With the rise of alternative investments such as private equity, hedge funds, and real estate in recent years, the role of custodians has become increasingly important. Custodians act as independent third parties to hold and administer alternative investment assets on behalf of investors. However, not all custodians are equipped to handle the unique requirements of alternative investments. Choosing the right custodian is crucial to properly safeguard assets, handle complex administration, and enable smooth operations. This article will examine key considerations in selecting alternative investment custodians and how the right custodian partnership can create value.
Due diligence process is vital in assessing alternative investment custodian expertise
Conducting thorough due diligence on custodian expertise is one of the most important steps before choosing a provider. Custodians should have proven experience in the specific alternative asset classes under consideration. For instance, real estate and private equity require different handling compared to liquid securities. The ideal custodian demonstrates extensive knowledge of areas like tax, regulatory compliance, fund accounting and reporting. Robust technology infrastructure tailored for each asset type is also a key capability to evaluate.
Independent governance and oversight controls are essential for alternative investment custodians
Unlike traditional custodians, alternative investment custodians must provide robust governance frameworks providing checks and balances on fund managers. Independent oversight on areas like valuation and reporting is crucial to prevent issues like overstating performance. Custodians should also conduct ongoing due diligence on fund managers and investments to sniff out irregularities. Comprehensive risk management capabilities to highlight issues before they snowball is a key service.
Top-tier investor servicing and smooth operations enable value creation
The investors in a private equity fund or hedge fund rely extensively on custodians for services like fund accounting, reporting and investor servicing. Lack of capabilities in this area results in delayed distributions, statements and headaches for investors. Custodians must have cutting-edge platforms, technology and operations to seamlessly handle areas like cash management, transfers and foreign exchange for global investors. The leading custodians provide customized services allowing investors transparency into fund investments and streamlined administration.
Leading alternative investment custodians provide complete solutions
The top alternative investment custodians are characterized by the breadth of solutions they offer clients. Key areas provided may include fund administration, middle office services, depot banking, fund financing, and data analytics. By working with one partner for a full suite of offerings, asset managers and investors benefit from streamlined processes and consolidated reporting. This avoids the complexity of using disjointed vendors. Institutional-grade alternative investment custodians also offer robust cybersecurity and full compliance with regulations.
In summary, selecting the right alternative investment custodian partner requires rigorous due diligence across areas like asset expertise, governance, technology and operations. While cost is a factor, it should not override the need for complete service capabilities. The leading custodians are distinguished by their holistic solutions driving efficiency and risk mitigation for asset managers and investors alike.