UMB Financial : Why Private Equity Leaders Continue to Move to Outsourced Administration

As institutional investors continue to take interest in private equity, transparency and accountability are more important than ever-and they are driving fund managers to open their minds to the outsourcing proposition.

Investor interest in private equity funds remains strong, and Preqin research‡ shows that private equity firms raised $714 billion globally last year, bringing the overall amount raised since 2014 to $3.7 trillion. We anticipate this trend won't abate as investors continue to search for alternatives to more traditional equity and fixed income investments. Institutional investors are increasingly demanding third-party service providers be involved to lower their risk and increase their comfort level, but there are additional benefits to an outsourced model that managers should consider.

A case for outsourced private equity administration

Meeting investor demand may be the reason managers begin to consider outsourcing. With a third-party administrator, investors have the benefit of knowing there is oversight in the accounting and cash movement processes. However, given the complex demands that managers face, outsourcing often allows them to focus more on the fund itself, as opposed to administrative functions. Some benefits to consider include:

• Gaining efficiencies
  Complex fund structures and investment types are a strength of fund administrators. Outsourcing allows managers to focus on their core investment strategies. Administrators do the heavy lifting when it comes to implementing best practices from an accounting perspective in order to deliver accurate reporting .
• Reducing risk
  Managers are turning to administrators to implement proven controls, processes and technologies that are costly and time-consuming to implement in-house. The risks continue to grow for fund managers including privacy concerns, errors and omissions. Administrators are not only documenting and auditing their policies and procedures, but they are making sure their organizations are adhering to those policies.
• Meeting regulatory requirements
  Administrators can add value by staying ahead of the curve and responding quickly to evolving regulatory requirements across their broader client base. Managers can look to their administrator to point out potential blind spots or advise on best practices related to new and changing requirements both on and offshore.
• Upgrading technology
  Maintaining technology solutions in a rapidly evolving industry can be challenging. Administrators are able to invest in technology and enhancements to support regulatory change faster and more efficiently than in-house money managers.

Overall, the greatest advantages for a manager outsourcing to a third-party administrator are increased efficiency and reduced operational burden.

Partnering for success

Managers are typically wary of outsourcing for reasons such as the perceived loss of control or a potential lack of understanding about their product by the administrator. Managers may wonder if their external partner can be trusted to deliver in the same way their internal team would. However, those concerns can be addressed by partnering with an administrator who is willing to take the time to understand funds and embrace individual needs.

In making this important decision, managers should conduct extensive due diligence to ensure the administrator is reputable and has proven policies. Beyond that, ask for references from a variety of clients. Ask questions about service levels, timeliness, access to key personnel and how knowledgeable the service team is about the particular fund products. A quality administration team can feel like an extension of your own office.

Ultimately, the technology platform supporting each function is the most critical component to success and is a major differentiator in the administrator space. All private equity funds are unique, and the technology supporting these funds needs to reflect their specific needs. Quality administrators have customizable technology tailored to each manager's needs. Technology should be continually developing to keep up with changing investor demands, regulation and product trends­. In addition to sourcing off-the-shelf technology, leading administrators may also offer proprietary technology which allows for even more customization and market responsiveness.

Administrators should provide robust reporting and online access to fund information, including portfolio company and deal information, investor information and comprehensive financial reporting. Fund managers need real-time access to their fund information, and an administrator partner should deliver reliable, timely and accessible data. At a minimum, administrators should be able to provide a detailed schedule of investments, committed capital summaries, performance information including MOC, IRR, TVPI, DPI, and RVPI, and since-inception transactional information and reporting.

An experienced administrator can provide a wealth of services to private equity managers including administration, accounting, tax, custody and investor servicing. Managers can better meet the demands of today's investors-which is critical to growth-with an administrator that takes the time to understand the unique components of each fund.

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