It seems evident that Third Party Administrators (TPA’s) will hold a prominent role in the newly regulated alternative asset management industry. However, there are certainly key concerns about the TPA’s ability to provide the services that they will be asked to perform. As a firm that spends all its time at our hedge fund and private equity fund client’s sites we gain a very rare perspective of understanding what our client’s are thinking and experiencing but unlike our client’s we are able to see this at many funds in many different scenarios. This provides us with a truly unique perspective that very few firms can claim. I recently had the opportunity to talk with one of the heads of a “Tier 1” TPA to get his view on their side of the story to better understand not only what the issues are but from the TPA’s perspective what they bring to the table.
Valuations
One of the key points the TPA’s make is that when they get to a certain critical mass in terms of the number of clients they service this will especially support FAS 157 and other valuation needs since as a company that is responsible for marking of so many assets they are a natural place to become an expert on this topic. This argument certainly seems logical, and on the surface it would seem that the largest of the TPA’s should have enough resources to hire the talent to perform effective valuations. Where this argument breaks down is in the world of exotic assets or with smaller TPA’s who do not have the large client bases and therefore the number of assets to do a thorough comparison.
Books & Records
For portfolio and partnership accounting the arguments for the TPA’s becomes a little less clear since these systems like Advent Geneva, SunGard’s VPM, Investier, Investran or Markit’s Wall Street Office are all very complex systems that require a large degree of customization in order to operate properly for a fund. It would be very difficult and extremely costly for any TPA to try to purchase and customize all these applications for their client’s. Therefore, what usually occurs is that a TPA will select a few of these systems and then all client’s will be placed on the TPA’s version of the Portfolio or Partnership accounting system. It will then be up to the TPA how often they make changes or upgrade their systems. Upgrades will likely not occur very often because that would mean changes for all their client’s which would be painful for any systems the client has built in house to work with the TPA’s systems.
Outsourced vs. In House Administration
In discussions with the TPA head the one point we could agree on is, if an organization is at a certain level of complexity, meaning they are a multi strategy fund and money is not a concern the fund will always be best served by creating their own administration infrastructure. This is simply because by picking, building and integrating the specific systems that the funds require they will always be able to create the exact information and support that their funds require. When a TPA tries to do the same they will have to take their existing systems which may or may not best fit the client and they may or may not try to customize their systems to meet the client’s specific needs. Of course setting up these systems is a very costly exercise so funds need to go into the effort with this very important understanding. In addition funds who choose this option must be prepared to hire a small full time dedicated IT team to support the systems after an integrator like FinServ Consulting has completed their work.
Should TPA’s be Regulated?
One point that the head of the TPA made was that he believes that their organization should be regulated in the U.S. He pointed out that their entity in Dublin is regulated. This was a very interesting point and seems to make quite a bit of sense. Certainly as the TPA’s become a required player in the industry there has to be certain standard levels of service that the TPA’s should be held to.
Conclusions
This is certainly a topic that we will spend much time in our Blog discussing over the coming months and years. FinServ Consulting is very fortunate to be inside many hedge funds to be able to get this rare insiders view of so many of the top funds in the industry. From this unique perspective we can clearly see that there are many facets to this question and it certainly requires more than just a simple review and answer.
In the end, the decision to utilize a TPA will need to be based on the specific requirements and resources of the asset manager themselves. One thing we feel safe in assuming is that many funds will be forced to take on third party administrators for their public image even if they are still maintaining much of their operations in house. It will then become a question of how effectively they choose to utilize the assets of their TPA’s. Over time FinServ has developed an approach to working with TPA’s most effectively which we share with our client’s. For a full perspective on this approach contact me at hweinstein@finservconsulting.com.
