proven controls, processes and technology, which would have been costly if not outsourced. For those who prefer in-house services, they argue that it can bring a certain level of risk, but in reality outsourcing providers can themselves bring additional credibility and also offer comprehensive insurance cover. It is important that a relationship of trust is built between the provider and manager. When it comes to control, there should be an operating model which will not affect the core business and can adapt efficiently. It is also important to ensure interactive involvement between the outsourcing team and managers.
Outsourcing to a specialised administrator allows fund managers to focus on their core operations and allow them peace of mind by having a specialist firm navigate through the complex and ever-changing regulatory landscape.
First published in Funds Society.
By Bas Horsten
Managing Director, SGG Curaçao.