HSBC rolls out admin for private equity

No longer must PE clients rely on a system designed for hedge funds.

HSBC Alternative Fund Services is introducing a new service to support private-equity funds, says Drew Douglas, New York-based managing director and global head of product management.

Until now, the bank has processed PE funds using the same platform it developed for its hedge fund clients (the platform originally developed by Bank of Bermuda, which HSBC acquired in early 2004). The bank says it has $200 billion of alternative assets under administration worldwide, of which only 5%, or $10 billion, is for private equity funds. The rest is mainly for single-strategy hedge funds and for funds of hedge funds.

Shortly after the acquisition, the division, headed by Paul Smith in New York, made the case to the group brass that it needed a separate platform in order to grow private equity clients as a proper third leg in alternative fund services. Currently the PE clients tend to be smaller funds that can be handled using Excel spreadsheets, but if the bank wants to bring aboard bigger clients it needs a more automated solution, Douglas explains.

The new platform is being rolled out in San Francisco, Bermuda, Luxembourg and Hong Kong, with other sites on the drawing board. It will allow the bank to compete with outsourcing providers such as Bisys, which acquired DML Fund Services, which processes PE funds in the United States and Europe.

"Unlike our competitors we've got a huge financial institution behind us that can add products; we're not just solely an administrator," says Douglas.

Processing for open-ended hedge funds doesn't emphasize capital inflows and outflows, which can directly affect the PE manager's ability to manage the portfolio and make investments. The emphasis on administrating hedge funds has been on calculating NAVs and valuing derivatives in the portfolio.

PE transactions can involve multiple facets such as equity tranches, convertible bonds, property, etc, and each piece needs separate processing. One of the most complicated features for PE funds involves linking capital call structures to the fund's operation: the fund and the administrator must be sure that the money is available when the PE manager needs it to invest in a deal.

The HSBC platform also automates functions such as statements to the fund's clients, who will be able to go online to review underlying transactions, returns on investment and other data, subject to the fund manager's discretion. Until now, HSBC had only provided static reports. The service also provides portfolio analytics such as performance measurement on top of the usual financial statements.

Douglas says currently some $6 billion worth of PE assets are migrating to the new platform. Such a move doesn't make sense for all existing clients, particularly those with funds close to maturity. The bank says the new platform is helping it market to new PE fund managers, the majority of which are to be found in Asia.

"About two-thirds of our private equity clients are in Asia," Douglas says. "They are more disposed to outsourcing." He says the bulk of the Asia business is property funds, with relatively few leveraged-buyout or M&A funds, although he sees opportunities among these types of managers as well.

Fees for the new platform vary depending on the fund's size, strategy, number of deals and frequency of capital calls. Whereas hedge fund administration fees are usually set as a percentage of AUM, the bank has a more flexible fee schedule for private equity firms, and in some cases may negotiate a flat rate because there is less risk of valuation losses for closed-end products.