Passing the book

Private fund managers are outsourcing an increased amount of administration, but the reason for the trend depends on who you ask, 

The role of the chief financial officer is widening. Now “anything but deal sourcing” falls into the remit of many CFOs, according to speakers at January’s PEI CFOs and CCOs Forum in New York.

The evolving workload has increased outsourcing of traditional day-to-day tasks. More than half of the firms in a recent EY survey in conjunction with sister publication Private Equity International said they now outsource their tax, fund accounting and technology matters, with at least one-third of those that don’t currently outsource planning to start doing so.

A top motivating factor behind the decision to outsource was simple: time. Participants in the survey said they wanted to spend less time on regulatory and fund accounting matters and more time on portfolio analysis and investor relations – which they believe add value to the strategic direction of the organization.

There is also a fledgling trend for CFOs to get involved with deals, at least in the US. According to fund administrator Augentius, this has been a factor behind its increased workload recently.

“I have noticed that several of my male counterparts who have their MBA are getting involved with deals. I’m not sure if it’s a gender thing, or an MBA thing, or both,” Blinn Cirella, CFO at Sawmill Capital, tells pfm.

But this isn’t the case everywhere, Chris Merry, chief executive at Europe-based fund administrator Ipes, says.

“Tasks undertaken by chief financial officers vary from firm to firm. In a small firm, they may be heavily involved in the deals process, while at a firm with a larger headcount they may take more of a back seat, or not be involved at all.”

Growing demand for data from LPs, both at the portfolio company and fund level, means the CFO has no choice but to demand more from service providers, Cirella says. Every quarter the firm must provide portfolio-company-level data to several LPs for each company, each with its own data-formatting requirements, making it highly time consuming.

“One of our LPs has a process where we are required to upload data to their data gathering website. It’s a nightmare to fill out because it doesn’t follow traditional accounting and requires fund level and portfolio company level data. I would be very happy if a fund admin could take care of this for me!” Cirella adds.
Those service providers that invest in technology and build systems that allow data to be “sliced and diced” in a variety of ways will be very valuable to the stressed CFO, Cirella says.

“I know two fund administrators who have put considerable time and money into their system to accommodate the ILPA template. This was a very wise place to spend time and money. There is no way my team can provide this data, so if we had a potential LP who demanded it (and they were important enough to us) I would have to hire a fund admin to meet the demand. This is a whole new service offering.”

In the future, CFOs will be managers of service providers, including compliance, cybersecurity and fund administrators, and in turn fund administrators will become a commodity, meaning they will have to distinguish themselves from the competition.
“I think range of services (and price point to some degree) will likely be what rules the day,” Cirella says.

Ipes’s clients have been turning to third-party administrators because of the growing complexity of running a private fund, Merry tells pfm. This includes regulation, increased frequency of co-investments and investor demands for more information – pressures that are unlikely to ease.

“There are already various regulatory requirements in place – accountancy, regulatory reporting, Foreign Account Tax Compliance Act, Alternative Investment Fund Managers Directive, Common Reporting System demands – and they’re going to continue,” Merry says. “Further down the track there’s also a potential change to UK regulation, following Brexit, so that will create further complications.”

The consistent demand for co-investments add another layer of complexity, he says. “On the investor side, co-investments will remain popular and demand for reporting is also going to increase. There’s no standard reporting template or requirement, so you need to offer a bespoke solution.”

At Sanne, an administrator across multiple jurisdictions, increased workload has been the result of regulatory adjustment after the financial crisis. This changed the role of fund administrators, Charles Le Cornu, co-head of private debt and capital markets, says.

“The same themes are noted consistently. Regulatory change and investor appetite for transparency of information have seen the role of the fund administrator becoming increasingly important and more varied,” he says.

The firm has beefed up its policies and procedures in response to the growing threat of cyber-attack, and it now takes a much more proactive approach to risk management and cybersecurity, something it has also been able to pass on to its clients.

“[Cybersecurity] is something we at Sanne have monitored and we have developed future-fit solutions allowing our clients to be abreast of change and remain leaders in their fields,” Le Cornu says.

As fund managers become more comfortable with outsourcing, there has been a notable increase in the level of trust they put in their chosen third-party service providers, viewing them as an extension of the team. Gone are the days of clients reviewing every piece of information reported by a fund administrator.

“Fund managers have adopted an outsourcing arrangement for a reason: the onus is on the fund administrator to add real value, whether that be providing exceptional systems capability, regulatory expertise or compliance,” he says.

It’s clear CFOs have much to gain from outsourcing their administrative tasks – not only can they free up time to devote to other, more desirable tasks, but they can leverage the benefits of their service providers’ technology.

For those that are yet to outsource, the key roadblock is a lack of trust in third-party service providers. These typically relate to the ability of vendors to deliver a consistently high-quality service; in total 79 percent of participants in the EY survey said that substandard service level and quality was a constraint to outsourcing, while 68 percent viewed their inability to manage complexity as an issue.

Administrators that can challenge those perceptions are likely to thrive as CFOs look for ways to free up their time to spend on other pursuits