But as private equity firms grow, they may need to consider outsourcing to expand their capabilities, maximise operational efficiencies and access skilled expertise they may lack in-house. Outsourcing funds administration, in particular, may give firms the ability to realise all these benefits and devote more time to what they do best — finding and closing deals that provide investors with the highest possible return.
But how will a firm know when it's the right time to onboard a fund administrator? There's no one-size-fits-all rule to outsourcing and the timing and approach will depend on a number of factors, including the firm’s resources, the fund’s jurisdiction and related compliance requirements. Firms can, however, assess several key areas to decide whether it's time to bring on a fund administrator. Here are four key considerations firms should weigh.
Consideration 1: Reporting and compliance demands
If a fund is facing increased demands for transparency from limited partners or is moving from smaller and HNWI investors to often larger, institutional investors, then it may be time to consider outsourcing.
Institutional investors generally require well-known, widely used fund administrators. In addition, they may demand certain certifications related to IT and other controls, such as service organisation controls (SOC) reports, Global Investment Performance Standards (GIPS) 2020 and ILPA Institutional Limited Partners Association (ILPA) 3.0. Limited partners also may require additional or more intensive reporting to mitigate their risks. Additionally, investors may want information on environmental, social and governance (ESG) risks and the assurance that private equity managers are investing their money into socially responsible investments (SRIs).
When considering reporting and compliance, a firm should also consider separating a fund's front- and back-office functions, which can be an effective risk management strategy. Doing so can extend a firm’s capacity to meet complicated and evolving reporting and compliance requirements, both from regulators and investors.
Consideration 2: Expansion plans
High-performing private equity firms are experts in raising and deploying capital and making strong returns. Going global and going big is frequently the goal. However, these aspirations come with the many regulatory and legislative demands that come with operating in various markets.
As a fund expands into numerous jurisdictions, it may experience challenges such as intensive bureaucracy and a lack of knowledge concerning local rules and regulations. A fund administrator likely will know about various global markets because they've probably shepherded other firms through the same process. As a firm grows, however, it may encounter knowledge and resource gaps and may not be able to handle every facet of its operations. Expanding into new markets is one area where onboarding a fund administrator can be valuable.
Consideration 3: HR resources
Most firms experience growing pains as they hire more staff, begin working with institutional investors, and deal with more regulatory and structural complexities.
At a certain point, doing everything in-house may no longer be the most cost-effective or efficient option. It can also be risky if compliance obligations fall through the cracks due to a lack of in-house knowledge or resources.
A fund may require more expertise that may take too long or be too costly to hire, so outsourcing may be the best option to help firms expand their capabilities as quickly as possible and meet heightened demands from investors and regulators. In today’s unpredictable labour market, using third-party personnel can ensure consistency in the event of turnover and ensure that no expertise is lost. Using an external fund administrator also may provide the fund with additional credibility based on the administrator’s reputation.
Consideration 4: Technology
Data-driven automation and decision-making have become vital in so many industries, especially private equity.
However, many funds still rely on spreadsheets, standard general ledger software and outmoded manual processes. Onboarding a fund administrator can enable firms to access technology platforms that automate and bring more transparency to their processes and allow them to scale their use of data. A fund administrator can provide holistic solutions and services that not only help firms navigate evolving operational challenges but become better data stewards to satisfy investors' calls for greater transparency, operational visibility and robust risk mitigation. Often, better technology also puts a firm in a better position to meet the demands of regulators.
Deciding to outsource
While outsourcing may not be the right step for every fund, looking outward rather than inward can help many growing firms expand their capabilities while effectively managing risks. Outsourcing funds administration and working with an experienced administrator can allow firms to cost-efficiently get the expertise they need, tackle regulatory challenges more effectively and keep investors happy. All of which will enable them to invest more time and energy into their core business and shift their focus from back-office operations to deals that give investors a solid return on their invested capital. For fund managers, carefully evaluating these four areas can help you decide the best approach for your fund.
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The contents of this article are intended for informational purposes only. The article should not be relied on as legal or other professional advice. Neither Vistra Group Holding S.A. nor any of its group companies, subsidiaries or affiliates accept responsibility for any loss occasioned by actions taken or refrained from as a result of reading or otherwise consuming this article. For details, read our Legal and Regulatory notice at: http://www.vistra.com/notices . Copyright © 2022 by Vistra Group Holdings SA. All Rights Reserved.
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