In recent years, many private equity and venture fund managers have explored ways to increase adaptability and enhance operational productivity within their management company operations. Forward-looking firms have recognized that fund growth leads to increased operational volume, complexity, and operating expenses.
More and more fund managers are looking to third-party service providers to outsource their management company responsibilities for full scope or ad hoc support. By outsourcing all or some of their operations, fund managers significantly benefit from increased in-house capacity and productivity and see long-term adaptability throughout the life of the fund.
At Ultimus LeverPoint, our team can customize a fund’s management company needs to achieve operational objectives and priorities best. With a consultative approach, we work closely with private equity and venture CFOs, controllers, and general partners to discuss the various aspects and benefits of outsourcing that can bolster growth initiatives.
Understanding the Management Company Structure
A fund’s management company, also known as the fund manager or asset manager, embodies the firm itself and employs the investment and financial professionals responsible for allocating capital and managing the fund’s investments. The fund manager is commonly affiliated with the general partner but is not the same entity.
The general partner will enter into a management agreement with the management company. Under this agreement, the fund pays the management fees to employ the investment team, evaluate opportunities, manage the portfolio, and manage all day-to-day operations. This common private equity structure allows the management company to work across multiple funds while having a general partner for each fund.
While asset management companies are tasked with keeping the investment management business running, fund managers may want to think proactively about how a looming growth spurt will impact the management company’s ability to control its operational needs adequately. Forward-looking firms in this situation may recognize that more or larger funds bring increased operational volume and complexity, along with extra operating expenses. While this may be considered a “quality” problem, it is, nonetheless, worth weighing the operational aspects and the beneficial outsourcing options that can help with growth.
Key Responsibilities of Fund Management Companies
Management companies are tasked with keeping the firm running. As such, managers may want to think proactively about how their growth will impact the management company’s ability to sufficiently control its operational needs.
The responsibilities of a management company are broad and typically include:
- Hire and pay employees
- Engage vendors, oversee the relationships, and pay expenses
- Bill portfolio companies
- Track and monitor account receivable
- Handle regulatory reporting obligations
- Pay ongoing operating expenses
- Oversee the fund and fund-related expenses
Benefits of Outsourcing
Outsourcing reduces the resources needed to support an in-house accounting team and allows fund managers to focus on their core business. Management companies can opportunistically engage a service provider to handle day-to-day non-fund accounting functions. Service providers deliver flexibility by offering a full scope of support or ad hoc services. For example, providers can:
- Maintain the general ledger
- Process account payables, accounts receivable, travel and expenses
- Prepare journal entries
- Bill portfolio companies
- Process payroll
- Provide weekly cash reporting and monthly bank reconciliations
- Prepare financial statements
- Provide an independent review of all outgoing payments
- Perform vendor callback verification and maintenance
- Allocate expenses
- Prepare and file 1099 reports
At Ultimus LeverPoint, we’ve seen fund managers benefit in significant ways by outsourcing all or some of their management company operations. Your firm size, fund complexity, and level of in-house resources will drive your specific requirements.
Staffing Benefits for General Partners
- Reduced resources needed to support an in-house accounting team
- Ability to scale quickly and effectively
- Access to skilled, qualified accountants familiar with the private markets industry
- Redirected focus on core competencies rather than accounting
Process Benefits for General Partners
- Immediate access to operational best practices and established standard operating procedures
- Burnished reputation through using an SOC1-compliant provider
- Independent Treasury review for all cash movements
- Ability to obtain synergies by outsourcing management company administration and fund administration to the same entity
- Enhanced communication, transparency, and efficiencies between accounting teams
- Ability to perform management fee reconciliations, discuss fund-level activities and offer a secondary level of review of expense allocations to the various funds and investments
- Reduced involvement from fund managers
- More accurate accounting records on both the fund and management company
Technology Benefits for General Partners
- Immediate access to best-in-class technology plus streamlined, automated processes
- Access to multiple accounting platforms (depending on the provider), such as QuickBooks or NetSuite
- Access to accounts payable processing software to minimize human error risk
Models for Outsourcing
As with most things, one size does not fit all. A management company’s size, complexity and in-house resources influence the optimal outsourcing model, from co-sourcing to partial outsourcing to full outsourcing.
Co-source – With the co-sourcing model, service providers work within the management company’s infrastructure, using their technology, processes, and procedures. The important benefit: alleviating or postponing the manager’s need to hire additional employees.
Partial outsource – Management companies can choose specific tasks to outsource. For instance, outsourcing payroll adds a layer of confidentiality by limiting visibility of firm compensation. Outsourcing simultaneously reduces the workload on in-house resources.
Full outsource – Management companies can choose a turn-key solution to outsource the full range of operational responsibilities to an external provider. The firms benefit from proven expertise and technology supported by a rigorous control environment.
To learn more about the benefits of outsourcing your management company functions, consult a trusted service provider. At Ultimus LeverPoint, we perform management company services for nearly 60 clients, offering a full suite of customizable solutions for all needs. Our team collaborates with private equity CFOs, controllers, and general partners to implement the best operating model for each firm to ensure their specific objectives and priorities are addressed.
We’d be delighted to discuss your needs and help determine the best outsourcing model for you to achieve the most benefits.
ULP 16796583 – 04/26/2023