2-3 | Debt funds: deal tracking underpins rise

4 | Gateway growth: Citco office centres help firms go global

5 | Real estate: outsourcing controls mangers’ costs

6 | Key players: the vital role of relationship builders

8 | Moving story: changing platforms isn’t as simple as the sales pitch says

9 | US tax reform: implications for private equity funds

10 | Services update: news from across Citco’s offering

11 | Performance: Citco assets under administration hit new highs

12 | Waterfall calculations: institutions seek transparency

At the end of 2017, Citco jumped to US$950bn in assets under administra-

tion (AuA), up from US$837bn at the end of 2016. While we judge ourselves by the quality of our client service rather than

our size, achieving this milestone is nonetheless very exciting. Our growth in AuA is entirely organic, and the result of alterna-tive asset managers trusting us with more of their administra-tive functions.

What is driving this expan-sion? The answer is both falling fees that are forcing managers to streamline their operations and substantial growth in sectors such as real assets and loans. Many alternatives managers are

choosing between hiring new teams in house or outsourcing to an organisation such as Citco.

From my perspective, alterna-tive fund administration is approaching a tipping point. For years, commentators

We are nearing a tipping point for alternativesJay Peller, Head of Fund Servicesjpeller@citco.com

The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.

Watching closely4–5 | Growth in debt funds relies on monitoring services

Industry SpotlightAlternative industry news and views from The Citco Group of Companies

Spring 2018

page 2 ⊲

2 Spring 2018

Industry Spotlight

have predicted that alternative asset managers would hive off administrative functions and focus on generating superior investment returns. Rising cost pressures mean that this is finally happening.

■ Growth in real assetsProportionally, our greatest growth over the past several years has been in real assets – primarily, from private equity and real estate funds. While investor allocations to these asset classes are increasing, only about 25-35% of these asset managers use a third-party administrator. Similarly, many loan funds, which have historically managed their administration function in house, are now looking at outsourcing.

Turning to hedge funds, the largest part of our business, cost pressures are leading them to outsource more functions: front office risk reporting, middle office treasury and collateral manage-ment, back office financial state-ments, plus tax and regulatory reporting, are all candidates.

Managers’ increasing diversifi-cation across asset classes, moves into hybrid strategies and the launch of a wide range of invest-ment vehicles (including Cayman-domiciled funds and regulated onshore funds) all translate into a larger and more complex adminis-tration function.

Anticipating these needs, we have made substantial invest-ments in our service platform and hired experienced people to build up our real assets capability. Today’s Citco affords alternatives managers a growing range of services and products through which they can access our scale and expertise. We also continue to improve our offering for asset allocators, such as family offices, endowments and pension funds.

As we look forward to achieving our next milestone AuA target of US$1trn, we take great pride that each milestone is a huge vote of confidence from our clients. ☐

⊲ page 1 Monitoring underpins growthAutomated monitoring of payments and covenants is enabling debt funds to grow AUM substantially

After the global financial crisis crippled banks 10 years ago, they were left with impaired loans, resulting in write-downs and diminished regulatory

capital. An unexpected consequence has been a difficult financing environment for banks’ traditional customers and the rise of private debt funds.

■ Debt funds manage almost US$600bnNature abhors a vacuum, as does capitalism. The shortage of bank financing has benefitted a new market participant: the closed-end private debt fund. According to the Financial Stability Board, 60% of global non-bank inter-mediation was provided by private debt funds in 2015. Preqin estimates that these funds command around US$600 billion in assets, which is quadruple their size in 2006.

Private debt funds have enjoyed success because they provide advantages to borrowers, investors and the stability of the system. Their fund managers are sophisticated judges of credit risk and they analyse and manage credit portfolios that include assets that fall outside the scope of traditional banks, including mid-market company loans, transitional real estate loans and personal unsecured loans. Further-more, unlike banks, closed-end funds do not provide continuous liquidity, so they are not prone to ‘bank runs’.

■ Infrastructure requirementsSome commentators have expressed doubts about whether the young debt fund manage-ment business has the infrastructure needed

to closely monitor loans. Investment managers entering what was previously the territory of banks find themselves in need of a unique set of back office requirements, which vary by asset class. There are also differences when a manager originates a loan rather than buying it in the secondary market.

