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Private equity outsourcing – A leap of trust

How UMB Fund Services is utilising proprietary technology to expand its service offering and customisation support to private equity managers…

With private equity enjoying a surge in interest among institutional investors, keen to seek out longer-term yield away from traditional asset classes, the opportunities for fund administrators to provide outsourced services are compelling. And as regulation increases in complexity, in tandem with massive improvements in technology, the appeal of outsourcing to an independent third party continues to grow.

The number of PE funds being offered directly to institutions, or indirectly through intermediaries on behalf of high net worth individuals, is substantial. There is, according to Tony Fischer, President of UMB Fund Services, a steady movement of PE funds downstream to HNW investors “who wish to participate in these structures for all the usual reasons: non-correlated returns, an effective way to diversify their portfolio and so on.” 

According to Preqin figures, in Q1 2017 a total of 175 PE funds closed having raised USD89 billion in aggregate capital. An even more revealing statistic, which serves to underscore just how popular – and competitive – the PE market has become, is that as of March 2017, the amount of dry powder was USD846 billion; up from USD821 billion at the end of 2016.

So how long can this love affair last? 

A recent Wall Street Journal article talked about stock picking falling into decline. There are now just half the number of public companies (3,600) available to trade today compared to 20 years ago (7,300).

“The question with private equity was always: Are we going to continue to see growth in the market? At what point does it become saturated? Based on the current market environment, I think we are still a number of years away from getting to that point,” suggests Fischer.

Against this favorable backdrop, UMB Fund Services, and other fund administrators, are seeking ways to tap in to the market and encourage more PE managers to outsource some of their in-house functions, without fear of losing control of their processes or data, and without concern that the administrator in question cannot provide adequate customization.

One of the drivers for outsourcing is that LPs want more transparency. That requires infrastructure on the part of the PE manager. It requires systems, reporting and a whole operational process to maintain and oversee. 

A PE manager who has to worry about implementing processes and procedures to support operational infrastructure may be taking their eye off the ball. 

Far better to outsource it to a specialist who can handle the myriad accounting, regulatory reporting and processing demands, leaving the General Partner (GP) to focus on sourcing deals and driving value in their funds.

“Then there are efficiency gains,” says Fischer. “One of our big advantages that we have in this market, and one of our key differentiators, is our proprietary technology. Off-the-shelf solutions take forever to adapt to changing environments, and lack customisation capabilities. There is still a great deal of customisation in the PE space. Very little is standardised and automated like you see in the US mutual fund space. 

“Most PE managers have very specific needs and we are nimble enough to customise our capabilities accordingly. Then, where we see commonality across our PE client base – such as for cash management – we look to develop standards and ways to make those processes more efficient.”

Recently*, Tim Fitzgerald, Global Head of Fund Services, Institutional Cash & Securities Services, Global Transaction Banking at Deutsche Bank suggested that as PE groups evolve and manage more products, in-house operating models are no longer scalable. 

Fischer is in agreement with this, observing that it is an issue the firm sees across its PE client base. He believes the days of running a handful of offshore private funds are over. Today, any ambitious PE firm wishing to build a global investor profile offers managed accounts, regulated open-ended vehicles (’40 Act mutual funds as well as UCITS funds), as well as traditional offshore funds.

As such, it is becoming more pressing to outsource the administration function and take peace of mind that all fund products in a PE manager’s stable are being properly handled.

“Part of our model at UMB Fund Services is that we provide administrative support for a full range of fund products – really almost any pooled investment product we can support in some fashion – and can effectively support managers with the solutions and services we have developed over time. 

“I think a lot of the resistance (to outsourcing) among PE managers relates to the perceived lack of control. The feeling is, ‘Why should I hand this off to someone who doesn’t really understand my business?’ 

“In response to this, what we are doing is promoting a proprietary portal technology. This provides a way for managers to access their data and be able to run any analysis they wish, locate any data they wish, in real time. They have the technology right at their fingertips 24/7, and make effective business decisions. That is one way that we can give that perceived lack of control back to the manager,” outlines Fischer.

Of course, trust is another key element. A PE manager needs reassurance that the internal processes they have developed to manage a fund, can be properly handled. As Fischer points out, “they have to have a high degree of confidence that you, as the administrator, would do things exactly the way they would internally”. 

This means having credibility: a demonstrable knowledge and intelligence that you understand the PE marketplace broadly, and the manager’s business specifically. Secondly, it means having the right technology. And thirdly, it means having a high-touch service model. 

“Currently, we have almost USD13 billion in private equity AUA spread across 320 funds, each with their own differences. We have some recognised names on the books and that goes a long way to building trust,” explains Fischer. He adds that technology only adds any value if it intersects with the expertise of people who understand a client’s business, and know how the right tools can be applied to that business.

Over time, Fischer believes that increased automation will come into the private equity space so that eventually it will feel a lot like more like the US mutual fund industry. 

“There are initiatives like Common Reporting Standards and the Institutional Limited Partners Association that are promoting uniformity and helping to introduce some standardisation, and we want to be part of establishing what those standards are. In my view, over the long term PE will evolve from a very fragmented, customised industry to a more standardised industry.”

As it does, UMB Fund Services will leverage its technology and its expertise to become, in many ways, an extension of a PE manager’s operations team. 

* http://cib.db.com/news-and-events/news/39378.htm#gsc.tab=0 

 

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