Outsourcing fund administration, also known as the “outsourcing imperative”, is a big decision for fund managers, yet internal and external factors continue to drive the increase in adopting third-party administration among funds of all sizes in recent years. Many managers have begun to realise that self-administrating and doing everything in-house can be a misuse of precious resources.
If you’re going move to a third-party fund administration solution, how do you do so securely, and how do you do so cost-effectively? Because in fact, it should be possible to outsource fund administration in a way that frees your bandwidth, boost investors’ satisfaction, and actually lowers your operating expenses — but the steps needed to get there aren’t always obvious.
So, what are the benefits of outsourcing? Wouter Plantenga, ICS Head of Group Client Services, shares the top seven benefits managers need to take into consideration:
- Reduced risk: Reducing risk is one of the biggest benefits of outsourcing, whether it relates to people, processes or regulatory compliance. Deploying a successful outsourcing model will give you the safeguards to mitigate and reduce risk.
- Systems: Investors are demanding more transparency, and many want to know which systems are being used. Spreadsheets are no longer sufficient; specialised accounting systems have become truly essential in our industry. But specialised systems can be very expensive, not only due to vendor cost, but also to support, maintenance and training. The cost can easily outweigh the benefit of buying the administration technology yourself. However, administrators are able to handle these technology platforms at scale — at a minimum. It is better to find an administrator that doesn’t use off-the-shelf technology at all, but one who has developed their own purpose-built solutions.
- People: Some work is cyclical, so it is difficult to staff during peak demand periods. And given staff turnover, you are continually training people. Third-party administration can offer overflow resources when your in-house staff and managers have limited or no capacity.
- Cost: Outsourced solutions are often regarded as expensive, but when you compare the cost versus doing the work in house, there are frequently cost factors that are either a) underestimated or b) not even taken into account. For instance, your working environment, office space, infrastructure, IT, human resources, recruitment, training, management time… it all adds to the cost of being self-administered. The discussion around this being a fund expense versus a management company expense is highly relevant, especially in a time where limited partners are putting pressure on margins and fees.
- Independence: General Partners’ returns are based on calculations of iRR®. Is it not a conflict of interest if these calculations are also performed by the GP? Having an administrator perform these calculations provides investors with an assurance that there is no undue influence.
- Specialisation: GPs’ talents lie in doing deals, raising capital and making prudent investments…not necessarily in overseeing accounting administration functions. Working with a fund administrator gives you access to people who have specialised expertise in the space.
- Stability: As you grow, you are going to launch new funds. By working with an administrator, you don’t need to worry about scaling your back office.
For more information on outsourcing fund administration download our white paper below.
And to find out how JTC can help you with any outsourcing requirements please contact Wouter directly.