Choosing the optimal fund administration resourcing model is becoming increasingly critical within the private markets industry. Many General Partners (GPs) are looking to understand the benefits and drawbacks of the various approaches when it comes to fund administration and outsourcing. A trusted advisor like Lionpoint Group can help guide businesses to determine the most impactful and efficient solutions when it comes to these complex topics, the base of which has been outlined in this article.

Advantages of outsourcing:

Outsourcing fund administration has traditionally offered several benefits to fund managers. Some of these benefits include:

  1. Scalability – the ability to lean on the resourcing of a third-party fund administrator to scale up or scale down staffing depending on the volume of work or activity during a particular period provides GPs with the flexibility of not having to worry about internal resource constraints.
  2. Access to leading technology – private equity firms can leverage the best-in-class technology from their fund administrators without having to select, implement and maintain expensive technology solutions in-house.
  3. Industry best practices – because fund administrators have visibility across multiple PE businesses, they can offer advice and solutions on how to best handle complex functions and reporting requests. They may also offer subject matter expertise across a variety of technology solutions and complementary products.
  4. Regulatory compliance – Fund administrators are required to be abreast of all regulatory changes taking place in the industry. Working with an administrator with the right skills and resources to monitor and adapt to these changes can ensure that the fund manager remains compliant.
  5. Cost saving – in some cases, leveraging a third-party fund administrator can reduce the cost of administering the firm’s back office functions. Reduced internal headcount, lower technology licensing fees, and lower infrastructure costs are borne by the GP.

Drawbacks of outsourcing:

Limited access to data for internal stakeholders has long plagued outsourcing. Fund managers need to have data at their fingertips to respond to both internal and external reporting requests. This can be a challenge if the data is not readily available within your technology ecosystem. Firms that choose to outsource often must reach out to their admin and request that they email over a report or spreadsheet, leading to delays in responding to requests.

“Shadow” books to mirror and validate fund admin work has become a common approach when outsourcing. This provides GPs with an extra level of comfort in ensuring all work has been thoroughly reviewed internally before reports are issued to investors or regulators. Maintaining shadow books, however, comes at a heavy monetary cost and many see it as duplicative (but sometimes necessary) work. If you are employing an accounting team internally and mirroring all the accounting work anyway – what’s the point of paying for a fund admin? This approach may also require firms to license a software solution internally, in addition to paying the external fund administrator.

To reduce the amount of effort required for maintaining shadow books, firms should establish an automated data feed from a fund admin to their internal technology stack. This can be either an API-based approach to send data from the fund administrator’s platforms to the firm’s, or via a file-based approach. Historically, many of the key players in the fund accounting software space have had limited API functionality available within their products. Over the past year, the industry has seen a shift, and these technology providers are now beginning to make their APIs available to customers, while expanding their service offerings to include pre-built connectors with data warehouse tools such as Snowflake.

Is Co-Sourcing the right solution for you?

Lionpoint’s experts are seeing co-sourcing leveraged more prevalently in the private markets space. With a co-sourcing model, the GP licenses the technology software directly, but the fund administrator logs into the GP’s software solution(s) and handles the back-office responsibilities and day-to-day operations. This gives the GP real-time access to their data, while still being able to leverage the fund administrator’s resources for key operational processes, such as booking journal entries, running cash reconciliations and reporting. It also allows the GP to maintain a lean back-office team, limiting the headcount requirement for the finance and accounting functions. A proper accounting staff is still required to perform reviews and handle any services not offered by an administrator, as the fund manager is ultimately the party responsible for the data.

The co-sourcing model also allows all parties to be working from a single source of truth – one technology software solution where everyone is accessing and maintaining the data. There is no need to reconcile systems, as is required by the “shadow” accounting model. Private equity firms are increasingly investing in in-house technology stacks to enhance core functions such as investor onboarding, CRM, portfolio monitoring, fund accounting, and investor portal. As firms seek to streamline operations and create a scalable operating environment, the ability to seamlessly integrate all platforms within their ecosystem has become a critical success factor. The co-sourcing model enables a fund manager to establish a fully-integrated technology infrastructure by keeping the software solutions in-house. Data can then be exposed to internal and external stakeholders leveraging data visualization tools such as PowerBI and Tableau.

When asked about why a fund manager might decide to use a co-sourced model, Elaine Chim, Head of Closed Products at Apex Group explained “It could be because the fund manager has historically relied on their own technology, which they are satisfied with and have already integrated these into all of their systems for processesing and reporting . However, they do acknowledge that the workload required to administer their funds is significant. Therefore, they are not as efficient as they can be, and can’t scale as quickly as they’d like. So they actually require a partner to help them realize all the benefits of the outsourcing model, while retaining control of their books and data that are linked to their core systems.”

Chim went on to mention, “with co-sourcing, GPs can reap some of the benefits of an outsourcing model by leveraging the fund administrator to perform certain tasks that an outsourcing model typically provides, such as the ability to scale, access to technology expertise, and access to talent.”

One factor to be aware of when employing a co-sourcing model, is that firms may end up in a position where multiple parties (internal team and the fund admin) are logging into the same platform(s) to perform their daily tasks. If certain funds are handled internally versus externally, organizations must ensure there is a clear division of responsibilities and systematic controls are put in place to avoid overlap. In this situation, data may need to be siloed off within the software solutions to only allow the admin “write” access to the funds or entities which they are responsible for. Many software providers offer functionality to accommodate this setup, but making sure proper due diligence is done during the administrator selection process is critical.

Benefits of co-sourcing for Fund administrators:

Some administrators have not been particularly open to the idea of offering a co-sourced model. Having to log into separate systems for each of their GP clients may make standardizing and scaling their processes a bit more challenging.  For those who have embraced it, offering their clients the option of a co-sourcing model can and has been a differentiator when establishing a well-rounded, go-to-market strategy. For GPs who may have been hesitant to outsource, providing the option of a co-sourced fund administration arrangement can help change their thought process and open up an entirely new pipeline of fund managers who may not have considered outsourcing.

When asked about Apex Group’s stance on co-sourcing, Chim said, “We see things as a collective partnership and not only do we want to do it, but we are actively doing it for a number of clients across multiple systems globally. We have use cases for Yardi, eFront and others where we are already implementing co-sourcing. It’s becoming standard practice for us.”

“One of the biggest reasons is that we find there is so much value since we have subject matter experts on our team across all of these technology solutions. Additionally, we have access to different types of clients who use this technology. We’ve also found that some GPs who may be hesitant to give up control will initially limit our scope to a small subset of funds. However, once they see the level of service we can deliver, they are willing to broaden our scope to include additional funds. ”

Next Steps

In order to choose the optimal fund administration resource model, organizations should seek out a trusted advisor like Lionpoint Group to help guide them. Our consultants bring extensive experience in the private markets sector, specifically in making sound in-source vs outsource decisions, identifying suitable fund administration partners, and pairing investment managers with new technology solutions. As a first step to get in touch, please fill out the form below:

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