This is where an administrator with a dedi-cated bank debt team can play an invaluable role. The administrator’s team can bring the necessary expertise in a wide range of asset classes, as well as loan closing and monitoring capabilities. Also key to a comprehensive administration service is the provision of

Michael Peterson, Managing Director, Citco Capital Solutionsmpeterson@citco.com

A team that’s familiar with each asset class can properly review loan documents

3Spring 2018

dedicated portfolio management software, such as ClearStructure, which automates asset monitoring and accounting.

■ Working with pools of loansDeal tracking differs depending on whether the debt fund manager buys pools of loans or originates assets, and administrators should be prepared for both scenarios. They should also be able to monitor loans after closing, to reconcile them with third-party servicers, custodians and the manager’s systems. An administrator with a robust debt team that’s familiar with each asset

class can properly review loan documents, set up investments, monitor them and report consistently.

In the case of high yield or ‘loan-to-own’ investors, which operate in a niche area of the market, the administrator must under-stand the nuances of debt workouts. This includes debt-to-equity conversions, bifurca-tion of single loans into multi-tranche struc-tures, and dual sets of books for bankruptcy.

Turning to the front office, the administra-tor’s deal team needs reporting functions that consolidate the entire portfolio into easily digestible reports that cover exposures across

borrowers, interest rate conventions, credit ratings, geography and industry.

■ Supporting debt fund managersFor debt fund managers filling the funding gap left by retrenching banks, loan monitoring is vital. But with specialist administrators expanding their services, and offering systems and people that can handle all the nuances of a complex debt portfolio, it should not hold back the continuing growth of private debt funds. ☐

For more on this topic, please refer to “Finding finance in an unpredictable era”, page 9, Citco Industry Spotlight, Spring 2017

Key requirements for debt fund service providers

Citco’s debt fund offering

Michael Peterson, Managing Director, Citco Capital Solutionsmpeterson@citco.com

Debt funds rely on the skills and expertise of their fund management team.

But the team’s job is made easier – and they will have more time to spend on analysis – if they have access to dashboards that provide quick access to deal summaries and can also depend on a service provider to deliver day-to-day loan manage-ment services.

■ Dashboards§§ Capture all aspects of the loan portfolio in one place

§§ Monitor credit trends and pipeline

§§ Maintain deal specific asset summaries

■ Loan management §§ Day-to-day loan administration (profit and loss, rate resets, fee calculations, drawdowns, repayments, reserve moni-toring, earn outs)

§§ Track loan attributes (fixed / floating / payment-in-kind, borrower data, credit, industry, geography, term, participants)

§§ Monitoring (agent / servicer / custodian reconciliation / covenant tracking and reporting)

§§ General work flow (position reconciliations, participation reporting, cash movements, accounting, tax tracking, notices, document storage)

If your fund is asset class specific or invests across different types of debt you need to be able to call on systems and people that can handle all the features of a complex debt portfolio.

Citco has a core team of industry professionals with expertise in private lending,

real estate and bank debt, who can handle all loan administra-tion needs.

Between our staff and our proprietary technology we have built an end-to-end solu-tion for our clients’ debt needs.

Citco continues to invest in the debt space and we are currently expanding our

servicing offering as we seek to continue to provide best-in-class service.

Citco has built an end-to-end solution for debt managers

4 Spring 2018

Industry Spotlight

Three years after the launch of the first Citco Gateway office centre, all four offices – in Amsterdam, Luxembourg, New York and Singapore – are close to 100%

occupancy. This shows the value that asset management firms place on flexibility at a time when profitability is under pressure and globalisation is receding. It also reflects a mix of local and international trends.

■ Brexit drives need for new officesLuxembourg, for example, is an early beneficiary of Brexit, as London-based asset managers anticipate needing to base certain jobs within the EU while keeping their head-quarters in the UK. A number of hedge fund and private equity managers have decided that they need a presence in Luxembourg but are waiting to see the outcome of negotiations before deciding if they need a leasehold office.

