In my role leading UMB’s transfer agency, alternatives sponsors call me and say, “Here’s an NDA; let’s talk pricing for this non-traded REIT (NTR) or business development company (BDC) we’re bringing out.” One reason servicing cost is on their mind is they recognize product sizes are different from years ago.
Most new NTRs and BDCs today are far smaller than they were 10 years ago. It used to be common for products to launch with 50,000 investors—and sometimes many more. Many sponsors are aware that the transfer agency business model for investor servicing is built around volume. They understand the economies of scale aren’t the same for a product with 50,000 investors and one with just 10 investors, and they aren’t sure what to expect when it comes to transfer agency costs for their BDC or NTR.
Look to bundle smaller products
Small investor numbers are especially common in the real estate space. Private-placement 1031 exchange products are a good example. Tax rules require that the investors in these products—who have just sold real estate and want to reinvest the proceeds—need to do so within 45 days of their sale.
Sponsors work hard to gather together groups of people in similar situations, including similar timelines. But that’s necessarily going to be a small group of people. For the sponsor, the business focus is to launch one product and move quickly onto the next. The next one may be very similar, but legally it’s a different instrument, with a different investor base.
Let’s take a hypothetical manager who has called me to talk about a real estate product. The trend these days is toward smaller products – products already in existence or planned or both – and are likely part of a larger strategic plan.
That strategic plan is important when I talk with the manager about pricing, since the cost of transfer agency services depends on volume.
That’s where bundling comes in. We are sometimes able to apply a stairstep-type pricing structure, in which the sponsor pays $X per investor in the initial product but then a lesser amount of $Y per investor as the volume grows in related products. There may also be a lower $Z level as well.
That structure can be a mutual fit, as closing multiple similar products is fundamental to the manager’s business model. And on our side, the structure brings some sensitivity to how supporting a whole system of investor services—call centers, transaction processing, commission payments, investor notifications and more—depends on achieving economies of scale.
Maximum efficiency is the new baseline
Sponsors may recall historical transfer agency pricing in which discounts were available when higher-efficiency practices were employed. For example, servicing contracts may have been designed to provide discounts when higher-efficiency practices were employed by a sponsor, such as digital account onboarding.
Today, pricing anticipates that all parties will adopt processes to maximize efficiencies. And, if not, more manual processes could be introduced at an extra fee.
Digital onboarding, which benefits both sponsors and the transfer agency, must be a standard operating procedure. The good news is that using digital systems has gotten easier, thanks to a variety of new platforms on the market and, on the sponsor side, an investor base that is much more comfortable and familiar with digital account-opening processes.
Other technology that benefits economies of scale—and therefore a transaction processor’s ability to price competitively—includes optical character recognition (OCR) and robotic process automation (RPA). Service providers are making significant investments in both these areas to speed up onboarding, freeing service teams to focus on reviewing exceptions rather than data entry and manual processing.
Digitalization means progress for both transfer agent and sponsor
The bottom line is, as in so many other areas of business, digitalization is making a huge difference. It’s making it possible for us to price transfer agency services for NTRs and BDCs in innovative ways, because everyone is on board with maximizing efficiency. So, while the per-investor pricing for a small product is necessarily higher than with a large product, you don’t have to worry so much about sticker shock.
Learn more about UMB Fund Services and how we can support your firm’s registered and alternative investment fund servicing needs, or contact us to be connected with a fund services team member.
