Whether it is the demands for data to meet the latest regulatory initiative or a query from a limited partner seeking greater transparency, back offices are under unprecedented pressure. That coupled with the rising complexity in fund management has led growing numbers of general partners to look to externally source specialist services to fund administrators. TMF Group’s Bruno Bagnouls explains how the landscape is shifting.
How is the outsourcing model changing for private equity firms?
Private equity firms are increasingly seeking more specific types of sourcing as a result of a number of trends. Firms are now being asked for additional and specific items of reporting at both a fund and special purpose vehicle level as LPs seek greater transparency from their GPs.
For example, LPs now look for access to data, legal documents and information around decision-making in addition to financial reporting to ensure they can monitor their fund investments more closely from a governance point of view. They want to know more than ever before about decision-making processes both at fund and portfolio company levels.
On top of this firms now operate in a much more complex regulatory environment than previously as initiatives such as FATCA, AIFMD and BEPS require the collection, disclosure and reporting of more specific information.
What does this mean for the back office?
Together these forces are leading private equity firms to reassess how they run their back offices – they need to work out whether they invest significantly in their in-house capability or whether they turn to external providers. With AIFMD in particular, the need for firms to hire a depositary means they are more likely to look to sourcing than they might have done previously. In addition, many firms that already use external services are looking to streamline. They don’t have time to assess how different providers are working out across different service areas and jurisdictions and so they are seeking solutions that encompass all of their back office needs.
And what about complexity within the firms themselves?
There is no doubt that private equity businesses have become more complex. First, there is the maturity of the industry – as firms raise new capital, they simply have more funds and investments to report on. Yet we are also seeing increased demand from LPs for co-investment opportunities and separately managed accounts and these create additional vehicles that funds somehow have to administer.
With the large, global players in particular there is a lot of demand for financial reporting services. Some of them will have 200 or more SPVs underneath the funds and they have to make sure that they are all compliant legally and in terms of reporting. Sourcing can provide a way of managing risk and ensuring that the right information is provided to the right constituents in the right formats.
How is this increased complexity shaping the managed services models at providers such as TMF Group?
There are two main ways of building an operating model. One is a client-centric model whereby a provider builds teams around the client and the same team provides all services to the private equity house, including sitting on company boards. This can be a very convenient way of servicing a client and is sometimes favoured by smaller and mid-market private equity firms as they will have regular contact with team members and they can feel as though they have dedicated resources for their firm.
However, the limit to this model is that, with increased complexity, there is a need for ever more specialist resources at the external service provider. Having specific teams dedicated to firms is not scalable cross multiple geographies, jurisdictions and areas of technical expertise – it also makes it harder for firms to streamline their sourcing to one provider. Larger firms increasingly require a more function-led organisation that can offer a whole range of back office services – and that’s what we’ve adopted at TMF Group. This model allows you to have much more specialist teams that have expertise in, say, tax, complex accounting methods and the idea is to deliver these services across a number of jurisdictions according to where the client has operations or investments.
So how do you ensure that you can remain focused on the needs of the client with a functional, as opposed to client-centric, model?
The key to getting this right is to ensure you have a strong service delivery offering. That in part comes down to getting the client management contract right at the outset with the right service-level agreements and terms and conditions in place. Yet it’s also down to having strong client service capabilities so that the needs of different firms can be met through tailored solutions, supported by a high level of co-ordination between the different teams.
At TMF Group, for example, we are able to provide services for SPVs in individual countries, while we have fund administration teams based in Luxembourg and Singapore, with teams in different areas collaborating to provide seamless services to our clients. We believe that having local skills and specialist experts, combined with a highly structured approach to client service and strong IT platforms, means that we can help streamline private equity firms’ back office operations.
You mentioned IT platforms. How are technological developments changing reporting and monitoring in private equity?
Technological developments are having a profound impact on reporting and access to information. With a central repository for all data, there is increased efficiency for private equity funds themselves as well as for LPs, who can access information when they need it and in a way that suits them. The quantum of information that can now be collected can also enhance risk management at fund and portfolio company levels – it’s far easier to create dashboards, for example, to monitor progress against specific measures and highlight where things are not going to plan.
Yet there is much more to come. We’ll see more automation of high frequency, repetitive tasks, such as accounting, and that will enable us to spend more time with clients and focus on more specialist, low-frequency tasks.
Of course, with these technological developments comes a need for greater standardisation of the way information is collected and provided if private equity firms are to gain maximum benefit from the potential for greater efficiency. That’s clearly still a work in progress but we are looking at ways of integrating our platforms so that our clients can streamline their back office further. So, for example, we are working on the development of a global platform for legal entity administration.
How do you think external services for private equity firms will develop in the future?
We are very confident about the growth of these services for the private equity industry as firms increasingly recognise that fulfilling LP requests and regulatory requirements is a specialist area. Most firms would prefer to focus on their core areas of originating, investing in and growing great companies. Yet we also see that more work needs to be done on standardising the information provided to ensure the greater transparency that regulators and LPs are seeking from the industry. ?
Bruno Bagnouls joined TMF Group in December 2015 as global head of private equity and real estate. He is also managing director of TMF Luxembourg. Bagnouls has extensive experience in the implementation, management, accounting and administration of private equity and real estate entities. Prior to joining TMF Group, he was head of corporate services at Alter Domus.
This story is sponsored by TMF Group and appeared in the Fund Administration Special 2017 published in Private Equity International in June 2017.