In New York, managers’ motivation is somewhat different. Citco’s 350 Park Avenue Gateway centre provides a prime US address without having to take on a long lease and other costs typically associated with an office.

In a cost-conscious era for alternative asset managers, they are increasingly keen to rent flexible office space. Not only are Brexit and other factors forcing them to be present in a larger number of locations worldwide, but also lower fees and rising regulatory costs have made them more careful of their expenses.

■ More than a hedge fund hotelWhile shared office and hedge fund hotel concepts are both increasingly popular, Gateway provides a far more specialist, high-end facility, tailored to alternative asset managers’ needs.

All four Gateway centres leverage Citco’s position as a leading service provider to alternative asset managers to help managers achieve their business objectives. Whether a manager is establishing operations in a new market or seeking integrated fund administra-tion services in its current location, Gateway avoids the commitment of a multi-year lease.

In broad terms, Gateway has three pillars:

§§ Citco’s administrative support, ranging from fund administration to incorporation and corporate governance services.§§ Premium business centres in prime loca-

tions, close to central financial districts with IT infrastructure and full office support. There is zero capital investment, with no set-up costs or management fees.

§§ Human relations and payroll services, including office managers and secretaries.

■ Accelerating growthAs most Gateway tenants are alternative asset managers, there is a natural cross-fertilisation of ideas and expertise. There are also official networking opportunities. For example, Gateway centres hold events focusing on topics such as cyber security, due diligence and fund raising.

Ideally, the Gateway tenant arrives as a small alternative manager and takes on more Citco services as it expands, its growth acceler-ated as it takes advantage of the wide ranging knowledge and contacts Citco has built up over 70 years as a service provider to alterna-tive asset managers. ☐

Flexibility drives demand for Gateway centresManagers turn to Gateway centres to access flexible office space and administrative support as they start up or move to new jurisdictions

Thijs van Ingen, Managing Director, Citco Gatewaytvaningen@citco.com

There is a natural cross-fertilisation of ideas among tenants

350 Park Avenue, New York: there is an unofficial waiting list for space in Citco’s NY Gateway

5Spring 2018

While there is no single source of information regarding the size of the global private real estate market, consensus among research firms,

benchmarks and media surveys suggests that the sector contains well over US$3 trillion of assets under management, depending on what is classified as private real estate.

Regional allocations are also inexact, but similar industry consensus estimates that the Americas account for about 40% of assets, with Europe close behind at about 35% and Asia Pacific at 25%.

Despite the size of the real estate sector, most accounting and back office operations continue to be managed in-house, rather than following the hedge fund and private equity sectors, which routinely outsource these func-tions to third-party service providers.

■ Reasons for hesitationThere are several key factors that account for why real estate has lagged behind other asset classes when it comes to outsourcing.

At the heart of this hesitation is the nature of the real estate asset class, which requires active hands-on management of the under-lying assets, including extensive oversight of operations. This is in stark contrast to the other alternative asset classes, which practice more passive approaches to asset manage-ment. For example, real estate investment managers commonly control or materially influence leasing activity, expense budgets and capital projects of the assets in their funds.

Furthermore, staff who perform accounting and back office functions for real estate funds work very closely with the invest-ment management teams. They serve as the gatekeepers of the financial position of the funds and the underlying assets. As a result, managers are reluctant to hand over control of these important functions to a third-party service provider.

Additionally, real estate does not come in a “one size fits all” package. Authoritative accounting rules can be complex due to the nature of real estate ownership structures,

fund strategies, geographic regions and asset types. This requires specialized expertise and a thorough understanding of the sector.

However, there are signs that the tide is turning, judging by the significant increase in the number of real estate fund service providers that have entered the market in the past five years. There are several explanations for this shift.

■ Controlling costs and scaling operationsManagers are under pressure to control the costs of the funds they manage, as well as costs on their own books. Major expenses such as personnel and technology can negatively impact fund performance and manager profit-ability. As assets under management grow, managers are looking to fund service providers to build scale and ultimately reduce costs in back office operations and the technology that supports them.

