As increasing numbers of Private Capital fund managers look to benefit from outsourcing, Holland Mountain’s Jeremy Hocter takes a closer look at what’s behind the rising trend.
A change in mindset
In recent years, the Private Capital industry has seen a definite shift towards outsourcing. Fund managers that were once reluctant to handover aspects of their operations to outsourced service providers are now re-evaluating the potential benefits.
The speed of technological improvements and demand for the latest systems can lead even the larger private funds houses to look more favourably at outsourcing opportunities. The cost of keeping up with the latest back-office technology can be prohibitive, and the time and effort required to implement and fully embed a new system often ends up as an unwanted distraction.
Of course, outsourcing isn’t just about managing costs – a fund operations team that has delegated back-office tasks to an outsource partner will have more time to spend on value-add activities. There are also potential opportunities to improve agility and responsiveness. When a new piece of regulation is introduced, firms with a robust outsourcing arrangement can rely on their partner to provide technical guidance. Similarly, a GP looking to scale quickly will be better positioned to do so if there’s an outsourcing arrangement to take care of the increase in back-office processes.
The view from the investor
Fund managers that are growing their businesses know that it’s critical to provide high quality services to investors, to maintain competitive advantage. When selecting a GP, investors generally look favourably on outsourcing arrangements. From a due diligence perspective, the centres of excellence offered by a well-respected fund administrator often provide greater stability and capability than is possible in-house, as well as the option for value-add services such as investor portals.
One of the potential challenges of outsourcing is the additional layer of complexity created by having more people, systems, processes and data in the mix. As an example, when it comes to reporting, investors will expect the same quality of service and timeliness of response, regardless of whether fund administration activities are in-house or outsourced. In reality, ad hoc questions can be difficult to answer if the data needed is held by the administrator, rather than the GP. This leads to ‘shadow bookkeeping’ which erodes the potential efficiencies that could be realised through an outsourcing arrangement.
Alongside a rise in the number of GPs utilising an outsourced operations model, there’s also been a notable increase in the number of functions that are being considered for outsourcing plays, from IT services and HR, through to tax and ESG. Companies providing outsourced services benefit from the communal knowledge of having multiple clients, which helps them quickly develop and maintain a centre of excellence for their specialism.
What does this mean for data?
Firms that are considering outsourcing opportunities must be aware of the increased complexity and associated risks. Data and reporting should be an area of focus, as this will be a pivotal factor in the success of the outsourced arrangement. Firms must be sure to validate access to information and secure APIs if possible, to ensure a full data set can be extracted into the data platform or reporting solution. Access to good quality, real-time reporting is vital if you want to avoid shadow bookkeeping and unlock the full extent of benefits and efficiency on offer.
For fund managers that are planning large scale growth, more systems will lead to more data. Regardless of whether a GP chooses to outsource activity to a third-party provider, it’s critical to have a robust data strategy in place that will help to prevent data from becoming siloed. The ability to combine data from multiple systems, in-house and from the outsource provider, will help to transform reporting and unlock greater possibilities for analytics. However, there are specific challenges to obtaining data from different systems, often in different formats. These challenges are compounded by talent shortages, where key skills are in short supply. Securing specialist support to help overcome these obstacles will be essential.
Outsourcing as an opportunity
Outsourcing has made a transformative shift. No longer just a cost-reduction exercise, increasing numbers of GPs see outsourcing as an opportunity to support growth, stabilise operations and offer an enhanced investor experience.
There are clearly still further benefits for many firms to unlock, which will largely depend on having the right teams in place on both sides to ensure the success of the relationship. It will be vital to ensure that the GP can harness the data held across both sets of systems to reduce duplication and maximise the opportunities on offer. As efficiencies are realised, the GP should be prepared to refocus in-house talent on the core activities of the firm.
Whilst a handful of firms have already chosen to outsource as much as possible, most seem to be aiming towards ‘rightsourcing’, with an optimal balance of in-house and outsourced activities. As innovative new service providers enter the market, it seems likely that the trend towards outsourcing will continue.
Jeremy is a leading expert in Private Capital operations, technology and data. He has 20 years’ experience advising GPs and LPs on operational strategy & best practice, alongside delivering successful change management engagements. He has a wealth of experience working with all the major industry software vendors & service providers, and a detailed understanding of the capabilities & limitations of available solutions.