Increasing numbers of private equity, private debt and real estate fund managers are outsourcing their fund administration to third parties. In this piece, we look at some of the benefits these managers have realised – and explore whether there’s such a thing as too much outsourcing. By Alex Di Santo.
Benefits of outsourcing fund administrationBy accelerating their outsourcing decisions, managers can benefit from enhanced operational efficiency. Leveraging an outsourced partner’s technology stack can support data management and automation - both challenges for fund managers as they seek to ensure timely, accurate and ever more granular reporting to the investor base.
Outsourcing allows managers to focus on their priorities, managing investment portfolios and investor relationships, rather than allocating time and resource to back office functions or keeping on top of fast-developing technology. Enhanced operational efficiency has a direct positive impact on cost base.
Regulatory expertise from an outsourced partner not only reduces risk but can also improve speed to market for a fund launch e.g. through the support of a regulatory umbrella. Indeed, a fund administrator’s existing regulatory licences and approvals can be wide-ranging. Clients falling under this regulatory umbrella can start marketing quickly and at a lower cost prior to obtaining a full licence. Crestbridge is one of the rare third-party ManCos in Luxembourg able to offer the EuVECA, allowing its venture capital clients access to European investor markets in a matter of days rather than months.
Fund managers can also benefit from deep operational support when outsourcing. Experts in specific asset classes can truly support from a structuring and ongoing operations perspective, bringing asset class (e.g. deep knowledge of buyout) and technical expertise (e.g. deep knowledge of carry waterfalls or a particular fund domicile) to the structure in question.
It also means those looking to streamline during uncertain times can benefit, as they’re no longer required to run an internal team of administrators, invest in or maintain specialist systems on an ongoing basis. Where many new funds have been launched, this permanent pool of expertise means there's already a team ready to take on the fund administration of the older, legacy funds that still require administrating.
Leveraging the expertise of fund administrators is particularly beneficial these days, as more recently, managers have reported increasing difficulty in sourcing and retaining talent across their firms, making it more impractical to hire auxiliary staff in the back and middle offices.
From the investor perspective, outsourcing is also favoured as fund administrators deploy robust control frameworks around key processes, including cash and investments. A robust control framework can support operational efficiency and minimise risk.
The pitfall – can you outsource too much?It very much depends on your partner. Knowing how, when and what to outsource is critical. Selecting the right areas to outsource is critical and it's important to as far as possible maintain a limited number of strong relationships with partners you can trust to deliver in the long term.
Understanding your outsourced partners operating model is important – what is their ownership structure? Do they outsource themselves to centres of excellence across the globe? What is the technology roadmap for the next 10 years?
How to get the most out of your relationship with your fund administrator:
Do your research– ask your peer group who they use and how satisfied they are and follow a formal RFP process.
Ask for help when you need it– it’s a partnership, and you'll get extra support from your fund administrator just by asking. Fund administrators work with a wide range of managers so will be exposed to trends you may not have sight of.
Create milestones– people work better when they know what they’re working towards. Create milestones through the year for your outsourced fund administration team to stick to.
Build positive relationships with them– know who your outsourced team members are. Be interested in them beyond the fact that they do work for you that you need.
Go and visit – everyone understands that meeting face-to-face is important with internal team members, but the same is true for outsourced partners. Spending time working through operational or strategic matters face-face can really help build the relationship.
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