New real estate fund product offerings are

contributing to the change as well. Faced with the costly prospect of building new functions in-house and investing in technology solutions to support new business, many real estate fund managers choose to outsource to an experienced service provider to save money.

Real estate fund servicing will continue to mature and is well positioned to grow signifi-cantly as more investment managers become comfortable with the ability of service providers to add value to their real estate platforms. ☐

Outsourcing: tide turns for real estate funds Real estate funds are finding that experienced service providers can help them build scale and control the cost of technology and personnel

Barbara Flusk, Head of Real Estate Fund Servicesbflusk@citco.com

New real estate fund product offerings are contributing to the rise in outsourcing

6 Spring 2018

Industry Spotlight

Navigation is in Citco’s DNA. Citco was founded to help Dutch multinationals steer the uncharted waters of offshoring assets to avoid confiscation by

foreign powers during World War II. From the late 1970s to the 1990s Citco helped asset managers deal with Section 864 of the US tax code, which was generally referred to as the “10 commandments” (it included 10 factors the IRS used to determine whether funds operating outside the US would be subject to US income tax).

Today’s Citco offers a broad range of services to address our clients’ jurisdictional, accounting and financial, regulatory reporting and operational needs. It’s this long history of focusing on the alternative investment space that has enabled Citco to develop a multifac-eted client service model providing insightful, practical and nimble solutions for today’s alternative asset manager.

Citco monitors and measures all aspects of the services we provide. Citco’s client service team are some of the most tenured individuals within the industry. Their scope of experiences are matched to the client’s requirements – and they also have cultivated the connections to work within Citco to bring solutions to the needs expressed by our clients.

■ Additive and ownershipTwo words sum up client service in my mind – additive and ownership. They go hand in hand. First, the client service person needs to be additive. He or she needs to understand the client’s business requirements and add value for the client. Shiny suits need not apply.

A client service person can only achieve this by ‘owning the client relationship’ within their organisation; by being the client’s advo-cate. It’s essential to understand why a client is interested in a topic and anticipate the tools/services that can be deployed to help.

Listening to the client’s staff, and Citco’s staff, should help to root out mutually beneficial opportunities. Ownership also covers client profitability. It is easy to provide

a superior client service person when “Yes” is the only answer. But client service must also add value to the Citco organisation.

■ Good housekeepingThe client service model starts and stops with a service level agreement (SLA) and associated key performance indicators. The SLA is a trans-parent living and breathing document that is continually tweaked as operational models evolve. It should never be rigid.

■ Sharing informationMeeting the asset manager regularly is key to understanding how to add greater value. This may take the form of adding services and solutions; improving efficiency and so

lowering costs; or even seconding resources in a client’s hour of need.

Solutions can range from outsourcing basic tasks such as daily reconciliations and payments, to more technical services like risk and loan administration. Value can also be added by enabling the client to leverage our infrastructure to add scale to their business without investing in more people or technology.

■ Benefits of benchmarkingGood client service means intuitively seeing how best to support an evolving enterprise. By benchmarking current processes against best practices from across our global client base it’s possible to be proactive. For more custom-ised solutions the client service manager can introduce specialised teams that can evaluate specialised and/or bespoke situations, and find ways to address them.

Client service managers are there to engage with our clients to help steer them through each stage of a fund’s lifecycle – from forma-tion to investor satisfaction, to operational efficiencies, to reporting. They can give asset managers unique insights into their own busi-nesses and help them to pilot a course through alternative investment’s ever-changing land-scape, as Citco has been doing for decades for its clients. ☐

Relationships are key to charting a better course Relationship managers’ unique role means they can anticipate clients’ needs and deliver tools to take advantage of new opportunities

Kieran Conroy, Head of Fund Services kconroy@citco.com

Listening to the client’s staff should help to root out mutually beneficial opportunities

$

EXPERTISE

SERVICES

Citco’s best-in-class technology means we process your data quickly and accurately, so you can access the information you need, as you need it, from real-time position views in our CitcoOne web platform, to risk analysis and investor reports.

Citco sta� bring you deep experience in alternatives administration, in trading operations, in banking and credit, in financial regulation and reporting, in tax, SPVs and corporate secretarial functions.

