Fund Administration Special
Outsourcing can be an appealing option for GPs these days, given the headcount, cost, technology investment and regulatory considerations required to effectively manage a firm’s accounting, financial and reporting functions. Over half of fund managers outsource at least some of their fund administration, according to a recent EY study of private equity CFOs. That has prompted the launch of several new service providers and driven long-term industry players to build bench strength, develop expertise and expand geographic reach.
Joe Patellaro, managing director and global head of private equity services, and Rishi Khanna, managing director of alternative assets technology, at SS&C GlobeOp share their insights into what GPs should look for in a service provider and how to best guide the onboarding process.
Some firms outsource from their debut fund, while others wait until they’ve raised a certain amount of capital or moved into a new geography. Is there an ideal time to start outsourcing?
Joe Patellaro: Any of those inflection points can be the right time for this discussion. What we’re finding is that firms are talking to us as part of a broader strategic business evaluation. This can be a proactive review of all their processes to address possible efficiencies, alignment of best practices and plan for the growth.Some firms outsource from their debut fund, while others wait until they’ve raised a certain amount of capital or moved into a new geography. Is there an ideal time to start outsourcing?
And that can lead them to explore outsourcing, perhaps for the first time in a while. What they find is an industry that has really evolved from basic fund administration to more complete business solutions for private equity firms and their investors. I’ve been in this business for almost 16 years, and we’re at a point where we have the critical mass and the expertise to provide value to complex, global firms that have multiple products in multiple geographies. For example, in addition to core fund administration and reporting, our ability to provide data in a way that clients can digest in an efficient manner can make a real difference. That’s one of the advantages of having roots as a technology firm.
Nowadays, it’s not just a binary question of whether a GP outsources or not, but of accessing resources that can address their unique needs.
Rishi Khanna: It’s not only increasing investor demands that can prompt GPs to look for outside help. The growth in data from managing bigger portfolios can make distributing monthly and quarterly reports more challenging. And that’s a problem technology can do a great deal to solve.
For those GPs who have realised they need some help, how do they choose the right service provider for their needs?
JP: Private equity funds are by their nature long term – up to 10 years or more depending on the terms. We believe managers need a service provider that has proven themselves dedicated to this space and with whom they can forge a long-term relationship. We feel experience matters, not just in terms of building institutional expertise, but in showing a commitment to serve the asset class.For those GPs who have realised they need some help, how do they choose the right service provider for their needs?
Another consideration is that a successful firm isn’t static. They raise more capital from more investors, they move into new geographies and product offerings. Even if a firm doesn’t need global expertise now, that doesn’t mean it won’t in the future. GPs need a partner that can serve the firm they are now, and the firm they might be in the future. The fact that we can discuss developments in Singapore or Luxembourg or trends in the credit or real estate space is key.
Are there any red flags GPs should take note of when looking for a fund administrator?
JP: As a buyer, I would be looking for a service provider that can be flexible in designing a solution based around how I work, while bringing discipline, experience, expertise and technology to the process. That requires dialogue and a practical view towards wants and needs that takes into account time, costs and control.
Cybersecurity remains top of mind, especially as firms consider outsourcing their data to a third party. What are some common sense questions they can ask potential service providers about data security?
RK: Some of the basics are questions about how the data is stored and encrypted and how the network is protected. But I think one of the most important questions that rarely gets asked is how they would respond in the event of a data breach. Because there will be a breach. It’s inevitable. And they should have a series of protocols in place for when that happens.
But I think a better way to gauge the quality of a cybersecurity program is how thoughtful and rigorous it is. We’ve been a technology company for 30 years, so it’s been a key priority for a long time. We have a dedicated team for information security and we train all our employees. Any service provider should have a robust programme that includes three key elements: training, policies and technology. A GP may not understand every element of the programme, but those three elements should be in place.
One of the major hurdles to outsourcing a back office is the onboarding process, where the GP uploads their data and learns the service providers systems. Are there any best practices you can share?
JP: Every onboarding process is unique to the client depending on a myriad of factors specific to that situation. Part of the value of having the experience and scale that we have is that we’ve seen an awful lot of what’s transpired in our space. We don’t take anything for granted when onboarding.One of the major hurdles to outsourcing a back office is the onboarding process, where the GP uploads their data and learns the service providers systems. Are there any best practices you can share?
So, in addition to the important data aspect, we spend a great deal of time with clients looking at process mapping, laying out how a firm does things now, and how we can integrate the teams and processes. Establishing the appropriate process flow with our clients is as important as understanding the elements of how the fund works.
Onboarding requires deep thinking and an honest assessment of time commitments and client capabilities. And while we have a dedicated onboarding team, there is senior level attention throughout the process.
How important is it to have someone at the GP responsible for the onboarding process?
JP: It’s vital, and it’s part of our formal governance process and documentation. We identify all the relative constituents on both the client and service side. And that’s the discipline we bring to the process; it’s the start of building a genuine partnership with our clients, so that we wind up as an extension of their financial, accounting, reporting, investor services or tax functions. The value of being part of a group as large as SS&C is that we have an enormous bench of talent to choose from, so we can find the best fit for that firm’s unique culture. Every client relationship has its own nuances and the right service provider will understand and address them. While technology and service execution are certainly fundamental to our process and success, this is still a business of relationships.
This article is sponsored by SS&C GlobeOp.