The benefits of outsourcing fund administration

What was once a relatively straightforward outsourcing of fund accounting has now become a more complex and tailored delegation of operational expertise that requires savvy professionals and sophisticated IT platforms. While hedge funds were early adopters of outsourcing, private equity managers are turning to outsourcing to increase efficiency, gain access to top tools and focus on other aspects of their business.

Today, outsourcing is a globally accepted and growing practice in private equity. According to Marc-Oliver Knobloch, head of commercial at Vistra Germany, an increase in regulation and a tight labour market are contributing factors to the outsourcing trend. The growing complexity in reporting and regulatory requirements makes administration in-house more and more expensive, Knobloch notes. “Finding qualified back office staff like tax accountants and compliance experts can be challenging in the current labour market,” says Knobloch. “Outsourcing takes care of that work, allowing fund managers to focus on the core competencies of the business, like fundraising and investing.”

Scott Kraemer, managing director of alternative investments at Vistra, sees the rise of outsourcing as a response to continued fee pressure. “General partners and fund managers are under more and more immense pressure to reduce operating costs,” Kraemer observes. “Fund administrators can help reduce the costs of infrastructure while accessing top-of-the-line systems.” 

Outsourcing: A broadly accepted solution

Industry data indicates that private equity professionals are increasingly turning to outsourcing as a solution to resource challenges. Research from Vistra found that more than 50 percent of the GPs interviewed outsource some of their administration to third-party providers, and nearly 40 percent of those expect to outsource more functions in the future. They also note that outsourcing fund administration “helps [them] access specialist skills and is more efficient, especially for those with a global footprint.”

According to Kraemer, emerging-fund managers are particularly interested in outsourcing funds administration. Many new smaller funds are coming to market, he says, and outsourcing the setup, operations and tech support ensure a quick and easy launch. “In the US, many asset managers have begun moving across fund types, for instance going from a standard hedge fund to a fully closed-ended private equity fund,” says Kraemer. “That’s when having a partner to manage the infrastructure becomes really valuable.”

However, some managers still prefer to handle fund administration in-house. Of the GPs resistant to outsourcing, they list “cybersecurity concerns, a lack of flexibility, increases in fees by administrators in some jurisdictions, staff turnover, and the fear of trusting an external provider” as the reasons for not outsourcing.

Knobloch notes that outsourcing is not one-size-fits-all. “It really depends on the fund,” he says. “It often comes down to a ‘can’ versus ‘should.’ Fund administration can be done in house, but is that the best use of resources? Does it leave enough time to focus on the business itself?”

Deciding when to outsource

There are a few considerations that can help you decide if outsourcing is the right approach for a fund. One factor is size. Once a PE firm is managing a number of funds across many jurisdictions — and must shoulder all the compliance and other administrative burdens that entails — it’s usually time to look for a third-party administrator. According to Gretchen Perkins, Partner at Huron Capital, running a large private equity firm is “an administratively intensive practice.” As firms increase in size and number, talent becomes a precious commodity. Kraemer agrees, adding that outsourcing can reduce training needs and simplify staff transitions when employees depart.

Often, Perkins says, a private equity firm will outsource administration simply due to a lack of manpower, especially when it might need the resources for more important functions. Investor demand for independence and institutional-level infrastructure are also motivating factors. Plus, Perkins acknowledges that LPs do appreciate what a third party brings to the fund by keeping the books and records at arm’s length.

Another consideration is access to technology. While many fund managers still rely on spreadsheets, using an external fund administrator can defray costs of more advanced software. Knobloch says, “fund administrators offer state-of-the-art tools like Investran and Vistra’s own VFunds, which creates more professional reporting than a tool like Excel.” And with more investors requiring customised portfolio statements, having tools with drill-down access and online dashboards to enable complex data management can be very valuable.

It’s important to carefully consider all angles when making the decision to outsource fund administration. Fund managers should think critically about what functions they might want to keep in-house, and which ones make sense to outsource. Of course, fund managers should examine the third-party administrator’s policies, technology and values to ensure alignment. 

Whether due to increased regulation, cost concerns or growing needs of investors, it’s clear that outsourcing fund administration is a trend that’s here to stay.