Transition Management Must Change, Says Regulator

(October 31, 2013) — “Poor transparency and opaque legal documentation could lead to poor consumer outcomes in the provision of this service.” So said the director of supervision at the UK’s fiscal regulator this week reporting on the agency’s examination of transition management.

Clive Adamson told attendees at the Financial Conduct Authority (FCA) asset management conference on October 30 that the agency had been probing the sector after complaints of malpractice were discovered in October 2011.

The agency announced in March 2013 that it was undertaking a close examination into the sector, but it had been widely understood that the regulator’s predecessor, the Financial Services Authority, had begun looking into practices soon after malpractices were unveiled.

“What we found is that the asymmetry of knowledge between providers and customers, combined with the potential for conflicts of interest to arise on such complex and fast moving transitions mandates may lead to adverse outcomes,” Adamson said.

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The industry has come out of the scrutiny with relatively good marks.

“While transparency remains a problem within transitions management,” Adamson said, “we believe the provision of more data and greater customer understanding is empowering customer decision-making and will be working with providers and customer groups to ensure improvements continue to be made.”

More broadly, however, custodians were found to be providing an acceptable level of service to their clients, Adamson said.

The FCA “assessed the importance of ancillary services to the business models of the custody banks in the UK; and, second, considered whether their reliance on these, and an apparent lack of transparency, might lead to inappropriate behaviours”.

Adamson said this was an important task given that for some of these banks, ancillary services represent some 40% of their revenues, “without which it is likely that their core offering of custody and fund administration would be unsustainable at current prices”.

Earlier this year, rating agency Moody’s placed a trio of custodian banks on a watch list, saying poor incomes from core custody products threatened their profitability.

The FCA, however, found custodians to be treating their customers fairly, said Adamson: “I am pleased to say that we did not find inappropriate behaviour taking place and have concluded that standards and transparency across the industry have improved over the past few years. This has been primarily driven by competitive pressures leading to improvements in services, and by clients being better informed about the potential risks and having better data.”

He urged their customers—both asset owners and asset managers—to keep pressing their suppliers on charges and transparency.

(October 31, 2013) — Unlisted infrastructure funds have hit a record high of $93 billion in capital available for investments as of October 2013, but completed deals are on the wane, according to a Preqin report.

Around 63% of institutional investors are expecting to increase their allocations to infrastructure in the next 12 months and 27% revealed plans to continue investments at the same amount, according to the report.

“The infrastructure asset class has grown significantly in recent years, with strong investor appetite for infrastructure investment driving substantial growth in fundraising,” said Elliot Bradbook, manager of infrastructure data at Preqin.

North America is expected to experience the largest proportion of investments at $42 billion, with European following second with $33 billion. Preqin projected $18 billion to be invested in Asia and other regions outside of North America and Europe.

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Most of the new money has found its way to the smaller players: available capital in smaller unlisted infrastructure funds with less than $500 million in assets increased to 21% year-to-date from 11% in 2009, the report found.

Larger funds saw less of the new inflows. Unlisted funds with $2 billion or more experienced a decline from 59% in 2007 to 40% in 2013 so far.

And the overall number of transactions was down too—Preqin stated 254 completed transactions had taken place in 2013 to date, a decrease from 405 in 2012 and 389 in 2011.

There are a number of roadblocks which need to be overcome for the levels of deal flow to reflect this surge in interest, according to the report.

“While this strong fundraising market has resulted in unlisted infrastructure fund managers having record levels of dry powder available to invest, there are ongoing issues impacting deal flow, such as high asset valuations caused by the higher levels of capital being raised and greater interest in the most desirable assets,” Bradbook continued.

“Fund managers may not be prepared to pay a higher price for assets that are not forecasted to provide significant levels of return.”

Despite their rising popularity, unlisted funds can make some investors nervous due to some managers’ poor fund governance.

“Unlisted funds need to be aware that if they want institutional capital, they’ll need to offer good governance from the start,” Charlotte Valeur, director of the Global Governance Group, told aiCIO last week.

“We are pushing for the unlisted fund space to give some level of transparency—even just one page detailing the board members, where meetings are held, and what was discussed—that would be a start.”