At an industry panel, private equity veterans cautioned that gaining a competitive edge from outsourcing requires understanding which functions to outsource, identifying the right partners, and effectively managing these relationships.
For growing funds seeking technological optimization and lacking infrastructure, the decision to outsource fund administration and back-office functions is significant. Failure to plan ahead can hinder growth, and even larger funds are recognizing the benefits of outsourcing specialized services.
Outsourcing is now understood as a way to achieve greater efficiency in select functions. The challenge lies in identifying each fund’s needs and maximizing the value outsourcing can add in those areas. This topic was explored at the 4th Annual LPGP Connect CFO/COO Private Equity Conference in New York on November 19th, 2024, during a panel titled “Outsourcing – The Icing on the Cake or More Workload?” moderated by JTC’s Michael Richards. The panel, which featured many experienced private equity professionals, shed light on the current industry stance on outsourcing and how it fits into a fund’s strategy.
Enhancing efficiency through outsourcing
Richards first asked the panel whether outsourcing and technology can make business processes more streamlined, or if they simply serve to fill gaps where a manager lacks certain capabilities.
The consensus among the panel was that outsourcing, when done with the right partner, the right people, and the right technology, can significantly enhance efficiency. The success of outsourcing largely depends on its fit with the size and complexity of the organization, and the importance of finding a partner who is going to be an extension of the managers’ team.
While outsourcing leverages third-party expertise and technology, the ultimate responsibility for these functions remains with the manager. Whether it is fund administration, valuation services, HR, or payroll, the manager still holds accountability as they outsource the work, not the responsibility.
The panelists also cautioned that outsourcing does not mean relinquishing responsibility but rather taking advantage of specialized expertise. Having third-party experts and dedicated teams can be highly beneficial and more cost-effective compared to building these capabilities in-house.
Fund administrators, with their established processes, procedures, and advanced technology, are often able to handle tasks such as capital calls far more efficiently than an internal team could. Their extensive experience and robust control measures typically result in fewer errors and greater productivity.
Determining functions to outsource
When asked which functions they outsource (or have outsourced), the panelists offered a wide array of answers, showing that there is no single correct way to do things. The panelists also emphasized that managers are increasingly looking outside their organizations even for high-level functions.
For instance, some companies maintain an in-house Chief Compliance Officer while also engaging consultants for regular reviews. Commonly outsourced functions include fund administration, HR, payroll, tax services, and valuation.
Valuation, in particular, was highlighted as complex, requiring retaining ultimate accountability despite outsourcing, as it helps to employ experts whose credibility and reputation are at stake. As institutional LP bases grow, there is a trend towards outsourcing valuations to meet expectations.
It was mentioned that it is crucial not to over-rely on vendors, maintaining the responsibility to verify all outsourced work. The panelists also advised thoroughly checking the reputation of all vendors before hiring them.
Choosing the right outsourcing partner
How to go about choosing the right partner to work with can be tricky. What questions should you ask a prospective fund administrator? The experts on the panel emphasized the importance of preparing questions in advance of meeting the prospective fund administrator.
Richards highlighted the need to “meet the team that you are going to be working with,” who added that it is important to test the capabilities of a fund administrator, so you don’t have to switch down the road.
“Making sure, when you’re looking at that fund administrator, not only can they service you here in the US, but can they handle you in Cayman? Can they go to Europe?” said Richards. “You might not want one of the larger firms, but you want that same level of professional, institutional service.”
Evolving relationships over time
The panel highlighted the importance of viewing the fund administration team as an extension of the accounting team, with continuous communication being key to a successful relationship. Richards emphasized the necessity of service-level agreements (SLAs) and the importance of flexibility to adapt to evolving needs.
Richards also advised post-audit season reviews with fund administrators, audit firms, and internal ops teams to refine processes continuously is key. Especially when having check-ins to look for opportunities on both sides for areas to build improvements into the process for the next year.
In summary, effective outsourcing in private equity requires critical decision-making on what to outsource, meticulous selection of partners, and robust management of these relationships to ensure efficiency and growth.
To learn more about JTC’s third-party fund administration solution for private equity, click here or contact Michael directly.
You can also download our ‘Outsourcing Fund Administration: A Roadmap For Success’ White Paper here:
