Outsourcing picks up steam in PE

Private equity is becoming a more lucrative market for fund administrators, but investors are still not comfortable with certain mid-office functions being outsourced.

Private equity managers are catching up to their hedge fund counterparts with respect to the amount of funds under third-party administration, a trend observers attribute to increasing regulatory requirements and investor confidence.

Total private equity assets under administration, including infrastructure, private debt, real estate and fund of funds, grew 23.7 percent year-over-year, reaching $1.58 trillion by end of 2014, outpacing the 15.5 percent growth rate of hedge fund assets under administration, a study from eVestment found. The software provider, which links managers with investors online, collected data from over 30 of the biggest fund administrators in the alternatives space, including State Street, Citi and SEI.

Despite the trend, hedge funds remain the more lucrative market for administrators with $4.22 trillion in assets under administration. Administrators estimate more than 50 percent of private equity assets are still managed in-house (compared to almost universal adoption by hedge funds) but cite regulatory factors like depository requirements under AIFMD and increasing investor acceptance of third-party administration as contributing to the recent shift.

Investors are most comfortable with fund accounting, treasury and tax being outsourced, a recent similar study from EY and parent publisher PEI found, but prefer GPs to retain control over middle-office functions like portfolio analytics and valuation.

In the time ahead, private equity CFOs plan to outsource tax, technology, human services and treasury functions at a quicker rate than CFOs who plan to hire internally to satisfy these functions, the EY study found.