Rapid development is a source of numerous challenges for the custodian

Once a niche activity dedicated to institutional investors, professional investors and the like, private markets¹ are now attracting a new category of investors, the general public, with the help of legislators and regulators. The lower entry ticket, the desire for investment diversification, combined with a certain attraction for performance, generous in past years, make these investments in the various components of unlisted assets particularly attractive for individual investors.

In a new context, marked by difficult fundraising over the past two years, private markets seem to have found new growth drivers to improve their inflows.However, this trend is not neutral for all players in the value chain, from the asset management company to the custodian, as it raises the issues of digitalisation, large volume management and automation.

More specifically, the challenges for the custodian are fairly comparable to those of its clients, the asset managers, and are multiple:

Firstly, being able to effectively collect a large number of subscriptions

The immediate consequence of the extension of private equity in particular to private individuals and the lowering of the average ticket is a considerable increase in the volume of subscriptions. This results in the need to acquire the technical and human resources to cope with this influx (adaptation of tools, automation, etc.) This phenomenon is also found in funds that are by nature closed and that now target Private Banking’s HNWI (High Net Worth Individual).

In the context of the circulation of shares via a Central Securities Depository (CSD), the main challenge for the depository is to make the necessary adaptations, particularly in the context of ELTIF 2 (European Long-Term Investment Funds), in view of the 14-day cooling-off period granted to individual investors by the legislator. The custodian must also take the necessary measures to run the widespread use of the Gates mechanism, an essential mechanism for managing potential fund liquidity crises.

The emergence of different platforms for collecting subscriptions necessarily requires multiple interfaces between them. However, the lack of standardisation of formats makes the custodian’s task even more complex.

The volume also has a direct impact on the KYC (Know Your Customer) due diligence to which investment companies and banking institutions such as SGSS are subject. The challenge of digitisation, the use of techniques such as optical character recognition (OCR) and the contributions of generative AI should enable us to automate this part to a large extent while controlling the associated risks

The frequency of valuation is the second challenge

Given the nature of the underlying assets and their particularly illiquid nature, private market funds have until now had fairly long valuation frequencies, quarterly or even half-yearly.

The opening up to private investors, whether directly or through their life insurance contracts, leads, de facto, to a more frequent valuation in order to offer the necessary liquidity and to encourage fund inflows/outflows.

The issue that then arises for the valuer, in order to produce the net asset value on schedule, is to move closer to the UCITS (Undertakings for Collective Investment In Transferable Securities) model by automating to a fairly large extent. This results in actions with regard to asset management companies in order to define forms that can be integrated into our tools, to provide for connections with the various functions that revolve around a fund, such as the registrar for example, and, lastly, to automate our consistency checks.

Thirdly, the subject of the method of holding pure registered shares is also a thorny issue

Depending on the holding method, and beyond the KYC impacts already mentioned above, the consequences for reporting, particularly tax reporting, are not neutral and also require adaptations to the processing chains. For these reasons, the preferred scheme for ELTIF type funds is administered registered via Euroclear.

Lastly, the strong growth of private debt funds should also be supported

The rise of this asset class is the result of several factors: banking disintermediation, the desire to diversify one’s assets, incentives from the legislator via the creation of more flexible vehicles such as OFS (Organisme de Financement Spécialisé, or Specialised Financing Organisation) and, lastly, the favourable macro-economic context, particularly with regard to interest rates.

The custodian must inevitably make the necessary adaptations to take into account the specificities of these funds. For OFSs, for example, accounting tools must be adapted in order to be able to record both share issues and bond issues on the liabilities side of the fund. It is also necessary to be able to absorb an ever-increasing volume of loans on the assets side. In general, as a true partner, the custodian must be able to respond to the fertile inventiveness of the fund structurers/managers in this area.

Lastly, the scaling up imposed by the democratisation of investments in unlisted assets and the very rapid development of debt funds is a powerful factor of transformation for the custodian, enabling it to effectively accompany the new development dynamic of private markets in investors’ portfolios. It is also an important lever for diversification, in addition to being a good growth driver.

¹Unlisted investments: Private Equity, Real Assets, and Private Debt

Gaëlle Duclos, Deputy Head of SGSS and Head of Fund Services Operations & Securities Banking Operations, Societe Generale Securities Services