Have the needs of managers and investors changed?
Joe Patellaro: I think several key themes have emerged in recent years. The amount of oversight and regulation in our space has changed substantially. Investor due diligence has increased and there is a desire for additional information and greater transparency. Many fund managers have also expanded into different asset classes. These factors have caused fund managers to pause and reflect on their internal operations, and to ask what they really want from their internal teams and to re-evaluate what external partners can do to support them.
Meanwhile, the outsourcing space has also matured. When I joined this industry almost 14 years ago, it was still a relatively boutique industry, and has now grown into something that’s quite mainstream, where you are able to demonstrate the critical mass, expertise, access to information and global footprint that meets the needs that firms in this industry are looking for.
So what have those regulatory demands meant for outsourcing?
JP: I think it’s been two-fold. First, it took what truly was a ‘private’ industry and put a much finer light on most firms and most capital around the world. In turn, firms became introspective about their own processes and operating models, what they had built over time, and many decided it was a time for a fresh look. A set of procedures and an operating model that had worked effectively now required a new assessment to determine whether that model met with increased regulatory scrutiny, oversight and reporting, amid increased investor due diligence. This left more firms considering or re-considering the outsourcing model, and we developed additional solutions to help support the new regulatory environment.
In addition, certain regulation, particularly AIFMD in Europe, created a global connectivity that many firms had not experienced before, along with increased regulatory oversight and reporting specific to that regime. This created another natural evaluation point to consider how a global service provider could help meet these growing business needs.
Ideally, when should a fund manager start looking into that partnership?
JP: I think it used to be a relatively binary decision: do you outsource or do you do this in-house? It certainly is not that black and white anymore. When we have the opportunity to meet with managers, we first talk about them, their organisation, their pain points, areas of growth and then work together to evaluate areas where they have needs to be filled.
Many managers in recent years have raised capital in different asset classes than had been their core focus and that becomes a natural decision point. A firm that has traditionally raised buyout funds may set up its first credit fund and could be seeking a partner to assist on that product, where the skillset needed differs from their current core capabilities in managing buyout funds. We will evaluate the best way to join with their existing team and process and bring them additional capabilities without diverting their attention from what they already do well.
Managers also have the pressure of continued growth on their operations and processes and being able to meet the needs of the firm and its investors. We strive to work closely with firms to think about ways we can help them with certain pieces of the puzzle, in addition to considering the full outsourcing model, in a way that would allow them to increase the size and scale of their overall operating model in a service partnership. We’ll lay out operational processes from beginning to end so they can see where a partnership might help them grow and allow them to focus on their business priorities.
How should managers determine whether outsourcing makes sense for them?
JP: I think it’s important to make a realistic, self-critical internal evaluation in terms of people, current operating model and technology so they can figure out what they have and how they got there. It’s not uncommon for successful fund managers on Fund III or Fund IV to make this evaluation and realise they’ve been doing it the same way since Fund I, which may or not still be appropriate.
Raising a new fund becomes a good time to take a hard look at how things are being done and be open to considering what else is out there now. Things are far different than 10 years ago at the time of the first fund.
It’s also important to consider the needs or issues of all constituents, internal and external, and to realise that while people are a key factor, it is not solely a people or headcount management decision. There are significant additional considerations and costs besides personnel, including ‘soft’ costs such as technology (cost, maintenance, keeping up-to-date), manager oversight and location costs. It is about maximising the overall outcome of a solution between the manager and service provider.
Frequently, a firm will put together a substantial and sophisticated industry team but fail to maximise the team’s utilisation because time is taken up keeping the books and records, getting financial reporting out on a timely basis and addressing investor queries. With additional support, a firm can retool people to their full capabilities and get help on what we are experts at doing for hundreds of firms.
So how have you evolved to meet this new landscape?
JP: SS&C has recently completed the acquisition of Citi’s Alternative Fund Administration businesses, creating one of the largest global fund administrators in this segment. The overall scale and size of the combined business – number of staff, clients, funds, committed capital under administration – is compelling, as is the global footprint.
Having capabilities around the world, coupled with local service provision, means we can work with a local fund based in Singapore or Luxembourg and service them directly on the ground in their backyard, and also help a US-based manager that sets up a fund there, perhaps for the first time.
From a product evolution standpoint, we’ve spent a lot of time expanding our real estate offering, creating a product specific operating model, industry specific leadership and additional reporting capabilities. We see a lot of opportunity in the credit space, particularly in Europe where you have such a huge carve out from traditional credit providers to private capital, and have combined loan administration and loan reporting capabilities with traditional fund accounting and reporting to provide a product specific solution to this market segment.
In many ways we’re mirroring the growth in size and sophistication of our clients. When they look at partnering with us, especially if they haven’t done this evaluation in a while, they might see a different mousetrap than they expected, with the global reach, experience, and problem solving mentality that we bring to the table. We have been at this for a long time, and we expect this positive trajectory of outsourcing in our space to continue for the foreseeable future.
Joe Patellero is managing director, SS&C Private Equity and Real Estate Services
This article is sponsored by SS&C and first appeared in PEI's Fund Administration supplement, published in June 2016.