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Posted Aug 18, 2023

How AI, data standardization, and cybersecurity are changing fund administration

5 Trends Blog

Over the last 20 years, the private markets have seen significant growth in AUM—12x, according to S&P Global. This growth was driven, in part, by investors pursuing higher yields, lower volatility, and returns uncorrelated with the stock market.

This growth in AUM also spurred significant changes in the fund administration industry to keep pace. With more investors, dollars, and data, administrators needed to offer fund accounting, treasury, and investor services that could do more than produce financial reports—they needed to create meaningful value at the intersection of finance and investor relations.

Here are five trends that continue to shape the future of fund administration:

A demand for greater transparency

Despite the emergence of digital exchanges, the marketplace for private funds remains opaque and fragmented. With mounting LP pressure to deliver meaningful insights and provide critical data on-demand and up-to-date, GPs are looking for a standardized, single source of truth that enables them to share investment data easily—from fundraising to operations to administration—with their investors. As Ben Bobroff of Northern Trust said, “There is a need to take a data-centric approach to move to a true real-time environment, coming out of the constraints of legacy architecture with data residing in multiple different applications.”

Fund administrators can become that source of truth, eventually powering everything from fund accounting and investor services to the investor portal and CRM. With the single system, GPs can easily combine investor data, investment track record, and underlying portal data to offer greater transparency.

The importance of standardization

Faced with growing volumes of data, effective data management is an essential, not a nice-to-have—a clean, reliable, and standardized dataset is core to operational efficiency. But private equity today is underpinned by a patchwork of disconnected systems, incompatible formats, and disjointed workflows—no universal system of record exists.

As Angela Summonte, the global head of asset owners at Alter Domus, wrote, “LPs do need data and are asking for support, but the major point they face is a lack of standardization, a lack of digitization of the information, and difficulty collating the data and having a consistent approach to analyzing it.”

Fund administrators can become a beacon of standardization. This transition will allow GPs and LPs to connect and communicate seamlessly across every stage of the investment lifecycle and move the industry closer to a universal system.

Using automation to drive efficiencies

Almost every modern company survives because of the data they can secure, provide, or manage. But data is like water—it’s necessary to thrive, but it can be tricky to manage and requires proper plumbing and infrastructure. With a commitment to data management and automation, tech-forward fund administrators will drive operational excellency across every interaction between GPs and their LPs, including:

  • Efficiently managing investor equity calculations

  • Configuring and executing waterfall calculations and allocations

  • Initiating, managing, and tracking payments for each investor

  • Eliminating conflicting performance calculations

  • Enhancing controls, automating review workflows, and creating approval rights to help minimize errors

By finding new and better ways to automate and streamline this accounting work, administrators become an extension of a fund manager's back office. They can deliver financial and investor reporting at scale.

An emphasis on cybersecurity

As with any advancement, the digitization of fund administration does present challenges. As fund administrators become more reliant on technology, it’s imperative to invest in robust cybersecurity measures to protect sensitive information and prevent cyberattacks. Utilizing the highest industry standards for encryption, data storage, and authentication can assuage investors' fears, whose sensitive information could be at risk with a weaker cybersecurity program.

Underscoring the importance of cybersecurity, the SEC recently adopted new rules on cybersecurity risk management, strategy, governance, and incident disclosure for public companies. They have also proposed a similar rule for RIAs and fund managers, though it has yet to be adopted.

The increased use of artificial intelligence (AI)

AI will play an increasingly important role as the fund administration industry becomes more complex and data-intensive. Just a few years ago, Robotic Process Automation (RPA) tools such as UIPath and Blue Prism were seen, at best, as helpful solutions that "might" change the operations landscape. Now, their impact is being felt far and wide with no sign of slowing down.

In a recent report, Deloitte called AI a game-changer for risk management, adding that it can be used to “bolster compliance and risk management functions, augment and automate data analysis, and anticipate and manage ambiguous events.”

These technologies will also help fund administrators streamline processes, reduce errors, and provide investors with more accurate and timely information.

Built on our industry-leading platform, Juniper Square unites expert practitioners with innovative and efficient workflows to improve quality, transparency, and the investor experience.

Learn more about our modern approach to fund administration.