Internal productivity is highly dependent on rewarding relationships with vendors. Inconveniences such as a late office supply order can inhibit project progress, but a complex communication system with an outsourced fund administrator presents a far larger blockage in a firm’s inherently complex investment operations.
Pensions and Investments’ Rick Baert reported in March 2014 that private equity firms have embraced outsourcing for their back office functions, attributing this trend to more complex investment strategies, increased scrutiny and mandates in compliance regulations, higher flows into private equity, and demand for timely and accurate valuations from limited partners. Resource constraints have further driven private equity firms toward outsourced fund administration, with external expertise favored over implementing complex back-office technology. Brian Kelly, an auditor partner for private equity at KPMG, noted in this piece that adoption of external fund administrators has increased because “margins have thinned while the cost of operations has risen dramatically, mainly the cost of creating and using the technology needed for back-office work…overall, it’s cheaper to do the back office funds externally.” Kelly Hurley, the CFO of Arlon Capital Partners, echoed this sentiment. “I realized that the evaluation, implementation and customization of any of the [back office] platforms would take time and personnel that I didn’t have…I need a “plug-and-play solution, so I turned my attention to administrators.”
Outsourcing to experts does not completely optimize productivity or investor relationships, nor does it eliminate the potential for human error. Ceding internal control of fund administration can present significant difficulties if safeguards are not put in place. The lack of a centralized database for fund administrator communications can result in delayed reporting, or lost context for the fund management team.
While private equity firms may eschew a dedicated back-office technology solution, software platforms remain valuable tools for optimizing relationships with fund administrators. Industry-specific online reporting portals integrate with third-party accounting systems, and provide a fluid communications conduit between the firm and fund administrator. Fund administrators are able to instantly submit and categorize accounting data through a reporting portal, expediting retrieval and organization for a private equity firm. Portals further benefit both private equity firms and fund administrators by providing a secure location for back office data; platforms supported by robust physical and network security are far more protective of confidential information than shared drives and email accounts.
Online reporting portals further streamline the relationship between fund managers and outsourced fund administrators by creating accountability for the fund management team. Workflows can be created to notify fund managers when a fund administrator posts specific data to an investor portal, and assign next steps for managing the data to the appropriate contact. Establishing a structure for task management minimizes miscommunication and potential loss of productivity.
Private equity fund managers also build successful relationships with their fund administrators by providing the tools to streamline the fund administrators’ operations. Online portals simplify administrative processes, such as delivering capital calls, quarterly reporting, and performance statements. Investors are able to personally update their contact information within the portal, significantly reducing the risk of outdated investor information. Compliance processes are also simplified for fund administrators by segmenting relevant documentation within a central location, eliminating the need for manually tracking record collection within multiple spreadsheets. Additionally, fund administrators are able to password-protect, watermark, and place distribution restrictions on documents, ensuring investor data is not compromised.
Fund administrators are a cost-effective, proficient back-office solution for private equity fund managers, but agreeing to work with an outside source for a critical operation is only economical if the structure is in place to maintain a productive relationship. Front-office software, such as online reporting portals, maximizes the ROI of these partnerships by providing a robust, versatile communications hub between both parties. The intelligent automation inherent in these software solutions help ensure your relationships remain stable and productive.