Guest Contributor: Jane Conway, Executive Vice President for Alpha FMC, US
Outsourcing particular business functions has been an established and growing feature of the more traditional asset manager landscape. Private Equity (PE) asset managers have to date largely shunned this trend – and with good reason. This is now set to change. The case for outsourcing is becoming ever more compelling for PE houses – driven by the search for cost savings and the need for cost avoidance, a regulatory environment that is becoming more intrusive and onerous, and the emerging capability to de-risk non-core activities by leveraging the scale and expertise of third party administrators (TPAs).
The Development of PE Administrator Capability
Historically, bespoke PE administrators have struggled with the scale and breadth of service offering required for them to be seen as plausible partners for General Partners (GPs). Conversely, larger traditional TPAs have been perceived as trying to deliver the administration of PE assets through their core service functions, without fully accounting for the inherent idiosyncrasies of complex asset classes or fund structures.
In recent years, however, the administrator landscape has evolved considerably. Bespoke administrators are reaching a level of maturity and scale that establishes them as genuine potential partners to the PE powerhouses. Concurrently, global TPAs have understood that PE administration is fundamentally more complex than their traditional asset coverage, and that administration on hybrid long-only systems and processes will not suffice as a credible service offering.
A Positive Sales Message
Like their traditional asset manager forerunners, GPs increasingly see the value of the positive marketing message associated with independent administration. Such an arrangement demonstrates transparency and rigorous asset servicing in an environment of increased scrutiny by investors and regulators, particularly on those organizations managing alternative asset classes. Indeed the use of an independent administrator is becoming a key checklist item for some investors when considering where to allocate their capital. Regulatory scrutiny and consequent investor pressure are only likely to become more acute – a challenge that outsourcing may prove the most effective means of addressing.
Technology – Economies of Scale
One of the key benefits to working with outsource providers is the opportunity to leverage their significant investment in advanced technology and reporting platforms. All leading TPAs have invested heavily in these platforms, driving service and efficiency improvements across both traditional and alternative asset classes. Investment on such a scale, and the service and efficiency improvements that result, are the sine-qua-non for TPAs, in precisely the same way that asset managers are increasingly reluctant to undertake the scale of in-house investment required on non-core functions, just to keep up with more sophisticated investment techniques, asset classes, and regulatory requirements.
With all TPAs boasting impressive platform credentials, (some of which are more real and tested than others), the industry consensus appears to remain, in the PE market at least, that while the utopian vision of a “light touch” front end system interfacing seamlessly with a robust, complex administrator platform is edging closer, it is still some way off.
A Compelling Case?
With such a compelling array of factors pushing the PE market towards an outsourcing model, it is almost hard to believe that such a significant number of GPs continue to run their operations in house. However there is still some way to go before many GPs would feel comfortable relinquishing the control and direct oversight they have over their own administration. The most common deterrents to outsourcing remain:
- A belief that administration can be performed cheaper in-house; and that the ‘all-in costs’ of outsourcing, including oversight, still remain comparatively high;
- Operational risk arising from the complexities associated with migrating funds;
- The constraints that may be imposed on PE firms through having to adhere to standard models, and the limitations on TPA adaptability to business change;
- Cultural differences between nimble PE firms and global TPAs
Administrators, for their part, are responding to this challenge head on, targeting mandates for start-up funds, and adapting their value proposition and service capabilities to a level that they hope will open up opportunities for a wider outsourcing trend across the PE market. After all, with the continued squeeze on profit margins experienced in most large legacy asset manager outsourcing arrangements, it is precisely these sorts of new markets and opportunities that present TPAs with the most promising route to new, profitable business.
The Challenge and Prize Ahead
All market participants face challenges as the PE outsourcing market develops. For the GPs, it is about evaluating the real cost of running their business, anticipating the impacts of changing regulatory and investor requirements, and choosing an effective end-to-end operating model that best serves their future business needs. For bespoke administrators, the challenge is to maintain the momentum they have built and to identify ways to maintain their niche foothold in servicing GPs. They face a challenging environment as the larger Administrators produce increasingly more compelling PE-specific servicing solutions and operational platforms to support them. Larger, international TPAs must demonstrate that they can be flexible, client-focused and accommodating – which is always a tough balance to strike in a business which fundamentally demands scale and standardisation. However, their continued development of innovative and differentiating PE solutions alongside their broader service offering is likely to prove an increasingly compelling proposition for GPs.
To find out more about the latest trends in asset management outsourcing from the market experts and participants, be sure to attend the “Asset Management Outsourcing: The Insider’s Guide With a View From Both Sides,” lead by Alpha FMC’s US EVP, Jane Conway Ph.D., on June 14, 2012.
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Silos, in the farming industry, refer to large structures designed to hold a specific grain. In technology, silos refer to the division between groups within a single enterprise and ‘silo effect’ refers to a lack of communication and common goals between multiple business units implementing changes simultaneously without strategic coordination. Just as in farming, silos are only steady when completely contained – however, if you open up the bottom of a silo, the grain within will quickly drain and set every single grain into motion. Similarly, siloed systems can create instability and negative impacts across an enterprise.