Continued investment in technology, people and processes by the Citco Group of Companies (“Citco”) ensures we deliver a world class administration function at a fraction of the cost of doing it yourself.

Our middle oce solution connects managers to best in breed vendors, technology platforms and reporting, and delivers trade confirmation, collateral management and treasury services.Our risk management o�ering enables clients to monitor and assess risk, using flexible, customizable tools.Our reporting tools equip you to meet the needs of investors and authorities, including preparing transparency reports and meeting the requirements of FATCA and AIFMD.Our lending and foreign exchange services enable investors to manage their working capital and share class hedging needs. We also process and calculate tax, set up and manage SPVs, and deliver a wide range of corporate secretarial services, as well as providing dedicated solutions for private equity and real estate investors.

Outsourcing enables you to focus on raising funds and driving returns.

SAVINGS

EFFI

CIENCY

8 Spring 2018

Industry Spotlight

Back in September 2015, when I was a panellist at the Bloomberg hedge fund conference, one topic caused an awkward exchange with another administrator’s CEO. The topic was

conversions – or migrating funds from one administrator platform to another.

“What are your thoughts about conver-sions Nate?” asked the moderator. I answered: “They can be ugly if you partner with the wrong firm.” My advice was to choose an administrator that has a solid reputation, deep resources and all the services that you might need in future.

The CEO disagreed. He told the audience of roughly 500: “Conversions are easy. You run parallel for two months and go live month three.” I retorted: “This is exactly what sales teams tell clients on sales pitches.” There was a roar of laughter.

Even so, there is some truth in the CEO’s sales pitch. Conversions can go smoothly if they’re handled by experienced project managers, planned properly and implemented by skilled IT teams.

■ Checklist for a successful conversionCitco has converted more than US$150 billion in assets over the past four years. This includes the conversion of 20 private fund managers with over US$2 billion in assets onto our fund services platform. Our experience with projects that include a great deal of complexity has helped us develop the following five pointers to a successful conversion.

■ ExperienceProfessional project managers, entirely focused on conversions, can see the good, the bad and the ugly. They set the tone for the onboarding process. Some firms have account-ants performing conversions in addition to their day jobs. Citco project managers deploy a step-by-step process with controls that ensure that the project runs smoothly.

■ ManpowerManagers considering whether to switch administrators must have sufficient

manpower. In the past, we have seen firms stretched thin without the resources internally for the conversion. We view our relationships as partnerships. As part of the onboarding process, we offer solutions and advice about best practices. Solutions we have offered include providing Citco staff to work at the client’s office or engaging a third party to act as an additional resource.

■ Detailed planningProjects must start with detailed planning, followed by monitoring. Many clients do not realise how much effort goes into a conver-sion, especially in exercises such as database creation, legal changes, extract, file testing,

middle office services and risk management. Citco emphasises the importance of in-depth meetings to ensure we create the right service level agreements (SLAs).

■ Integration managementA strict integration plan ensures conversion dates will be met. Factors that managers must consider include: finalising legal documents; SLA definition; database build; reporting and data extracts; trade, price and loader develop-ment; prime broker and counterparty connec-tivity; and investor reporting.

■ Technology Moving data from one administrator to another is always an IT challenge: there are many formatting and extraction issues to work through even before the data can be set up on the new system, so a skilled development team is always a key component of a successful conversion. The best IT departments help transform a potentially sour process into something that runs sweetly – ‘turning lemons into lemonade’. ☐

Conversions: “Turning lemons into lemonade”The move to a new administrator platform can go sweetly and smoothly if it’s planned carefully and managed by a dedicated, experienced team

Nate Goodman, Head of Business Development North America – Hedge Fundsnagoodman@citco.com

Conversions can be ugly if you partner with the wrong firm

9Spring 2018

On December 22, 2017, Presi-dent Trump signed the Tax Cuts and Jobs Act (TCJA). The TCJA will have far-ranging and complex effects on private

equity (PE) funds, their investors and portfolio companies. Below we summarise Citco’s insights in six main areas.

