Deutsche Bank’s Alternative Fund Services team chairs SuperReturns US’ first ever summit for private equity CFOs and COOs. Flow reports on why more of them are outsourcing
Outsourcing of non-investment functions in the USD$2.49 trillion private equity industry is picking up momentum as organisations try to obtain scale, reduce variable costs, and win over their growingly institutionalised investor supporters. This was one of the key themes coming out of the Super Return US East in Boston, according to Melanie Cohen, global head of private equity and real estate fund services at Deutsche Bank, speaking at the conference.
Such is the importance of the theme to the industry that the conference dedicated its first ever summit to CFOs and COOs of private equity and venture capital firms. The CFO / COO Summit, chaired by Deutsche Bank’s head of alternative fund services sales Jason Sheller, explored the evolution of the role of the CFO. Key to this evolution is the outsourcing of non-investment functions, which was addressed during a panel titled ‘A path toward outsourcing solutions’.
Traditional administrator roles such as fund accounting, net asset value (NAV) calculations, distribution calculations and calls and regulatory and investor reporting have often been performed internally by private equity managers. Preqin, a data provider, said just 30% of private equity and real estate funds use third party administrators but added this would jump to 45% by 2018. The low rates of outsourcing among private equity against other fund manager brackets is because their businesses have generally been very complicated, and many COOs were troubled about delegating fine-tuned operational processes to externals.
Melanie Cohen of Deutsche Bank, however, said that private equity was increasingly accommodative to the benefits of outsourcing to qualified third party administrators. “There has been a big change in the last ten years. Traditionally, private equity managers would wait until they had launched their third fund before transferring some of the operations to an administrator. Increasingly, however, managers are approaching administrators such as ourselves during their first-time fund launch, and discussing what they may be able to outsource,” she said.
This transitioning to outsourcing at private equity has been prompted by several factors. Institutional investors want private equity exposure as it has outperformed public equity markets and other alternative asset classes. Some investors including pension funds, endowment vehicles and foundations – who are new to private equity – are even outsourcing the CIO role to established and more experienced consultants.
To bury long-held issues around transparency though, private equity managers are having to provide detailed and frequent reporting and analytics to institutional clients covering everything from investments, operational controls and criterion behind fee calculations through the Institutional Limited Partners Association’s (ILPA) standardised template. Regulators all over the world are also demanding greater disclosure from private equity managers, but the reports do not always match.
Appointing (and managing) third party outsourcers
Allotting this repetitive operational and reporting work to a third party – as opposed to investing in technology and in-house staff– eliminates variable costs and helps managers develop their businesses without getting bogged down by cost-centres.
“Administrators like Deutsche Bank have the scale, talent, expertise and technology to perform investor and regulatory reporting, giving our clients more time to spend on managing investor relationships. Creating customised reports and analytics is hard to do in house with limited resources, and again this is another reason to outsource. Fund administrators are holistic and have wide-ranging and deep knowledge, which enables us to consult with clients on how they can maximise efficiencies. In addition, technology is expensive to operate in-house at private equity, so outsourcing can reduce costs. Delegating operational functions can also help minimise succession planning risk and minimise disruption in the event of a key operations or back office staff member exiting.” said Cohen.
Equally, the manager cannot simply outsource to a third party, hoping that it is an absolution of responsibility, a point made by Jason Sheller, global head of alternative fund services sales at Deutsche Bank. “While private equity will obtain benefits from outsourcing – namely the expertise, it is critical that firms are serious about managing their outsourcer,” he said.
Many nascent institutional investors into private equity are making capital allocations provisional on the appointment of a third party, independent administrator. Cohen highlighted investors were not only asking private equity managers about whether they used an administrator, but were increasingly conducting on-site due diligence at the provider itself, scrutinising service levels, processes and operational controls in areas such as cyber-security.
The key to outsourcing
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