A recent study by CSC, a global administration and outsourcing solutions provider for alternative asset managers, reveals a growing trend among private capital firms to outsource distribution waterfall modelling and calculations to third-party specialists.
The report, Distribution Waterfalls 2024: Transparency, Technology, Trust, surveyed 200 general partners (GPs) and 200 limited partners (LPs) across North America, Europe, and Asia-Pacific. It highlights a significant move toward outsourcing as firms navigate increasing demands for transparency, accuracy, and customisation in waterfall arrangements.
The study found that 92% of LPs expect more GPs to outsource waterfall calculations within the next two years. Moreover, 87% of LPs said they are more likely to invest in GPs leveraging third-party services for these complex tasks.
“LPs value the independence and expertise of third-party providers, which help minimise errors and ensure accuracy,” said Silvia Tong, CSC’s Director of Fund Services for North Asia. “Outsourcing also reduces potential conflicts of interest, further enhancing trust between GPs and LPs.”
The findings indicate that GPs are increasingly prioritising outsourcing to address the complexities of waterfall provisions. 75% of surveyed GPs plan to outsource more waterfall services in the next two years, while only 17% intend to keep these calculations in-house.
“Waterfall provisions often involve intricate calculations and bespoke legal terms tailored to individual LP agreements,” said Alejandro Jr Tan, Senior Manager of Fund Services at CSC.
“Outsourcing helps GPs meet these challenges, providing transparent and objective data while building stronger investor relationships.”
