The Lure of Private Equity and Real Estate Funds
Private equity and real estate are investment opportunities that provide a way to deliver a concrete financial return and preserve capital both of those in a yield-starved market.
A Growing Industry
In these extraordinary low rate monetary times, investors are seeking yield and ways to preserve their capital in unorthodox ways. Private equity and real estate are investment opportunities that provide a way to deliver a concrete financial return and preserve capital both of those in a yield-starved market.
We see a clear trend towards non-listed assets (private equity, real estate and loans) as an asset class, and this is reinforced by independent industry data. Figures from data provider Preqin testify to the volume of funds available for investments.
There is, however, a flip side to what some see as a potential boom both in terms of the volume of money being allocated to the private equity & real estate niche and the growing range of funds on offer. A lasting effect of the 2008 global financial crisis has been the requirement to provide more detailed information to investors and to regulators.
Each regulation requires a different set of secure and standardised reports. Each regulation needs to be analysed intensely to establish the new demands that it is imposing upon the industry. A process then needs to be devised in order to meet those requirements to improve understanding of risk and governance.
For financial intermediaries such as banks, institutional investors and asset managers, the main challenge is fulfilling third-party transparency requirements. Insurance investors, for example, must be compliant with Solvency II regulation. This requires looking through all of the assets to provide the best or the worst capital points of the insurance function. An awareness of the rules and an understanding of the perspective of an investment are essential components of a healthy investment process.
An awareness of the rules and an understanding of the perspective of an investment are essential components of a healthy investment process.
Much industry attention in recent times has focused on the Alternative Investment Fund Managers Directive (AIFMD I &II) and the Markets in Financial Instruments Directive II (MiFID II), but the list is long. The Common Reporting Standard (CRS) report is the latest; all financial intermediaries dealing with investors had to be ready for CRS reporting by the end of June. TheCRS requires all market players to report investor assets or investment holdings by indicating who is the final end investor or beneficial owner. The challenge or obligation for investors and their service providers to face this regulation is always the same: to provide, in due time, sign-off on data to be transmitted or exchanged and to agree on the personal data to be transmitted.
Returning to familiar territory, we have seen the emergence of a number of new real estate funds following the implementation of the AIFMD. Although AIFMD was conceived as a common rule to be applied uniformly across the European Union member states, its use and market practices do differ from country to country.
Players in Europe tend to remain attached to their own best practices and local regulation, local generally accepted accounting principles standards, local taxes, local legal requirements and so on. The reason for this is very simple. As real estate assets are by definition not transportable they need a suitable local ecosystem with local players.
Institutional investors drawn to private equity & real estate mainly face three challenges:
Understanding, classifying and benchmarking each asset in terms of risk and reward
Monitoring cash flow
Properly informing relevant third parties
The ability to have access to all of the information they will have to provide when they buy an asset, and to understand that information, is important. Not least as investors will be confronted with administrative tasks that they haven’t had to do before in order to be able to compare the asset’s performance.
It also takes time to fill in the reports and it isn’t always obvious what data need to be put in each box. Information on this can be somewhat limited and experienced assistance can be invaluable in achieving regulatory compliance in a time- and cost-effective manner.
The often microscopic detail often involved in gathering, analysing and formatting data can baffle even experienced and sophisticated investors. It is clear from close observation that the number of industry players who are almost certain to require external help from a supplier such as SGSS can only grow. From fund launch through set-up, investment and development and maturity and exit, SGSS offers a range of bespoke services.
Making the Most of Opportunity
Any turning of the cycle will present many new investment opportunities. Those new opportunities will present questions about how best to maximise those opportunities without creating excessive new administration issues on the buy-side.
Almost every move forward in any market creates what might be described as a 'moment of truth'. Investors need to consider whether to continue with their own administration or whether to outsource administration in favour of focusing on the core business of investment itself.
For those who decide to take this route, my colleagues and I look forward to playing our part in the market's ongoing development, identifying, providing and refining the additional services that institutional investors are likely to need as they expand into the private equity real estate sector.
In the world of private equity & real estate, the decision to outsource to an experienced specialist almost makes itself.
Global Investor 2017
SGSS is really proud to have earned this award. Our real estate fund administration activities have seen massive growth thanks to our dynamic commercial team and our existing clients' trust. It's the crown of eight years of involvement aside our expert client all around Europe.
The essence of SGSS
SGSS is one of the world's top 10 global custodians and the second-largest in European custodian. It has a direct presence in 27 locations and a sub-custody network covering over 80 markets.
Societe Generale offers execution capabilities across all asset classes and derivatives, strong and recognised global research and a cross-asset dealing facility.
We offer custody, trustee, administration and transfer agent services across a wide range of markets and new services aimed at reinforcing existing capabilities in financing, alternative assets, reporting et al.
We also offer full cross-asset clearing across listed products and over-the-counter (OTC) derivatives, full financing capabilities and securities lending and collateral administration and management.