A Potential Win-Win-Win
The decision to maintain critical but non-core investment management functions in-house versus outsourcing is one contemplated seriously and frequently by private fund managers (“Managers”) looking to optimize their resources. The increasing demands of market complexities and investor expectations require the full attention of private fund managers, highlighting the potential benefits of allowing others to take responsibility for execution and oversight of back-office, fund administration functions. Easing the decision-making burden is the ‘lift-out’ solution.
A lift-out occurs when a third-party service provider, such as an administrator, takes function-specific Manager staff and brings that staff on as their own employees. In turn, the Manager pays the third party for services that used to be considered internal. As a result, lift-outs can provide a win-win-win situation by benefitting the fund manager, the staff and the third-party provider.
Why Consider a Lift-Out?
Lift-outs can be used effectively as part of a long-term strategic decision or to address an immediate or unexpected need. Following are the primary reasons Managers contemplate lift-outs.
Focus on investing. Propelling growth through front-office functions like investing for performance and servicing limited partners is the primary focus of most Managers. By transitioning some or all back-office functions to a third-party provider, the day-to-day onus of managing those operations is placed squarely on the provider, allowing Managers to focus on what they do best.
Ensure continuity. While outsourcing (rather than lifting-out) back-office functions may at first seem appealing, established fund managers often fear the loss of continuity with investors. Further, Managers value their staff, the work they perform, and want to “do right” by them. With a lift-out, Managers benefit from retention of staff institutional knowledge and relationships, ensuring consistent and clear communication with investors and the Manager.
Reduce management expenses. In-house staff costs are traditionally the expense of the Manager, and carving out expenses related to fund-servicing proves challenging. Through a lift-out, costs related to fund administration are more clearly defined for expensing to the fund as appropriate. Best practices and operational efficiencies by the provider may also reduce the cost of administration.
Technology Best Practices. The pace of technological advancement in the private equity space can be daunting and expensive without economies of scale. A lift-out solution allows you to retain lifted-out staff’s institutional knowledge and relationships while gaining access to the latest technological tools and platforms of the service provider.
Address uncertainty. With most private fund manager firms running lean and fast, staff resignations and short-term leaves — combined with the difficulty of hiring during the pandemic — elicit pain. Third-party providers integrate lifted-out staff with their staff, ensuring succession. Service providers are paid to have a deep and experienced bench. It’s their responsibility, no longer the Manager’s, to quicky and seamlessly fill resourcing gaps.
A Win for the Asset Manager
The reasons for a lift-out are numerous, as are the benefits. For example, when Manager’s partner with a leading administration firm, there is opportunity to leverage new technology tools and platforms, upgrading both the Manager and investor experience. Further, administrators are expected to stay current with best practices and regulatory requirements, alleviating substantial burden from the Manager’s leadership.
Lift-Outs: Benefits for the Asset Manager
- Accelerate change
- Transition staff costs to a fund expense
- Potential to reduce back-office costs
- Continuity of services for investors
- Retain lifted-out staff’s institutional knowledge and relationships
- Access latest technology tools and platforms
- Access best practices and regulatory updates
- Provide career opportunities for staff
A Win for the Lifted-Out Staff
Rather than being laid off as part of an outsourcing strategy, the lifted-out staff join an established fund administration firm, accessing a wide array of career opportunities. Third-party providers have a large variety of accounting, finance, operational and technology roles to consider for future advancement. The lifted-out team becomes part of a firm where their skills are considered core to the business.
Lift-Outs: Benefits for the Lifted-Out Team
- Career opportunities within and across departments
- Access to training in best practices and regulatory requirements
- Job satisfaction from being a core function provider
- Retain relationships with the Manager and Manager’s investors
- Diversify experience through servicing other Managers
- Upgrade skills by accessing the latest technology tools and platforms
A Win for the Third-Party Provider
The last win goes to the third-party lift-out firm. The provider gains a new client and new staff simultaneously. The new staff bring multiple benefits to the provider.
Lift-Outs: Benefits for the Third-Party Provider
- Gain a client
- Add experienced and proven staff to the team
- Deepen the bench
- Leverage staff to work with additional clients
- Potential to diversify the team
What to Look for in a Lift-Out Partner
It goes without saying that your lift-out partner must be deeply experienced in fund administration with a proven track record of customized client service in the alternative asset management space. But beyond that, there are softer criteria to assess.
Evaluate Prospective Lift-Out Partners
- Is the partner excited to add your team to their deep bench of experienced staff?
- Does the partner invest in people through professional development and career opportunities?
- Does the partner have a culture of relentless improvement, supporting the evolution of processes to meet changing client needs?
- Is the partner interested in a long-term relationship, not a quick transaction?
- Does the partner have resources dedicated to managing the transition, relieving you of the project management burden?
We believe a lift-out provides an excellent alternative for a private fund manager seeking to outsource back-office functions without laying off existing staff. A lift-out solution not only avoids layoffs, but provides specific, tangible benefits for both the Manager and the lifted-out operations team. As a fund administrator, we benefit too, as we add experienced and qualified members to the Ultimus LeverPoint team.
There are a myriad of compelling reasons to consider partnering with a reliable fund administrator to provide a lift-out plan and outsourced services. If you are in a position to consider, or want to proceed with a lift-out, let’s connect. Ultimus LeverPoint has extensive knowledge about performing lift-outs and will be happy to put a project plan together that is customized to your unique circumstance.