Why private equity is outsourcing fund administration to deliver value

Fund managers are increasingly outsourcing private equity fund administration operations in order to focus on adding value to assets and investor relations, explains Mary Bruen, Regional Head of Fund Services - Jersey, Guernsey & Isle of Man.

Why are private equity firms increasingly outsourcing their fund administration?

Done right, outsourcing fund administration duties to a third party can be part of the solution to gaining a competitive advantage and delivering enhanced value to investors. 

For general partners (GPs), the decision to outsource really comes down to three things:

1.  Evaluating the real cost of running their business;

2.  Anticipating the impacts of changing regulatory and investor requirements; and

3.  Choosing an effective end to end operating model that best serves their future business needs. 

What are the differences in attitudes between US and European attitudes to outsourcing fund administration?

Whilst the outsourcing model is very familiar to the European market, it is still comparatively new to the US market where there is still some way to go before many GPs feel comfortable relinquishing the control and direct oversight they have over their administration.

However, on both sides of the Atlantic, we are now seeing a greater expectation that the fund manager focuses on its core areas of expertise rather than getting distracted by ancillary functions. 

In addition, increased scrutiny by regulators, with US regulators warning private equity managers to expect more fines and enforcement actions for overcharging investors, is stretching in-house compliance teams and causing GPs to reassess. 

In December 2021, Global Infrastructure Management LLC was ordered to pay $4.5m to settle charges that it failed to properly offset management fees and for making misleading statements about the fees and expenses it charged. 

The fund manager needs to focus on its client relationships at one end and on maximising the value of its assets at the other. The challenge is that in between those two pillars, there is an awful lot of hard work that needs to be done.

In-house vs outsourcing model

The GP must decide whether to take on that complexity itself, which can be costly and a headache, or to rely on third parties with a depth of understanding of the underlying asset. We have certainly seen an increase in the desire to outsource over the past decade. Only last year, in our survey of 100 alternative investment fund managers did 72 per cent of respondents acknowledge that outsourcing would play a more central role for the fund manager over the next three years.

One of these reasons is that GPs are increasingly having to handle larger volumes of data. There is great interest in deploying technology to make everybody’s lives easier, but if you want to deploy technology effectively, it is invariably expensive. For a fund administration platform, for example, you then have the ongoing expenditure to maintain the system, keep it up to date and train staff to use it. Increasingly managers are deciding to leave the running of operations to experts that can spread the cost of that technology over many clients.

Fund managers will increasingly be looking for not just outsourcers with expertise of both processes and asset classes to share their administrative burden, but partners who can proactively come up with ideas that will enhance the operational performance of their funds. An ideal partner will offer a winning combination of global reach and scalability, whilst maintaining the ability to provide a tailored personal service.

The right fund administrator can enhance your competitive advantage

From renewables to space technology, we provide bespoke fund administration services for some of the most cutting-edge alternative investment managers. 

Outsourcing your private equity fund administration to our Global Funds team can help you stay in control of your operations whilst enabling you to focus on executing your investment strategy and maximising investor returns.

Contact our team to discuss how we can optimise your operations.