This article is sponsored by MUFG Investor Services.
One of the by-products of the covid-19 pandemic is a fundamental change in the way we work. Whether it is the increased acceptance of remote working or the re-evaluation of our office requirements, the last 18 months has seen a seismic shift in how businesses and finance firms operate.
There’s also a clear trend towards outsourcing, as highlighted in the inaugural MUFG Investor Services sponsored Private Funds CFO Leaders Survey 2021. The survey outlines how private markets firms have reacted to the pandemic by focusing their in-house attentions on areas where they can genuinely differentiate, while bringing in third parties for anything deemed non-core.
With LPs demanding more data and regulatory pressures mounting, the use of external service providers looks set to increase. We sat down with Mike Dickey, head of product development at MUFG Investor Services, and Joseph Latini, global head of business development, to discuss why the outsourcing model is finding growing acceptance in private markets.
How would you describe the current level of outsourcing that you see across private markets?
Joseph Latini: Outsourcing today is certainly relevant to all private market managers, and the need for it has only intensified with the challenges of the past 18 months. A manager’s primary focus is always on asset growth and alpha generation, so if there is a cost-effective, low-risk solution to support operations, that can only be seen as a good thing.
We have seen outsourcing become a globally accepted solution that spans the entire spectrum of managers. Emerging and mid-sized managers will look to outsource as much as possible to focus on launching a new product. While the larger more established managers with $15 billion-plus of AUM, who have historically insourced, will be looking to see where they can find efficiency plays.
One area that no one could have predicted, is the effect covid-19 has played in revolutionizing the future of work. As we plan on what the future of work will look like, even these mega-managers are now revisiting the fundamental questions around working practices, office space, costs and outsourcing.
So, the pandemic has really accelerated the outsourcing trend. What are the other key drivers?
JL: There are a whole confluence of factors ranging from LP demands to a proliferation of regulation and an enhanced focus on ESG. When taken in conjunction with an unprecedented global pandemic, the ability to outsource non-core, but vitally important, operational functions to a trusted partner has become a source of comfort for firms.
We have all experienced many things over the past year for the first time. Mass working from home, remote investor relations and remote transacting were completely new phenomena. Against this hugely challenging backdrop, knowing you can outsource to a trusted partner is seen as a flight to safety.
There are clear advantages to outsourcing, then. But what are some of the common objections to the outsourced model and how can you overcome them?
JL: A loss of control and inadequate transparency can be problems if a manager doesn’t choose the right partner. It is all about making sure that your partner has a proper service model that includes a layer within the organization dedicated to servicing clients: a team that digs deep into all the operating processes, while speaking the same language as the client. An outsourced relationship shouldn’t feel like a function is being put in some distant place where you hope for the best outcome – outsourced partners should feel like an extension of your organization.
Mike Dickey: A robust client service model is certainly one way we deal with the challenges of loss of control and lack of transparency. Another is through data. Data is increasingly integrated between our organization and our clients to access the information they need readily. Giving them ownership of their data allows clients to make use of data in similar ways than before they outsourced.
Which functions are most commonly outsourced and which do you expect to be more widely outsourced in the future?
MD: Administration is always going to be one of the most widely outsourced functions. Regulation is another function that few firms are choosing to tackle in-house. What we see now, however, is a growing number of managers looking to outsource technology needs as infrastructure becomes more complex and costly.
The question is, who is going to meet this need? Is it something that service providers will take on, or will it become more of a standard vendor-based product? It will be interesting to see how that plays out.
What trends are you noting around ESG monitoring and reporting, and what level of need for external service provision is that creating?
MD: We are seeing managers focus heavily on establishing ESG policy and embedding that policy into their investment processes, as well as on managing ESG reporting and the bespoke information requests from LPs. The bulk of that work is still taking place manually, which can be highly labor-intensive. But firms are starting to recognize that help is out there. We, for example, can provide technology and consultation that can help firms better manage their ESG requirements.
We work with them to establish the information that they need to capture and monitor. Then using technology, we ensure that information is gathered and stored in an appropriate way to facilitate analysis, reporting and benchmarking. I would also add that an important challenge in the future will be demonstrating a positive correlation between ESG and performance. I think that will require a longer track record and bigger data set but will be a critical development in the future.
What evolutions have you seen in the provision of fund finance?
JL: The use of fund finance continues to grow across all strategies and jurisdictions. Subscription lines and capital call facilities are a huge part of the discussions we have with clients.
The ability to provide fund finance alongside our other outsourced services is extremely important. Being able to provide multiple services not only gives clients efficiencies, it also reinforces the overall partnership approach.
Additionally, we are also seeing that closed-end funds are becoming larger and larger. As a result, the subscription lines and capital call facilities being sought are often getting so big that it requires syndication across several banks. As we all know, balance sheet is not unlimited, so taking a holistic view on a client is certainly important.