An outsourcing trend is sweeping through the offices of fund managers and investors, as new technology solutions and providers emerge.
• Firms with excess of $15 billion in funds are leading the way to a more institutional mindset, as private equity catches up with other asset classes
• Fund admin and back-office accounting are still the first functions to be outsourced but the trend is impacting middle and front offices too
• Smaller managers may struggle to find a solution that accommodates their more nimble approach to working
An outsourcing trend is sweeping through the offices of fund managers and investors, as new technology solutions and providers emerge.
While fund administration and back-office accounting are still the first and most common functions to be outsourced, the trend is starting to hit investor relations and portfolio management too.
In a survey by Private Equity Wire in June, almost half of more than 50 respondents said they had outsourced part of their firm’s operations over the past 12 months and around three-quarters of that group believed the decision had “added value” to their business.
The research forms part of the latest Insight Report by Private Equity Wire entitled ‘Why private equity is finally turning to technology’.
“It’s partly driven by demand [from GPs] but there’s also more supply of these tech solutions – you see more start-ups coming into the front and middle office space specifically geared towards catering for the needs of private markets,” says a US-based source with one of the world’s largest private equity funds.
Popular outsource solutions typically involve Big Data, NLP, machine learning, and “generally doing things that humans can’t do fast enough”, adds the source.
According to a London-based lawyer who advises some of the world’s most well-known private equity funds, while there have been some early movers in adoption and outsourcing of tech solutions, an increasing sophistication is visible among GPs across the board, particularly in the use of virtual portals where data on investments can be uploaded, shared and analyzed more efficiently.
Firms with excess of $15 billion in funds may be leading the way currently, but all firms are stepping up their game to keep pace with the larger players in the space, according to EY’s 2022 Private Equity Survey. The move to a more “mature” business approach and institutional mindset includes improvements to internal reporting and compliance to fully developed financial planning and analysis functions, it found.
Historically, or even 10 years ago, most of this work would have relied heavily on Excel spreadsheets and human interpretation but private equity is finally catching up with fund managers and investors in other, more established asset classes.
“This is 30 years of firms doing this in Excel, with whatever model they’ve built, and have never tried to do something different despite how painful putting those models might be,” says a technology consultant to private equity firms.
However, not all fund managers are finding that an outsourced approach fits their business model.
Smaller managers, which typically rely on moving quickly to seize investment and fundraising opportunities, may struggle to integrate another link into the chain of a small team.
“If you need to be quick and nimble then outsourcing may not be the way to go – we have one fund admin who only checked their emails twice a day, at 11am and 3pm. We were banging our head against a brick wall [when we needed information quickly],” says one manager.
Key Takeaway | GPs: As private equity continues to grow by AUM, increased competition will force managers of all sizes to look at their cost base for efficiency savings, in some case triggering them to redeploy staff and resources into more valuable areas.
