Vistra Insights

Operational outsourcing: Providing resilience and security in a time of crisis

In early 2020, we published an article explaining how operational outsourcing can take care of the administrative and compliance requirements of an alternative fund manager so they can focus on generating returns.

While the benefits of such an approach were well-established, we never imagined what the next 12 months would bring. In retrospect, the pandemic has provided a clear demonstration of just how critical outsourcing can be.

The benefits of outsourcing amplified

As the pandemic hit on a global scale, fund managers were forced to adapt to unprecedented ways of operating. The two most immediate challenges were transitioning to remote working and ensuring deal valuations and investor reporting obligations were met in a timely manner. 

For many — particularly small and mid-sized shops with lean teams — remote working proved extremely difficult. Work had to be done in the absence of a dedicated IT function or a robust information security environment that guaranteed investor information was protected. 

Fund managers who had in-house operational teams faced numerous difficulties. For example, they had to quickly arrange for their finance and accounting teams to work remotely and securely, while at the same time addressing valuation challenges. This resulted in some delays in finalizing the net asset values of their respective funds for the first quarter of 2020, and in meeting investor-reporting obligations as prescribed by the funds’ legal documents.

Delays to investor reporting obligations also created a reputational risk, which could have far-reaching ramifications. Investors may have been willing to give fund managers some leeway under the exceptional circumstances, but when the next round of fundraising takes place, they may be far more cautious about putting down commitments. They will likely demand a much more robust and reliable back-end framework to be in place to deal with any future “black swan” events such as Covid-19.

Critically, with all the pandemic’s turmoil, many fund managers were in “firefighting” mode and unable to focus on their primary function of deal making.

While these challenges could never have been predicted, it is worth viewing them through an operational outsourcing lens.

Consider again the transition to remote working. Those fund managers without dedicated IT support or a reputable third-party fund administrator were less likely to be able to quickly and securely move their back-end operations to a remote model. Those managers who had outsourced IT and fund administration, by contrast, found themselves in the enviable position of having existing providers with the systems, expertise and technology to quickly and securely shift to remote working. 

(As a third-party provider ourselves, Vistra was able to transition its own workforce of nearly 5,000 employees in over 45 jurisdictions to a secure remote working arrangement within less than a week. In addition, we have a secure, SOC 1/ISAE 3402 certified information security and control environment, and all client work is done in the cloud.)

Furthermore, fund managers with in-house operations and technology had to handle both the front and back end of operations. Those who outsourced, on the other hand, could give their full attention to addressing valuation challenges, and hand over the back-end fund accounting and investor reporting to their third-party service providers. This ensured all investor-reporting obligations were met in a timely manner. 

Needless to say, those who had outsourced both technology and administration were able to move more seamlessly to the “new normal.”

Canada: Firms poised to adopt outsourcing

A year on from the pandemic, it’s likely that all fund managers have caught up with their quarterly reporting obligations. But in the first six months, those who weren’t outsourcing would have faced a multitude of challenges to just remain operational.

These lessons are perhaps particularly relevant in Canada. Despite an initial downturn at the start of the pandemic, the Canadian private equity (PE) and venture capital (VC) markets looked in pretty good health. The PE market may have had a relatively poor year across the whole 12 months, yet the fourth quarter of 2020 had the highest number of deals than any other quarter in the past five years. 

And VC activity during 2020 stood up exceptionally well, seeing the second-highest level of annual VC investments in Canada based on existing records, with CAD4.5 billion across 510 deals according to the Canadian Venture Capital and Private Equity Association (CVCA). All of this demonstrates that there are deals to be done and opportunities that shouldn’t be missed because of operational or technical shortfalls. 

The reality is that the world we work in has changed. The shift to more remote and flexible working is likely to remain. As a result, fund managers must have robust technology and a back-end operating framework in place. 

Furthermore, the pandemic has forced business leaders, investors and fund managers to become increasingly cost-conscious. This strategic shift, along with the need for secure and nimble technology and back-end operations, has driven the demand for outsourcing more than ever before in Canada and beyond.

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