Technology-driven co-sourcing is fueling Darwinian competition in fund administration

Fund managers should be ecstatic. Fund administrators should be happy too.

Are you a fund manager who keeps a separate set of “shadow” books for investor questions in case your fund administrator might take too long to answer? Have you discussed switching fund administrators with your colleagues only to conclude that the costs and distractions associated with a change would outweigh the benefits?

Bryan Botha

If you answered yes to either of these questions, you are not alone. The high cost and expertise required to develop new fund administration technologies and the increasing complexity of investor demands is driving PE and VC fund managers to outsource back-office tasks more aggressively, according to Private Fund CFO’s Fund Leaders Survey 2022. At the same time, close to 40 percent of fund managers feel that their service providers’ lack of bandwidth was a headwind for closing deals, an increasing trend from the previous six months, found BDO’s Private Capital Pulse Survey for Spring 2022.

What if there was a way to partner with your service provider that effectively eliminated these constraints?

A new breed of fund administrators and technology platforms are adapting to meet the expectations of managers who want to rebalance the risks and rewards for improved partnership with their providers. These efforts have spurred innovations in ‘co-sourcing,’ where GP managers invite their fund administrator into their own tech stack rather than losing control of their data to their service provider. It may come as a bit of a surprise to know that today this loss of control remains by far the most common approach when GPs outsource to a fund administrator.

Where once cash was king, today’s king is data. An important strategic advantage for fund managers to consider is to what extent their current tech stack supports co-sourcing. A GP’s tech stack is where their mission-critical portfolio and investor data is secured. When engaging the services of a fund administrator, managers may inadvertently be farming away this data to their service provider’s tech stack. They do have a choice and will want to proceed with eyes wide open to the downstream impacts from the outset. More and more technology vendors in the private capital markets are innovating to support co-sourcing for the growing number of GP customers who demand it.

As a result, fund managers today can benefit from more flexibility and security when choosing technology and service partners who support co-sourcing. Co-sourcing has essentially put fund managers in a position where they can pick the right administrator for their next fund based on merit rather than hereditary claim. In this new world, performance, counsel and service win out over inertia. As the demand for outsourced fund administration services continues to increase, the choice of providers available to GPs is creating an opening for those firms willing to innovate.

Getting the best counsel

Co-sourcing allows fund managers to benefit from the valuable services offered by fund administrators without losing control of their data. This shift enables fund administrators to manage their client’s books and investor reporting directly on their client’s tech stack. Traditionally, when a fund manager looked to outsource, they had no choice but to turn over control of their data to their fund administrator. Today, fund administrators are increasingly adapting to their clients’ evolving needs, with the emphasis shifting away from exclusivity and entitlement toward innovating services and improving performance.

Fund managers are able to derive benefits from co-sourcing in multiple other ways. With direct access to their critical data, managers always have the information they need to act on time-sensitive decisions in real time. Having to wait days to hear back on an answer to a question from your service partner is a real disadvantage to the traditional model. By avoiding the exchange of sensitive and confidential data with their administrator via email, GPs can mitigate operational and reputational risks. Furthermore, by leveraging one single source of truth, GPs improve their efficiency and no longer have to manually reconcile a separate shadow set of books. Co-sourcing gives GPs direct access to the books maintained by their service provider so they can instantly check and reconcile with their bank or other counterparties.

Should the need arise, co-sourcing also makes it easier for a fund manager to switch to another fund administrator or to leverage multiple fund administrators across their portfolio of funds. Let’s face it – fund managers routinely discover a gap between what their professional service providers offer and their needs. With co-sourcing, your administrator does not possess your data, you do, thereby removing the pain associated with moving your data from the old administrator to your new one.

With your data safe and under your control, bringing a new fund administrator on board is a breeze. Co-souring can be uniquely branded to your firm so you are in full control of the user experience for all external stakeholders (both LPs and GPs). Lastly, scalability can be achieved more quickly – you can add another partner or provider into your same tech-stack. Compared with the traditional approach, implementation fees and switching costs are marginal.

A win-win

Some readers might wonder why fund administrators would embrace co-sourcing. Don’t they want switching costs to remain high? Those costs are a kind of moat that protects their business. This thinking is wrongheaded on many levels. Many fund administrators have seen the benefits of this new approach.

With co-sourcing, fund administrators are no longer forced into playing middlemen between their clients and their technology vendors. When they onboard a new client, there’s no painful implementation or data migration typically required with the traditional onboarding model. The trend toward co-sourcing opens the playing field for firms willing to innovate and tailor their offerings to the specialized needs of their customers.

Lastly, fund administrations that embrace co-sourcing focus on service – which is the point, isn’t it? When administrators up their game, the managers win. That means administrations do too.

Bryan Botha is head of business development at Ark, a cloud-based fund administration platform for private market funds and fund administrators