■ Deduction of interest expense Under the TCJA, both corporate and pass-through entities will have net business interest expense limitation of 30% of the business’s “adjusted taxable income”, which will include an add-back of depreciation and amortiza-tion for the next four years only, resulting in a harsher limitation thereafter.

Reducing this deduction will decrease PE funds’ returns, as much current tax planning is designed around leverage. Additionally, the value of portfolio companies would be expected to drop because potential buyers would expect to pay less for them. There is no rule for grandfathering existing debt but unused deductions can be carried forward indefinitely.

■ Lower tax ratesThe TCJA retains the current structure of seven individual tax brackets, but reduces the top rate to 37%, while retaining alternative minimum tax (AMT), which was anticipated to be repealed. However, both exemption amounts and phase-out amounts for AMT purposes have been increased. With the increased exemption, new limitations on state and local income tax deduction, and the repeal of miscellaneous itemised deductions, fewer taxpayers will be impacted by the AMT. Busi-ness taxes at the entity level that are reflected in a funds’ partners’ distributive share of income will continue to reduce such partners distributive share.

The corporate income tax rate has been reduced to 21%. This will reduce incen-tives for companies to shift profits overseas and also reduce portfolio companies’ tax expenses and the value of the deferred tax assets and liabilities. In some cases, the

change in the value of the deferred assets may impact debt covenants.

■ Carried interestThe TCJA characterises certain gains with respect to “applicable partnership interest” from long-term to short-term to the extent the gains relate to property held for less than three

years. The “applicable partnership interest” is defined to include the general partners of PE and other investment partnerships. However, given that most PE funds hold investments for longer than three years, their general partners would not be affected by this provision. None-theless, allocations from funds with shorter holding periods would be impacted and those cases need to be monitored.

■ Tax on partnerships’ business income The TCJA introduces a 20% deduction for qualified business income from pass-through entities. Qualified income does not include investment type income or “specified service trade or business”, which is defined to include investing and investment management, trading and dealing in securities or partnership interests. Therefore, much of the income of a typical PE fund would not be qualified busi-ness income and not eligible for the deduction.

■ International provisionsThe TCJA will exempt all dividends from foreign subsidiaries. Additionally, repatriation tax on accumulated earnings and profits is introduced, with 15.5% rates on accumulated foreign earnings held in cash and 8% for all other earnings. This tax can be paid in instal-ments spread over eight years. As a result, portfolio companies may need to reassess their cash flow modelling.

■ Capital expense Under the new rules, taxpayers are permitted to fully expense the cost of new depreciable prop-erty, which provides a significant benefit for portfolio companies with high capital expendi-tures. Depending on the facts, this may partially offset limitations on interest deductibility.

■ Preparing a strategyAlthough the tax reform is comprehensive, the themes above should enable private equity managers to think strategically about some issues to address. There may be significant opportunities to re-structure transactions to maximise the potential benefits and minimise the potential drawbacks of the new rules. ☐

Finding ways to work with US tax reformA new framework for US tax reform has replaced plans from President Trump and House Republicans. We look at the implications for PE funds

Julia Kogan, Executive Vice President – Private Equity Taxjukogan@citco.com

Deduction of net interest expense at entity level will be partially limited

10 Spring 2018

Industry Spotlight

Citco provides risk and transparency reporting on US$100bn of assets

Citco’s comprehensive risk and transparency reporting services are available to all types of alternative asset managers and investors, including hedge funds, private equity/hybrid funds, institutional investors and family offices. Clients access interactive dashboards showing exposure and performance risk via the CitcoOne portal.

Returns reporting includes both time-weighted rate of returns and money-weighted internal rate of returns.

The service currently reports on total combined assets of more than US$100 billion.

CitcoOne platform moves to version 2.0

After the successful rollout of CitcoOne to 60,000 users in 2016, Citco has been bringing further power and functionality to the platform. In 2017, Citco introduced release 2.0, which includes improved filtering and additional investor document handling options, additional fund of hedge fund reporting, and the introduction of our private equity and real estate offering.

Plans for 2018 include online approvals, integrated document exchange, regulatory reporting and additional features for funds of hedge funds.

