Private Equity Q2 2023: Preqin Quarterly Update

Outsourcing management company: increasing productivity and adaptability

Frank Anduiza of Ultimus LeverPoint discusses how outsourcing can benefit fund managers

In recent years, many alternative fund managers have explored ways of increasing adaptability and enhancing operational productivity. Forward-looking firms have recognized that fund growth leads to increased operational volume, complexity, and operating expenses.

It is crucial that operational processes and functions are customized to the specific needs of the fund manager to help them achieve their operational objectives and priorities. As with most things, one size does not fit all when it comes to outsourcing. A management company’s size, complexity, and in-house resources influence the optimal outsourcing model, from co-sourcing to partial outsourcing to full outsourcing.

At Ultimus LeverPoint, we help our clients achieve their goals through a consultative approach. We discuss the various factors and benefits of outsourcing management company operations and how it can bolster a client’s specific growth initiatives.

Outsourcing options

Fund managers are increasingly looking to third-party service providers to outsource their management company responsibilities for full scope or ad hoc support. Fund managers benefit from increased in-house capacity and productivity by outsourcing all or some of their operations. Below are the various options to consider when outsourcing management company operations.

Co-sourcing

With the co-sourcing model, service providers work within the management company’s infrastructure, utilizing their technology, processes, and procedures. The main and most important benefit is alleviating or postponing the manager’s need to hire additional employees.

Partial outsourcing

Management companies can choose specific tasks to outsource, which can reduce the strain on in-house resources. For instance, outsourcing payroll adds a layer of confidentiality by limiting visibility of firm compensation.

Full outsourcing

Management companies can choose a turnkey solution to outsource the full range of operational responsibilities to an external provider. The firms benefit from proven expertise and technology supported by a rigorous controlled environment.

Retain the option to scale up or down

Fund managers who outsource can quickly add or reduce services as assets under management (AUM) fluctuates. Choosing the right strategic partner for an outsourcing management company allows for a relationship that will grow and flex with the fund manager’s needs. Administrators who serve as an extension of the fund manager’s team also become a valued contributor to the business plan.

Choose the right mix of resources at the right time

GPs balance the costs of technology, human capital, and outsourcing as they build their operational infrastructure. What might be considered the ‘right mix’ varies over time based on several variables, including the firm’s lifecycle stage, AUM, and preference for fixed versus variable costs, to name a few.

Replace rote work with value-added activities

Back-office tasks are often repetitive, and the function itself is often perceived as a cost center by fund managers. By outsourcing rote management company functions, which can be automated by a tech-enabled fund administrator, in-house staff can perform higher value and more impactful tasks. GPs become more efficient with business processes, mitigating common risks which enables in-house staff to focus on core competencies while providing their investors with a level of comfort that comes from third-party independence.

Outsource, but ensure internal accountability

Outsourcing should never fully replace internal staffing. GPs require leaders who will monitor and provide oversight for the outsourced work, specifically managing the deliverables and timing of those deliverables.