A fund will always be judged on the returns it generates and, therefore, the actions and decisions of the deal team. But however fundamental their role may be, they can’t do it alone.
They might not boast the glamour that grabs the headlines, but the team responsible for the day-to-day administration and operation of the fund have a fundamental part to play in its success. And, increasingly, we are seeing more and more managers entrust this role to a specialist administrator.
In this Q&A, our Group Head of Private Equity, Alan Ross, explores the reasons behind this trend and the various factors driving the rise of outsourced fund administration.
What does outsourcing entail?
Professional administrators are generally set up to provide all the services needed to establish and operate a fund; examples of which include fund launch activities, financial reporting, depositary services, transfer agency, and company secretarial and administration support.
Some managers will want a comprehensive outsourcing arrangement covering most of these services, whereas others can be more selective. That said, it’s not uncommon to see managers testing the waters first, before expanding the scope of their outsourcing demands once they are more comfortable with the outsourcing concept, or their administrator has sufficiently proven themselves.
What drives the decision to outsource?
There are common triggers that kick-start the process, such as new resourcing or systems requirements, governance challenges and investor preferences, but, broadly speaking, it is a case of the manager recognising the scale of the investment required to build and maintain an administration platform.
Overall, the decision to outsource should be a carefully thought-out, strategic one, based on factors such as access to specialist expertise and infrastructure, convenience, and economies of scale.
What expertise can you expect from a specialist administrator?
I would put this into two buckets. The first one being the expertise you get on the front line – i.e. that of managing the relationship and performing the core tasks vital to the operation of the fund. This would typically consist of fund accountants who manage financial reporting and other accounting requirements, company secretaries who manage the day-to-day administration of the fund, and compliance professionals who ensure all legal and regulatory obligations are met.
Then you have the team behind the team, spanning specialist fields such as information security, legal, risk, financial systems, IT infrastructure and regulatory reporting. In the same way a deal team can’t function without a solid administration team, the administration team can’t function without these experts. Complementary, but critical, you could say.
What about the cost of outsourcing relative to doing your administration in-house?
There seems to be a misinformed perception within the industry that outsourcing comes at a premium. The reality, however, is quite different. Hiring permanent staff involves recruiting, training, developing and housing a team, all of which bring considerable costs. With outsourcing, however, the cost is absorbed and shared across a client base.
The same principle applies to systems and technology. Outsourcing fund administration eliminates the need to own the advanced platforms required to administer funds, as well as the high upfront costs of set-up, configuration, and ongoing maintenance.
Additionally, as investor bases become more institutional themselves, they’re beginning to expect that a third-party administrator will be used to provide arms-length controls over the fund operations. As a result, they’re willing to bear that cost through the fund itself – so usually the cost is ultimately borne by the investors outside of any management fee.
How has fund administration changed in recent years?
The obvious one is the legal and regulatory landscape – it’s almost unrecognisable from several years ago. We’ve had AIFMD, FATCA, CRS and BEPs in addition to a myriad of local compliance requirements imposed on the industry. It’s become a far more complex field that takes specialist resource to manage.
The digital revolution has also had an enormous impact – for those who have chosen to embrace it – on all areas of activity, from financial reporting and managing investor relationships to company secretarial practice. It really has brought a new dimension to fund administration, helping to streamline activities, enhance controls and improve information security.
Staying on the subject of information security, this is without question one of the main areas administrators have had to make significant investment in, and not just from an IT standpoint. It’s no secret that cybercrime is on the rise, with failure to manage the threats and mitigate the risks making financial and reputational damage a real possibility. Robust policies, controls, access restrictions and comprehensive training for staff are all imperative, as is the employment of specialist IT security professionals.
What should managers look out for when choosing an outsourcing partner?
First and foremost: a solid reputation. Look at their track record – if the administrator is retaining clients while continuing to attract new ones, it’s obviously a good sign. Better still, don’t be afraid to ask other managers or the administrator for references – positive or negative, individual feedback is extremely insightful.
Casting an eye over their client base is also a smart move. If they’ve supported managers of a similar size, structure and investment profile to yours, they’ll have that all-important relevant experience to draw on.
Organisational stability is something that is often overlooked, but frequent M&A activity, particularly when an overhaul of company structure, leadership and service model follows, can really impact client experience.
Also, take the time to understand how you will be serviced day-to-day. Can you expect to work with a consistent team of familiar faces or along the lines of a classic functional model, where requirements are dealt with by departments? What’s more, an administrator may claim to offer a dedicated relationship team, but is it a stable team? Employee turnover rates will give you a good idea.
Then there is the point of governance. Review audit reports and look out for key accreditations and certifications, such as ISAE 3402 and ISO 27001 – there’s nothing more important than an independent assessment of the administrator’s risk management and control environment.
While these are the main things to look for, expertise in the right areas, investment in technology, employee development, company culture and client to staff ratios are just some other important points to consider.
Finally, what can you do to ensure an outsourcing relationship gets off to the best start?
Outsourcing is a big move, and it’s easy to see why it can be a cause of apprehension for managers. The migration really sets the tone for the relationship and by ensuring the process is well thought out, managers will go into the arrangement with a lot more confidence. A detailed plan with timelines, action points and resourcing, backed up with regular meetings and status calls, is an absolute must.