Automated ILPA fee reporting tool launched

Citco has developed a tool that automates the ILPA fee reporting process for private equity clients, creating an efficient solution that replaces time-consuming Excel-based methods. The tool is a response to ILPA’s fee transparency initiative, a broad-based effort to establish more robust and consistent standards for fee reporting and compliance among private equity investors, fund managers and their advisors.

Citco middle office solutions reduce costs and minimise risk

Citco middle office greatly expands the capabilities of the Æxeo administration system. The service provides hedge funds with fast, accurate data, and manages complex treasury and collateral processing.With Citco middle office, Æxeo ingests trades post execution and distributes to the middleware vendor and/or prime broker/custodian. It reports trade status to the investment manager and escalates any discrepancies.

Clients can view the status of any trade at any time, irrespective of instrument type or matching venue.

Private debt team offers legal review, covenant monitoring and more

Citco’s enhanced direct lending service applies to portfolios holding privately negotiated loans, such as commercial senior mortgages, mezzanine debt, construction loans, bridge loans, residential mortgages and asset-backed credit.The team reviews legal documents, tracks customised loan attributes and monitors compliance with deal covenants.

Other services include verifying interest rates and accruals, preparing amortisation schedules and establishing electronic feeds with loan servicers and agents.

Æxeo delivers real-time oversight of payments

Citco’s Æxeo payment system covers fund investments, settlement of OTC trades and margin, transfers between accounts and invoice payment.Clients can use Æxeo payment system to approve payments without logging into individual bank portals. The system uses SWIFT to execute secure payments directly to leading financial institutions.

Æxeo payment system has strict authentication and permissions, and enables payments history to be extracted and audited. Stored data includes Standard Settlement Instruction and wire details from inception.

Citco Capital Solutions arranges US$15bn of debt and equity capital

Leveraging the breadth of Citco’s global relationships and expertise across the alternative investment space, the capital solutions team is dedicated to helping sponsors and investors with their financing needs. Citco has been involved with arranging over US$15 billion of financing for funds, club deals and joint ventures on behalf of capital located in North America, Europe and Asia.

Our recent mandates have included arranging capital call, NAV and rediscount facilities on behalf of our clients.

Systems and services updateThe latest news and highlights from Citco’s comprehensive range of services for alternatives managers and investors

11Spring 2018

Citco assets under administrationPerformance and capital flows across funds administered by Citco Fund Services companies for January to September 2017

Inflows & outflows(Jan–Sep 2017, $bn)

Performance by strategyJan–Sep 2017 for funds administered by Citco

Arbitrage

Equities

Emerging

Markets

Event Driven

Private Equity/Real Estate

0

4

8

12

16

7.2%

15.8%

14.3%

3.1%Fund of Funds

6.6%G

lobal Macro

4.8%

Multi Strategy

6.2%

10.3%

Equities, 17.4%

Arbitrage, $2.5bn Emerging Markets, $1.6bn

Event Driven, $2.7bn

Fund Of Funds,$13.8bn

Global Macro, $10.5bn Multi Strategy, $42.2bn

Equities, $25.5bn

-20

-15

-10

-5

0

5

10

15

20

January

February

March

April

May

June

July

August

September

Growth (%)

Inflows Outflows Net flowInflows

by strategy (Jan–Sep 2017)

Outflows by strategy(Jan–Sep 2017)

Total inflows $114.0bn

Total outflows $131.0bn

Equities, -$30.8bn

Multi Strategy, -$50.7bn

Fund Of Funds, -$18.9bn

Private Equity/Real Estate, -$8.3bn

Global Macro, -$12.8bn

Event Driven, -$4.5bn Arbitrage, -$2.2bn Emerging Markets, -$2.8bn

Private Equity/Real Estate, $15.2bn

Positive returns reported across all strategies to September 2017

Citco ended the third quarter of 2017 with assets under administration across all product lines of US$910 billion.This growth was largely fuelled by strong performance from existing clients, as well as the addition of new mandates. There was some offset as a result of negative flows, with capital flows continuing to disappoint overall.

