Do-it-yourself dilemma

The debate over how to allocate resources to the fund administration function continues.

Within the private equity universe, a sizeable portion of GPs are finding themselves faced with the need to expand their fund administration capacity, in light of the increasing size of funds, their investor base and the complexity of reporting requirements. The boom times seen on the fundraising and dealmaking fronts have necessitated a catch-up of sorts for many of those lucky individuals in charge of administering these growing and active funds.

The resulting ?to-dos? range from recruiting additional CPAs to organizing existing talent, from maintaining the IT platform to analyzing new software, from complying with current regulations to anticipating with the rules on the horizon. Suffice it to say that those responsible for running the financial and operational aspects of private equity funds have more on their plate than perhaps ever before.

In the face of the madness, one consideration that many GPs grapple with is whether to outsource some portion of their fund administration needs to third-party service providers. After all, there are now dozens of third-party fund administrators that have cropped up, and they are more than happy to step in and lend private equity CFOs and COOs a helping hand.

At one end of the spectrum are those GPs that prefer to develop their own fund administration team and expertise rather than entrusting the function to outside parties. The argument there tends to be that, by establishing the back office as an in-house function, it is possible to obtain a greater degree of responsiveness, as well as superior customization abilities as they pertain to analysis and reporting. Even though the do-it-yourself model translates into having to be on top of technological developments and accounting for the additional real estate need to house an internal fund administration team, many GPs today still prefer the ?hands-on? approach.

The top deciding factors are strategy and budget – both present and projected.

The chief financial officer of one US midmarket buyout group commented that the rising number of funds of funds that the firm has taken on as LPs, coupled with the increased activity in secondaries trading, have resulted in a greater workload for the firm's fund administration team, requiring a lot more interaction with LPs. He has seen some other private equity firms who have adopted the outsourcing model – thinking that it would be a ?cure-all? – who then ended up frustrated with the effort, given their specialized needs.

On the other side of the spectrum, the enthusiasts of thirdparty fund administrators say that good providers have evolved to be able to provide services in a way that is in sync with such GP needs – and perhaps just as importantly, their culture – while at the same time providing more manpower and an expansive body of knowledge.

Perhaps the two considerations that stand out as the top deciding factors are strategy and budget – both present and projected. Those firms managing larger funds clearly have larger management fees to funnel toward operational costs. Some private equity shops, such as those captive GPs that are part of a larger institution, have the luxury of allowing their financial management be more focused on investment capacity, rather than the fundamental cash flow management of independent shops.

Other private equity firms – and it's interesting to note that this population is expanding – are diversifying their businesses and pushing into the asset management realm. Firms like American Capital and GSC Group have found that investing in the establishment of a strong in-house back office capacity has translated into greater ease when adding on new product lines and growing their businesses.

However, for those smaller, leaner operations that do have to deal with the ?keep the lights on? issue, budgeting is still a key concern, particularly as the cost of administering funds continues to rise. Particularly for these firms, whether it's better to have accounting experts who have intimate knowledge of the firm while being physically located within steps of the GP's finance chief, or if it's preferable to utilize the wider swathe of talent that third-party administrators can provide, continues to rest on the priorities and preferences of the private equity firm in question.