Funds are borrowing from the corporate playbook

The corporatisation of the funds industry is a response to the new risk landscape. 

In the face of intense market volatility, organisations across the gamut of financial services are re-examining business and operational models. Funds are no exception, needing to respond to the impact of interest rate and inflation levels unseen since 2008. For fund managers seeking to navigate continuing economic uncertainty, the corporate world offers a useful template for greater resilience and operational efficiency. 

Consequently, a trend towards the ‘corporatisation’ of funds is seeing them embrace financial and risk management techniques more commonly associated with large corporates to futureproof themselves against further upheavals in the financial landscape. 

Economic factors are driving funds to adopt corporate best practice around liquidity, FX, rates risk management

The base drivers behind the adoption by funds of corporate liquidity, foreign exchange and treasury management best practice are clear. A spike in rates after an extended period of near-zero interest, plus corresponding inflation, have forced them to reassess their approach to the investments they hold. 

“We’ve had a low interest rate environment for over a decade. Some managing directors have never seen interest rates above 1%,” says Stewart Hotston, sponsor coverage director at NatWest. “Then in the last two years, interest rates and inflation have become extremely volatile, moving in ways people didn’t predict.”

This shift has sharpened fund managers’ focus on handling cash reserves. Where previously the goal was to minimise negative cash drag, funds now need to manage excess liquidity. “There’s more attention on extracting a return from those reserves,” says Stefan Szczurowski, senior director at RBS International. “Where they’re dealing with substantial sums, larger managers are placing them where they can generate the most attractive returns, and some have specifically recruited individuals to focus on cash management.”

To achieve this, funds’ treasury and fund administration functions are developing new disciplines. “They’re creating systems to earn revenue off of what was previously just plumbing, and also to avoid losing value because, with inflation so volatile, money may not be worth tomorrow what it’s worth today,” Stewart says.

Rising interest rates have created a secondary driver of corporatisation by accelerating the consolidation of how fund companies view risk. Greg Handelaar, director, corporate financing and risk solutions adds, “There is a clear trend towards financial risks being managed more centrally, with a more strategic lens, as opposed to at individual company level.”

Adaptation in evolution: bringing corporate risk management and operational efficiency into the funds industry

Funds aren’t adopting corporate practices part and parcel, however. Corporatisation is manifesting in the funds world in ways particular to the nuances of the sector, with fund managers tailoring corporate methods to fit their needs.

Increasingly common across funds is targeted treasury management, ranging from software implementation right up to the appointment of enterprise-wide CFOs. “Mid-market size funds have previously had finance directors, but more often, they now have CFOs controlling an overall strategy, reflecting a more corporate structure,” says Stewart.

Risk management is another area where funds are having to explore unprecedented issues raised by the unpredictability in FX, interest and inflation rates and other macroeconomic and geopolitical factors. “If you don’t have a handle on everything that’s going on, you don’t know what your exposures are,” Stewart adds.

As a result, treasury practitioners are thinking more proactively around pre-hedging interest rate or foreign exchange risks coming down the line, says Greg. “The concept of ongoing, proactive risk management is more prevalent – for example, opportunistically topping up existing hedging; or where a piece of debt is being repaid early and hedging is being unwound, funds customers are more alert to extracting value from restructuring or unwinding the risk management instruments they have.”

Corporate operational efficiencies are also being adopted by funds. “If you can bring parallel operations into one place and do it with one piece of software and fewer, more expert people, it frees up the deal-doers,” Stewart says.

Another way in which corporatisation is demonstrated is with the setting up of centralised specialist functions such as ESG, to manage ESG policy. “Where there may have been people handling ESG up and down the structure, there’s a more global view being taken on these issues,” Stewart adds. “It’s partly being driven by legislation, and corporates are setting the example.”

Good housekeeping is making funds more competitive

Following the restructuring of operational practices along corporate lines, frequent reflection on which methods work best in the fund environment is vital to ensure changes remain fit for purpose. Funds need to take a long-term approach when making innovations and commit to regular structural housekeeping. 

“Given the pace at which the macro environment can change, funds regularly assessing the way they are managing their liquidity and funding is very important,” says Stefan. “Interest rates have increased rapidly after an extended period of ultra-low rates, and FX rates have been particularly volatile, as recently experienced with Euro and Sterling last year. The frequency at which funds review both their cash management and risk management practices is key in being able to adapt to those fast moving situations and being able to mitigate potential risks coming down the track.” 

Regular reviews allow funds to identify when to be agile, adds Stewart. “Inertia exists because they don’t want to jump at every fad, but regular reflection can help funds respond in a timely way to major shifts when needed.”

Ultimately corporatisation can help funds become more competitive. “It allows you to do more with the money you have, and also to demonstrate to your LPs that you’re putting their money to best use,” Stewart says.

The trend towards corporatisation therefore seems likely to continue. “The funds business has grown since the 1990s from a boutique industry to a global powerhouse. This is just part of its natural evolution – and it’s likely a permanent shift,” he concludes.

If you want to discuss this further then please contact Stefan Szczurowski, senior director at RBS International or Stewart Hotston, sponsor coverage director at NatWest.

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