In June 2022, operational leaders of the U.S. hedge fund sector gathered for the HFM Billion Dollar Leaders Summit to discuss the direction of the industry. Ultimus LeverPoint’s Frank Anduiza, Executive Vice President and Head of Private Fund Sales, led a panel session entitled, “Outsourcing—the way forward?” With the topic posed as a question, not a statement, the panel examined the current and future states for outsourcing key back-office functions. We share some of their insights here, broadening the aperture to all private funds.
The panelists, which included individuals from operations, compliance, legal and business development backgrounds, represented distinct segments of the fund industry, thereby providing a cross-section of perspectives.
The Drivers of Outsourcing are Personal to Each Fund Manager
Outsourcing has been a staple of the financial services industry for years. Limited Partners have grown comfortable with the outsourcing model for funds’ operational functions, including—albeit more recently—the Chief Financial Officer and Chief Compliance Officer roles. General Partners (GP) who began outsourcing in their nascent stages continue to find the flexibility of the approach beneficial as they scale.
The panelists noted that each GP makes the determination to outsource based on their firms’ unique needs and situations. They referenced the most common reasons:
Retain the option to scale up or down. Fund managers who outsource can quickly add or reduce services as assets under management fluctuate. Sudden growth, changes in fund complexities, and the desire to attract institutional investors can all drive the need to hire staff at a direct expense to the firm when the fund’s back-office work is being done in-house. Choosing the right strategic partner for outsourcing fund administration provides a relationship that grows and flexes with a fund manager’s needs. Fund Administrators who serve as an extension of the fund manager’s team become a valued contributor to the business plan. Outsourcing links the cost of services to the scale of work. Many GPs consider outsourcing a de-risking strategy for fixed overhead staffing expenses.
Choose the right mix of resources at the right time. GPs balance the costs of technology, human capital, and outsourcing as they build their operational infrastructure. The “right mix” varies over time based on a number of variables, including the firm’s lifecycle stage, assets under management, and preference for fixed versus variable costs, to name a few.
Replace rote work with value-added activities. Back-office tasks are often repetitive, and the function itself is often perceived as a cost center by fund managers. By outsourcing rote back-office functions, which can be automated by a tech-enabled fund administrator, in-house staff can perform higher value, impactful tasks, benefitting them, the investors and the firm. GPs become more efficient with business processes, mitigating common risks which enables in-house staff to focus on core competencies while providing their investors a level of comfort that comes from third-party independence.
Reduce the number of people to manage. Managing people can be challenging and time-consuming. Does the GP envision higher uses for its managers’ time? If so, outsourcing is a satisfying answer. An experienced fund administrator’s business model relies on managing a variety of dedicated service teams, so managing resources is a natural core tenant, providing GPs with more time to focus on developing investor relationships and investment strategies.
Reduce time spent on hiring, training and retaining staff. Retention of back-office staff has always been difficult but was made more so by the pandemic’s “great resignation.” The ongoing cycle of hiring and training staff can be distracting for fund managers; losing one key operations person can be devastating. Most fund administrators, on the other hand, have a deep bench and can withstand the vagaries of staffing. With standardized onboarding and training, administrators are better equipped to maintain service levels for clients.
While outsourcing proffers numerous benefits, the panel members reminded fund managers of cautionary factors.
Outsource, but ensure internal accountability. Outsourcing should never fully replace internal staffing. GPs require leaders who will monitor and provide oversight for the outsourced work. What are the deliverables and timing of those deliverables?
Outsource, but select a true partner. Determine if the fund administrator’s culture aligns with yours. Will the administrator act as an extension of your staff and business? Will your firm be important to the administrator, or will you be lost in the crowd? Will your dedicated team work well alongside your internal staff?
Outsource, but diligently evaluate the technology. Both GPs and LPs are clamoring for the customization of fund reports. Gauge whether the service provider’s technology can satisfy your data and automation requirements. Ask for technology demos, dashboard views for both the GPs and LPs, and sample reports and deliverables that will go to your limited partners. A tech-enabled service provider will have cloud and data and API strategies that provide GPs and LPs tools for onboarding, customization, and data analytics, bringing the information to life.
Outsource, but evaluate the human capital function. What are the recruiting and retention efforts of the fund administrator? How does the firm incentivize employees and create a nurturing, fulfilling environment with opportunity for career and professional advancement? Does the firm offer onsite, work-from-home, and hybrid options? Does the firm have a deep bench? What professional or job-specific training does the firm offer to its associates?
Outsource, but assess strategy-specific expertise. Judge whether the fund administrator’s staff has expertise in your strategy. Complex strategies require specialty knowledge. Private fund administration demands distinct expertise from public fund administration. Esoteric strategies pose particular challenges for outsourcing middle-office roles. The key is to outsource to experts who understand the nuances of your vehicles and strategy. Remember that your in-house leaders must similarly possess the expertise.
The panelists agreed that outsourcing back-office functions will continue to be standard for fund managers. While the panel examined the key drivers of fund administration outsourcing, they balanced it with experienced advice regarding important factors to consider in conjunction with outsourcing. They also noted that while outsourcing middle-office roles is less common, it is becoming more acceptable to LPs.
About Ultimus LeverPoint
Ultimus LeverPoint provides tech-driven fund administration, management company, general partner, investor, and treasury services to private equity and hedge funds, including those with complex and unique fund structures. We combine advanced technology with a flexible servicing model so General Partners can outsource operational functions with confidence while enhancing the investor experience.
ULP 15546183 08/24/2022