Each quarter-end showed material net outflows, marginally tempered with some positive activity intra-quarter – a trend which has continued. The only strategy to witness real positive capital growth in the period was private equity and real estate (PERE). Equities and multi-strategy funds saw the largest drawdowns.

Equities, emerging markets and PERE strategies led the way in a positive performance cycle across all sectors. Global macro and event driven were most challenged in terms of delivering returns. ☐

Industry Spotlight

Spring 2018

Winner

European Services Awards 2017

AMERICACitco Fund Services (USA) Inc.Tel: +1 201 793 6177 newyork-fund@citco.com

EUROPECitco Fund Services (London) LimitedTel: +44 207 290 1350 london-fund@citco.com

ASIACitco Fund Services (Singapore) Pte LimitedTel: +65 6571 1298 singapore-fund@citco.com

Citco DISCLAIMER: No Citco companies and/or their directors, officers, shareholders or employees (collectively “Citco”) make any representation or warranty, express or implied, as to the adequacy, completeness or accuracy of the information contained in the document or other information provided to you and/or to your representatives, whether orally or in writing. No liability whatsoever is accepted by Citco for any loss howsoever arising from any use or reliance by you, your representatives and/or your clients of the information contained in this document or other information provided to you and/or to your representatives in connection therewith, whether orally or in writing. For the avoidance of doubt, Citco is not promoting, endorsing or otherwise recommending investment in any fund to which it provides services by the provision of the information in this document or arising in connection therewith. © The Citco Group Limited 2018

As capital flows into private equity, private debt and real estate funds, investors are continuing to ask for more trans-parency. While this trend places

an additional burden on investment managers, the calls by institutional limited partners (LPs) for improved disclosure into fees, expenses and waterfall calculations presents a new opportunity for fund administrators, which have previously focused primarily on the needs of investment managers or general partners (GP).

■ GPs and LPs turn to verificationNew regulations open the door for fresh partnerships between LPs and third-party administrators, specifically through waterfall verification and recalculation services.

Under a waterfall verification/recalculation service model, a GP that does not outsource its accounting and reporting functions would engage an administrator either to indepen-dently verify or recalculate its waterfall calcula-tions (ensuring that the methodology and results align with the fund’s governing docu-ments). The verification model is also possible when an LP appoints an administrator to provide waterfall verification/recalculation services across its portfolio of investments.

Partnering with an administrator benefits both the GP and its LP clients. From the LP’s

perspective, this provides assurance that carried interest is being computed accurately and in line with partnership agreements, and also provides the transparency necessary for LPs to comply with rules and regulations.

From the GP’s perspective, leveraging the administrator’s technology and expertise reduces the risk of miscalculating carried interest. Furthermore, independent review and verification provides comfort to their LP

clients, reducing investor queries and the need to expand the GP’s administration function.

While LPs will almost certainly drive demand for waterfall services, they will only succeed if GPs willingly play their part. Unlike a traditional full administration offering in which the administrator verifies the waterfall calculation’s inputs, a bespoke verification/recalculation model largely requires the investment manager to take responsibility for providing all relevant inputs.

Administrators can play a further role in the standardisation of these inputs (including, but not limited to, standardised data templates, standardised output reporting and possible integration with external GP accounting platforms), allowing the whole process to become scalable across an LP’s portfolio, while also giving the GP consistency in terms of data requests and requirements.

■ Citco looks to develop best practiceAs LPs increasingly demand waterfall verifica-tion services (and other verification services, such as management fee and NAV verifica-tion), we believe that both GPs and fund administrators would benefit from under-standing what constitutes best practice. We also think that independent waterfall verifica-tion and recalculation will become an impor-tant tool for LPs, and have clear ideas about how it can be both robust and practicable. ☐

The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.

For questions about these articles contact your relationship manager or Spotlight editor Diana Arakelyan at darakelyan@citco.com

Bringing transparency to waterfall calculationsFor limited partners, administrator waterfall verification services deliver assurance and transparency – which in turn benefits managers, too

Tim Eberle, Vice Presidentteberle@citco.com

The LP may appoint an administrator to provide waterfall services across its investment portfolio