This article is sponsored by SANNE and first appeared in The CFO Guide to Fundraising that accompanied the December 2018/January 2019 issue of pfm.
The alternative assets industry may be booming, but that hasn’t made the business any simpler. The complexity of both the products and the regulations has given rise to a boom among service providers pitching their services to allow GPs to focus on what they do best: investing. Apparently, plenty of firms like that pitch.
In the pfm/SANNE CFO Survey 2018, over half of CFOs reported outsourcing fund accounting (61 percent) and a solid majority outsourcing technology (75 percent), with a little over a third (37 percent) outsourcing compliance. Going forward, it seems most of those not outsourcing admitted planning to outsource technology (26 percent), fund accounting (29 percent) or compliance (22 percent).
Who wouldn’t want to delegate more of these headaches to someone else? But as Fred Steinberg of the fund administrator SANNE told us, the appeal goes beyond workload and speaks to the difficulty in managing the operational side of alternative asset firms today, and the increasing demands of investors and regulators. With over 30 years in the industry, Steinberg, managing director, New York, has been both the client and the service provider as fund managers learned to stop worrying and start outsourcing.
From your perspective, what’s the level of outsourcing out there?
Fred Steinberg: It varies based upon the service. Traditionally, tax always has been outsourced. But in the last decade, more firms are outsourcing fund accounting and administration. As firms launched funds with various products in multiple geographies, it became more challenging for the back office to keep up. They saw the value in an outside platform with a pre-existing infrastructure to tackle that growth.
Technology is a large part of the equation. GPs might have started with Microsoft Excel and eventually migrated to a more advanced technology solution, but it became difficult for in-house staff to stay up to date with the latest advancements. Unless they had an internal expert dedicated to that role, it’s a hassle. Most times, when we sit down with new clients, they’re using their technology in a very elementary way. They appreciate the expertise in both administration and technology that comes with a service provider that focuses on these disciplines.
It varies by asset class as well. Real estate is relatively new to outsourcing, but private equity has certainly embraced it for accounting, fund administration and technology. Going forward, I expect more GPs will look for compliance services. There are KYC and AML requirements around the world, and as firms move into new geographies, that regulatory exposure multiplies.
While these regulatory requirements are crucial, they are not a daily task. They only need to be addressed periodically, but with speed and competence, so, in many ways, a service provider makes sense.
Are first time funds outsourcing more these days? It seems with such high caliber service providers in the market, it beats trying to build that back office from scratch when they’re starting out.
FS: That’s fair, and we do see more first-time funds outsourcing. Some of that is due to spin-outs from larger organizations that outsourced, so they’re already comfortable with service providers. However, they still need a CFO; everyone does. CFOs aren’t just dealing with accounting and finance matters nowadays. They’re directing matters on the operational side of the business with a focus on strategic priorities. There might also be an in-house controller for more granular activities, but these new groups simply are continuing a process from their former firms. We pride ourselves in offering real support to all our clients, new or established, because it’s natural for in-house staff to be more reactive than proactive in fund administration matters. They just have too much on their plates to act otherwise, so we like to be there to offer the most current best practices in our space. We can do that because it’s our core focus.
Have today’s LPs played a meaningful role in the growth of your industry?
FS: Not exclusively, but they are part of the landscape. They are more sophisticated, which increases expectations. The private equity industry still is relatively young, maybe 40 years or so. The investors involved now are large pension funds, sovereign wealth funds and endowments that often invest alongside the GPs.
More expertise comes with the enormous amount of money put to work. In turn, that leads to GPs being asking tougher questions. An established service provider can help ensure that those questions are answered quickly and satisfactorily.
More to the point, answers from independent providers lend credibility. We live in a post-Madoff world where there isn’t the same level of trust between fund managers and investors. We like to say we’re a transparent extension of the firm’s back office, and that transparency can be reassuring to LPs, who appreciate the independence that comes with an outside perspective.
Furthermore, there’s pressure on fees and expenses. While investors want to keep costs low, they also understand that fund accounting, administration and compliance are not where they want GPs to cut corners. Fund managers can allocate the costs of a service provider to the fund, which helps investors understand what roles are served by the internal team versus a third party. It can offer some much-needed clarity around those costs.
Many firms are expanding geographically. How important is it for their service providers to have staff and resources in these new geographies? How can GPs make sure their service providers are truly ‘global’?
FS: Some of our long-time domestic clients are assessing structures in Luxembourg or Dublin. It’s a natural evolution as each fund grows in size to start looking abroad for investors, and that requires ensuring that funds are structured in an attractive manner for them. That also means a service provider needs a physical presence to continue to service that new, more complicated, international fund.
Fund administration is complex enough without having to manage multiple service providers, often who have different technology platforms that will need to be reconciled by the client. A single administrator with boots on the ground in all relevant jurisdictions remains the best bet, and we feel that there’s a need to have a real presence in these places. Our clients are relying on us to understand the complexities and nuances of that new geography that they might not have themselves.
We fully expect our clients to perform the same exhaustive due diligence on us as their investors do on them. GPs shouldn’t take our word for it, but talk to current clients and other references to verify that we are a skilled and global provider. Our activities may be non-core to a firm’s business of investing, but they are a vital part of ensuring their overall success, and keeping their clients satisfied.