Discussions around ‘in-house’ vs. outsourcing operations have been more prevalent in recent months among our GP clients. Whereas previously such discussions were mostly limited to wholesale outsourcing of back-office functions or LP fundraising, it is increasingly common to see GPs thinking about how they accomplish other recurring or one-off tasks throughout the firm. At the same time, carefully thinking of tasks to outsource can help firm scale their AUM without necessarily increasing headcount. 

In some cases this is driven by an enforced hiring freeze. In other cases there is a desire to not distract key staff from core roles by getting initiatives done. Some firms proactively outsource tasks in order to provide a more efficient working environment for employees and remove some of the tricky or manual data tasks from their workload.

In this article, our experts outline areas and tasks which are ideal candidates for outsourcing. 

Investment

While we do see firms using services such as Finquest, SourceScrub and Valu8 to complement internal sourcing efforts, origination and execution are core competencies and will always be a primarily in-house activity for firms. What we are starting to see is that the best firms are using increasingly advanced reporting and analysis to track their pipelines, and as more tools are being leveraged, these reports are time-consuming to maintain.  

We see opportunity to leverage specialised resources to manage the creation and production of reports, plus work to ensure that underlying data is in a good state. Leveraging intelligent tools for passive data entry can also work to absorb new data and cleanse existing. 

Overall, it plays well for employee satisfaction, allowing for origination teams to do what they do best rather than getting bogged down with CRM data quality workflows.

Front office is also an area where we commonly see subpar implementation of CRM due to busy team underestimating the task of migrating data and managing implementation properly. We recommend using external resource to help manage such projects, and it’s important to understand that this is something which is required in addition to implementation offered by the vendor.

This also gives more time for GPs to focus on change management and business buy-in for a successful implementation rather than losing focus on the migration task that can easily be outsourced.

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Investors Relations and Fundraising

Like the Deals Team, we are seeing more firms outsourcing tasks in Investor Relations and Fundraising. Of course, the use of placement agents is a long-established strategy, but internally we are seeing a desire to create and maintain more sophisticated reports around activity like fundraising and re-ups progress, which is something that plays well for an external resource to build and maintain. 

In addition, the creation of LP reports and data validation which supports this is another task which can be outsourced once the GP has determined the correct format and process. 

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Middle office

While it is possible to entirely outsource the portfolio monitoring process to a third party, this is not a strategy which would be appropriate for most managers given the need for close interaction and oversight of portfolio companies. A hybrid approach is recommended, so GPs can maintain a personal touch e.g. managing communication themselves with companies. 

Where we do see potential for outsourcing is with elements of the process such as data collection, validation and ingestion. We also see firms successfully leveraging third party analyst support to aid with elements of the valuation process and for ESG data collection and reporting – a process which can be time consuming and challenging for portfolio managers to take on.  

As with front office, the point at which new software and technology is being introduced represents an excellent opportunity to leverage temporary additional resource from a third party to ensure success and minimise distraction for the core team.

Like any system change, we highly advise to invest in change management programme to maximise benefits of this new technology in the long run and consider training your team on the new system. Both of which can be outsourced.

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Fund Administration

Fund administration is, along with fund placement, the most outsourced activity. But there are other options here to employ third party resource to aid with tasks which would otherwise be conducted manually. Back-office activities in private capital firms face cyclical pressures, particularly during intense periods like quarterly reporting. Outsourcing offers a strategic solution, enabling managers to concentrate on core business functions without the need for additional, costly training for new hires. 

At the same time, we see many of our client investing in automation and efficiency backed by new technology, but managing its implementation can be put aside during peak work periods. On-demand supports then ensure that these operational activities are being done.  

In general, outsourced tasks are around data migration, financial and investor reporting, amendments to reports based on feedback, coordination and oversight of service providers. Then, recurring Business as Usual activities like invoice processing, support for system changes or implementations, and enhancing service levels with firm’s providers through procurement and management of software tools and compliance documentation. 

Lastly, one of the advantages of outsourcing in the back-office hinges on cost-efficiency, particularly when expenses can be recharged to the fund, not the manager, aligning with fund operations and offering a financially strategic win-win for CFOs. 

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Aligning Outsourcing with Strategic Operational Goals 

The changing landscape of private capital firms necessitates a strategic re-evaluation of operational models to enhance efficiency and scalability. By shifting some tasks from GPs workload to service providers, firms gain agility and tranquillity, ensuring a smoother operational flow and a more focused workforce. Planning is crucial; identifying tasks that can be outsourced, whether as one-off projects or recurring services, allows for a more streamlined approach to managing resources and priorities.  

This strategy is particularly effective in overcoming challenges such as hiring freezes, enabling core staff to concentrate on essential tasks without spreading resources too thinly across less critical activities. This approach ensures that your firm remains agile, focused, and prepared to leverage opportunities for growth and enhancement in the competitive landscape of private capital. 

Ultimately, embracing on-demand resources as a component of your operational strategy is not just about managing costs or workload—it’s an important step towards scaling your assets under management efficiently. 

Thinking of outsourcing cyclical work? We can help.  

At Holland Mountain, we have helped hundreds of Private Capital firms – both direct and fund of funds / secondaries – outsource operations to help them be more operationally efficient and get tricky projects completed. Get in touch with us to learn more about our services and how we can help you meet your operational objectives.

By Tim Friedman

March 7th, 2024

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