Unlocking Efficiency – Outsourcing Fund Administration - Leverage for Ever Increasing Operational Demands

14 December 2023

Private Fund Management has experienced significant shifts over the past few years. Record fundraising over the prior 3 years, increased investor demands for dynamic data and new Private Fund Advisor rules adopted by the SEC in August 2023 all have contributed to a massive shift in how Private Funds need to be administered. This all comes at a time where the industry is currently facing a significant slowdown in activity. According to Convergence data, $222.49BN raised from new funds through Q4 2023 YTD, down 39% from $365.83BN through Q4 2022 YTD.

Emerging private fund managers in particular face increased scrutiny and heightening competition given the decrease in investor allocations. Having a solid foundation for the firm and fund operations is critical when facing investor operational due diligence.

Outsourcing fund administration provides leverage to established managers looking for solutions to these new demands and emerging managers the ability to stand up firm operations credibly and quickly. Let’s explore how outsourcing fund administration is a viable strategy for investment managers.

The Growing Demand for Efficiency in Private Equity Fund Management

In this hyper-competitive market, every advantage counts. Whether you are a seasoned fund manager or new to the industry, finding new ways to improve operational effectiveness and your investors' experience is imperative. Specifically, streamlining internal operations can mean the difference between succeeding and moving forward into the future or remaining stuck.

The current slowdown in activity is likely short-lived. As such it presents an opportunity to focus on improvements for the fund and firm to address the operational inefficiencies that have built up over the last few years. Easier said than done. Capital is limited and all teams from the back to front office could benefit from investment in operational efficiency.

Data – hyper focus on data quality and reporting; support larger data strategies
Finding the right outsourcing partner can provide the exact leverage needed to achieve your firms' goals. Both first time outsourcing clients and those looking to top grade their current provider can enjoy the benefits of outsourcing with GPFS including: Co-Pilot – from establishment of the fund through complex exits; GPFS is a true partner and advisor sharing best practices and collaborating with your attorneys and tax professionals. Controls – immediate focus on internal controls to reduce risk of errors and omissions.
Investor Relations – providing support for complex side letter requirements to bespoke investor requests
AML – provide white labeled AML solutions to meet your governance requirements
Compliance Collaboration – work with internal or external compliance professionals to operate in a fit for purpose regulatory framework

Benefits of Outsourcing Fund Administration

Partnering with GPFS can offer game changing benefits. The most significant is the ability to direct more of the precious firm resources to front and middle office operations while gaining a true partner in the back office.

Cost Savings

Outsourcing provides increased access to technology and infrastructure at significant cost savings. Fund managers are better positioned to leverage economies of scale. Outsourcing fund administration allows fund managers to remain open to opportunities while reducing compliance risks and overhead costs.

A 2022 study conducted by Forrester Consulting revealed that private equity firms who outsourced realized significant savings. Those that outsourced saved an average of $1.3 million annually or $3.9 million over the course of three years. Some of the most significant savings came from the following areas:

Access to technology that would be prohibitively expensive to implement in-house
Reduced need for internal staff and smaller office footprint, compared to firms that self-administer
Lower recruitment costs
Increased access to expertise and knowledge of new markets
Improved regulatory compliance
Data is an essential element in fund management and investing. However, as more firms leverage data-driven solutions, investors' demand for transparency also increases. Outsourcing with the right provider can improve transparency in data use and reduce firms' expenses on licensing fees, technology implementation, and IT management. The Forrester Consulting study revealed that firms that chose to outsource saved more than $875,000 over three years on technology alone.

Access to Specialised Expertise

Fund managers specialise in making strategic investments, deciphering complexities of fund structures, and closing deals. By outsourcing administrative tasks, fund managers no longer get mired in the murky waters of areas outside of their expertise. Instead, they can rely on professionals with extensive knowledge and experience in financial and regulatory matters. The deep operational support provided aids firms and fund managers in matters of compliance and navigating the complexities of regulations.

The right partner can deftly handle fund manager services, including areas such as operational due diligence and investor reporting best practices. Fund administrators lend their expertise to all fiduciary responsibilities, supporting fund managers in seamlessly meeting those requirements.

Improved Compliance

Labor shortages, continually evolving regulatory requirements, and the complex global nature of fund management can make compliance challenging. Fund structures are increasingly complex, and investors continue demanding increased transparency. Additionally, regulations continue evolving, with growing pressure on private equity funds.

Outsourcing fund administration to experts with the necessary knowledge makes it easier to keep up with regulations and financial complexities. In turn, firms and fund managers are positioned to reduce risks and navigate the evolving landscape. Fund managers enjoy added credibility while investors can breathe a sigh of relief knowing that all facets of fund management are tended to by experts.

