ELTIF 2.0: Navigating technological challenges in the private asset fund value chain

The recent launch of ELTIF 2.0 marks a significant milestone and opportunity in the landscape of private asset investments, impacting the value chain and operating models of the key actors of the sector. This updated framework not only broadens investment opportunities, but also streamlines regulatory requirements, and makes investing more accessible to a wider range of investors, reshaping how private assets are managed, monitored and distributed.

In Europe alone, institutional investors account for 55 percent of the available capital, with the remaining 45 percent sitting among retail investors* (which include the whole spectrum of the asset management industry, ranging from pure alternative investment players to more mainstream ones (listed assets)).

So, what are the top six emerging product distribution channels aimed at reaching retail investors?

1. Direct distribution
2. Tokenization platforms
3. Third party marketers or placement agents
4. Fund of funds
5. Private asset platforms
6. Traditional fund platforms

Regardless of the servicing model, private asset managers and servicers all encounter common challenges when managing retail investors. For example, dealing with less experienced buyers and a high number of lower-volume transactions that require robust technology to scale efficiency across commercial, regulatory and compliance aspects, and meeting increased liquidity requirements.

In markets like Luxembourg, asset servicers play a pivotal role in supporting asset managers by addressing challenges and seizing opportunities. They have the potential not only to assist asset managers in tapping into the retail market for private assets, but also to expand their service offerings by combining both worlds – private assets with traditional funds.

However, the transition towards hybrid funds supported by ELTIF 2.0 means asset servicers must adapt their operating models. How exactly? Well, these adaptations vary depending on whether a player originates from the mainstream funds world or the private asset world. It’s also a question of the use of technology, and the ability to leverage knowledge to bridge the gap between closed and open-ended funds.

Let’s take the high-level private asset value chain example outlined below which illustrates the multifaceted impact of hybrid funds from a technological standpoint. The example focuses on an asset servicer that is already well-established in the private assets sphere. It requires enhancements to its existing technological infrastructure (tailored for traditional asset classes) to accommodate a hybrid fund predominantly investing in private assets.

It's plain to see that a considerable portion of the value chain is affected. While activities like waterfall calculation and credit facility management may see limited direct impact, broader shifts are significant in other areas. Increased subscription volumes, primarily affecting investor onboarding and transfer agent functions, lead the charge. Furthermore, heightened liquidity demand impacts middle office/treasury management and cash flow monitoring.

The additional traditional product features will require a solution that encompasses multiple areas, spanning from product management to custody/cash management. Ultimately, the new investor type may also trigger increased demand for transparency and, in turn, reporting requirements.

Given the unique challenges and repercussions faced by each organization, what exactly is needed? In short, a tailored evaluation of existing capabilities is crucial. To ensure successful integration, this evaluation should consider factors including knowledge, resources, technology, and the legal framework of the ELTIF structure.

One of the notable tractions in today’s market is the onboarding of an additional fund administration platform – transfer agency services, in particular, to account for the increase in transaction volumes around investor onboarding, subscriptions, and redemptions, while giving priority to the existing fund administration platform to serve as the primary source of reliable data.

Recognizing the complexities inherent in various fund structures and investments – especially those managed by hybrid funds – asset servicers can reinforce their existing platforms. How? With either mainstream or private asset platforms, catering to increased volumes, liquidity demands, and specific product requirements.

While industry players are considering the development of dedicated platforms, the decision to pursue this avenue requires a meticulous cost-benefit analysis to ensure viability and effectiveness.

The new operating model will highly depend on each organization's maturity when faced with the various challenges at fund and corporate level (e.g. maintaining a single book of record and being able to handle nominee accounts).

Some organizations will need to bridge the gap between knowledge and expertise; others will have to focus on identifying how the increased volumes and frequencies of subscriptions can be handled using their existing technology (or by complementing their current technology with another); whereas others will need to implement a liquidity management tool to account for the increased redemptions.

We expect to see diverse strategies emerge, particularly in the realm of technology. Major players in private asset management have already initiated comprehensive assessments, enhancing their technological infrastructure as necessary to adapt to evolving market dynamics and operational challenges. This includes enhancing liquidity management, strengthening due diligence processes, managing increased operational demands related to reporting and compliance, refining risk assessment frameworks, and boosting overall operational efficiency.

When it comes to upgrading technology infrastructures, adapting to market changes by providing technology assessments and implementation services, strategic advisory for navigating market dynamics, not to mention regulatory compliance and risk management support, KPMG has the knowledge, experience and expertise to assist private asset management and servicing firms. Reach out to our dedicated team of specialists today!

* Source: EFAMA, KPMG analysis | European countries excluding eastern Europe (except for Poland)

This article was co-written by Niels Ozerée and Christian Guertler.