For providers of trust services, the huge growth of real assets over the last decade has provided both an opportunity and a challenge. The opportunity comes in the shape of a fundamental shift towards alternatives by investors. This has created unprecedented demand for trust services for infrastructure funds and real assets at the big providers such as Northern Trust.

Clive Bellows, head of global fund services, EMEA, at Northern Trust, says that in 2018, every piece of its new business written in Luxembourg went to its traditional funds accounting platform. By 2019, 70 percent of new business went to its alternatives platforms.

“In a 12-month period, in the Luxembourg market – and I don’t think we’re unrepresentative – the pivot had gone from long only to the real asset space,” says Bellows. “Whether it’s pension funds, private investors or family offices, you don’t have to be an economist to work out where people are looking for return in the current interest rate environment.”

Complex fund structures

The challenge comes in the complexity of the structures required and the demands from institutional investors for greater transparency. Unlike tapping single wealthy investors, these assets need to be wrapped into fund structures that come with high levels of regulation – and that’s just the starting point.

The importance of these underlying tasks was highlighted by the introduction of the EU’s AIFM Directive, according to Romain Amiot, business development manager at PERES Global Services.

“It was key for infrastructure managers to have a provider that has embedded in their processes the knowledge of the asset class in the service delivery, so they can focus on the most important part: their investments and their fundraising activities,” says Amiot.

The innovation does not stop there as service providers seek new solutions, with specialisation often the key element. “As an example, due to the multi-layer ownership structures and internationalisation of fund investments, often as a depositary bank we have to perform full look-through down to each individual investment in the various countries where our clients invest,” says Amiot.

This is one of the most complex tasks, due to the ever-expanding range of what investment managers want to put into their regulated fund vehicles to diversify the risk/return profile.

Bellows poses the following question: “Looking at some of the assets we are responsible for – medicinal patents, aircraft leases, toll bridges, shopping centres, hotels – how do you make sure as the custodian that the investor has got what they thought they purchased, but also that it’s valued appropriately?”

After all, Bloomberg cannot produce a real-time price for a hospital in Dublin or an aircraft hangar in Tokyo.

“Our responsibilities don’t change, but the way we discharge them does,” Bellows adds.

Northern Trust, and its peers, need to work with independent valuing agents as a starting point. It is also vital to establish that the funds are being properly described, both from a liquidity and risk profile perspective. Not only does this demand almost forensic investigation, it requires expertise and good knowledge of local markets and regulations.

Esoteric investments

The esoteric nature of these investments means no two fund structures are identical, according to Bhagesh Malde, global head of real assets at SS&C in New York.

“The majority of my clients are using both open-ended and closed-ended fund structures and REITs,” he says. “If you want to buy something, a certain type of asset – say, real estate or infrastructure – together with the type of investor you are targeting often dictates the structure you set up.” This means that any type of “cookie cutter approach” that may have worked for long-only equity funds will not fly in this arena.

“We employ very skilled, expert accountants in this area who spend a lot of time with the client to really understand the investments they are planning to make or have made,” says Malde.

Crucially for infrastructure, these accountants and other relevant professionals need to investigate non-financial information on a case-by-case basis – and investors are savvier than ever.

“They’re pushing investment managers for more transparency of information, and that’s a big change in the last 10 years,” says Malde. “Historically, investors may not have had a good understanding of what the managers were doing but were more focused on the ultimate returns. Now, the competition among managers is to provide, especially to sophisticated institutional investors, more information in a quicker fashion.”

In an ‘always on’ world, investors want to understand their exposure to everything right now. This can mean fund administrators need to dig down to find individual tenant leases or the materials used to construct a bridge.

Scrubbing the data

But for SS&C, like many others, the investigation is just the start. Cleaning, scrubbing and consolidating the data, then turning this data into something a specific type of fund structure demands is another duty it has taken on.

“That’s the new frontier,” says Malde. “The data layer that more people are looking for is beyond the financial information. Some managers do it themselves on a spreadsheet, with its limitations and risk, but a lot more outsource to people like us – we are in the data business with the people expertise and technology tools to help our clients.”

Service providers have been adopting and developing new tools just as quickly as assets have grown and new fund structures have emerged. “We have the opportunity to develop new bespoke tools to collect that underlying data,” says Malde. “Managers genuinely have an opportunity to transform their operating model.”

This transformation can be seen most clearly in the reporting demands on managers. Periodic updates to demonstrate everything is under control are no longer sufficient.

“Nowadays, whether it’s the investor or asset manager themselves, the board of the fund or, increasingly, the regulator, they want data, often daily, demonstrating what’s going on,” Bellows says. “The provision of that data gives everyone reassurance that the assets in the fund, and indeed the fund itself is secure and doing what it should.”

PERES Global Services has seen the same developments.

“With the latest regulations, including General Data Protection Regulation and the new Anti-Money Laundering Directive, technology and data security are now key for infrastructure managers,” says Amiot. “They want their service providers to use the best-in-class systems from an operational and security perspective.”

One thing remains constant, however: keeping costs down. Managers do not want to see their investors’ returns wiped out by fees.

“We are finding ways of becoming more efficient for asset classes that don’t lend themselves to straight-through processing,” says Bellows. For example, in Guernsey, Northern Trust uses blockchain technology to operate ‘smart contracts’ for private assets that are accessible to all associated parties.

Bellows nevertheless realises that there is no silver bullet. Instead, bite-sized solutions will pop up around the industry, depending on the asset involved.

“Ultimately, our clients are the asset managers that are running these products, and legally, our responsibility is to make sure the end investors are protected,” he says.