Focusing on core strengths is the primary driver for outsourcing, cited by over half of participants in the Private Funds Leaders Survey 2022, conducted in partnership with MUFG Investor Services. This is followed by a lack of internal resource and the cost of building inhouse capabilities.
Meanwhile, the range of functions being outsourced is far reaching. Over 40 percent expect to increase IT outsourcing over the next two years, for example, while more than half identify tax and fund accounting as functions that LPs would prefer to be carried out at arm’s length.
Abris, for example, outsources fund administration, fund accounting, legal services, investor tax reporting and some corporate and SPV administration. “Some of that is driven by regulation, but the main commercial driver for us is scale,” says the firm’s partner and CFO Stephen Richmond.
“Most of the services we outsource need experienced, professional specialists. These would be expensive to hire and bring inhouse and our current volume of work does not require any of these specialists on a full-time basis. For us today, it’s more cost effective to outsource and pay when needed but, like all outsourcing, this needs careful management to ensure quality control and delivery timelines.”
Steve Darrington, CFO at Phoenix Equity Partners, meanwhile, says he is on a mission to outsource as much as possible. “We are a relatively small firm and I have been embedded here since before our buyout in 2001. That means that, over the years, I have ended up taking on a lot of responsibilities and it can be difficult to work out who would take those on if I wasn’t here.”
Stellus Capital Management, however, has been on the reverse journey, with a move towards insourcing. “We have insourced investor relations and fundraising over the years and whilst we have outsourced our administrative agent, we have chosen to beef up our accounting staff and insource that function,” says founding managing partner Joshua Davis.
“We are a public filer in the US because we manage a BDC and having control of those financial statements inhouse is incredibly important. Frankly, we didn’t find the quality we needed when we were initially looking for external support, so we have tended to insource more than we outsource.”
Portfolio management and fund operations stand out as the areas where technology investment is most likely to have a significant impact over the next five years, cited by around two-thirds of respondents each. Meanwhile, 35 percent of those that took part expect technology to shake up origination.
“We are using a number of software packages to take some of the burden off the reporting requirements of our staff on the portfolio management side,” says Davis. “We have also found that there are some software tools that can really help on the relationship management side, in terms of origination. We are always looking for ways to explore automation, if it frees up time for our folks to talk directly to customers or work directly with portfolio companies, rather than just crunching numbers.”
Just under a third of respondents also expect technology to impact investor relations in the years to come. Equistone Europe partner Christiian Marriott is one such exponent. “When I first started in investor relations 25 years ago, it was probably more of a sales and marketing role. But IR continues to be transformed by the ongoing integration of data and analytics to help us articulate what we do to an increasingly sophisticated LP base,” he says. “This intelligence-led approach, supported by innovative technology, will become further entrenched as we manage bigger teams and become more proactive in how we source new types of capital.”
“There are some pretty amazing tools on the IR front that have really gained traction, particularly in the last few years,” agrees Ryan Hughes, managing director and head of investor relations at Stellus Capital Management. “Digital adoption amongst the LP community probably accelerated five years through covid, as investors became comfortable with the tools at their disposal.”