Enhanced Investor Relations

Investor relations are arguably among the most critical elements for a private equity fund management firm. Open, honest communication with a focus on transparency can distinguish good firms from great firms. Regular reporting, honesty regarding risks and opportunities, and adherence to best practices are vital functions. Third-party fund administrators can provide accurate reporting with the added benefit of an independent eye on all financial matters. This can add robust transparency and provide added peace of mind to investors.

Choosing the Right Outsourcing Partner

The outsourcing imperative can be an incredibly effective strategic maneuver. To leverage maximum benefits, it’s critical to choose fund administrators who align with the values and objectives of the firm. Like any third-party partner, fund administrators can hurt or help a firm’s reputation and fund managers’ goals. Making the shift from self-administration to outsourcing requires attention to vital considerations, such as the following:

Expertise and Experience

Carefully evaluate the credentials of any third-party administrators you consider. Raising your own expectations is critical to ensuring you choose a partner who can navigate the complexities of the private equity fund management landscape. The provider should have a proven track record and extensive knowledge of the industry, best practices, and all regulatory requirements. The provider should also have experience in international regulations and compliance.

It’s important to evaluate administrators' industry experience, technical know-how, and knowledge of regulations. Also, look at the stability of the fund admin. Ask about employee turnover. Low employee turnover means that people and systems stay integrated and institutional knowledge about your fund is retained.

Additionally, it’s important to select a third-party who is aligned with you for long-term growth. GPFS provides consultative recommendations across the fund management to ensure that all parties will benefit.

Reputation

A provider’s reputation speaks volumes about what you can expect. It should be impeccable, with timely deliveries and a commitment to excellence and delivering maximum value. Review the provider’s list of current and past clients and ask for references as needed for feedback.

Technological Capabilities

Fund administrators typically have access to the latest technology and systems that can handle the complexities at hand. Ensure the partner you select has fully integrated technologies and the ability to report at both the fund level and investor level for maximum efficiency. For example, GP Fund Solutions’ expert team is augmented by a best-in-class platform with stringent data security, world-class data governance, and support for complex operations.

A world class fund accounting platform forms the foundation of GPFS reporting. It grants access to crucial business insights, personalized dashboards, and detailed custom reports, empowering fund managers and GPs to streamline operations and effectively navigate the dynamic landscape of private equity reporting. GPFS also collaborates with Passthrough for investor onboarding. Passthrough offers a comprehensive platform solution that simplifies the subscription document process for investors by incorporating easily replicable and verifiable identity information for future use.

Scalability

One of the primary benefits of outsourcing fund administration that hasn’t already been discussed is the inherent scalability it offers. The right outsourcing partner provides the scalability and flexibility needed to adapt to changing market conditions and emerging opportunities. Look for partners that offer seamless processes and procedures for agility and scaling as needed.

Onboarding Assistance

Effective collaboration is critical along with a smooth transition. Robust, comprehensive onboarding is essential. Look for partners that provide a clear timeline for implementation and support throughout the process. The onboarding process is an excellent time to discuss and set ongoing expectations regarding metrics, reporting, and other factors.

Addressing Common Concerns and Misconceptions

Myths and misconceptions swirling around outsourcing fund administration have long swayed fund managers and firms away from this powerful strategy. Taking the time to debunk these myths and address common concerns can minimize the risk of missed opportunities. Let’s explore some of the most common misconceptions below.

Outsourcing Increases Risk and Decreases Control

For many fund managers, worry over losing control is a major obstacle. However, fund managers and their firms remain very much in control. Working with outsource partners, you will set the parameters for what tasks they handle and the level of access they maintain. Providers work in secure, monitored environments with independent audits as necessary.

Outsourcing Compromises Data Security

Because third-party fund administrators have the latest technology and remain abreast of emerging trends and shifts in regulations, data is more secure. Leveraging the expertise of providers and the transparency they offer enhances data security and assuages investors’ concerns.

Outsourcing Is Too Expensive

An in-house team may seem like the logical cost-saving option. However, when you factor elements like recruiting, training, and onboarding costs into the mix, the potential savings quickly add up. By outsourcing, you also have a larger bench, which reduces risk associated with turnover. Additionally, by outsourcing, firms receive access to technology that could otherwise be cost prohibitive to implement and maintain in-house.

Outsourcing Partners Risk Cultural Alignment

The right provider will align with your company culture. Fund administrators will contribute to your diverse goals and objectives, helping to keep you more agile and capable of serving investors’ complex needs.

Leveraging the Power of Expert Outsourcing Partners

Cost savings, greater scalability, access to extensive expertise, and improved investor relations are compelling benefits. As a fund manager, you’re already pressed for time. Freeing yourself from some (or all) back-end tasks can allow you the mental bandwidth to focus fully on your clients and make the best possible investments.

Streamlining and improving operational efficiency can be a great differentiator. This strategic imperative can allow private equity fund management professionals to improve their ability to compete in this ever-evolving landscape.

Learn more about how GPFS can lend our expertise to your private equity fund management goals and objectives. Contact us today!

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