Turning the tables on fund administrators

Most fund administrators use antiquated technology that doesn’t allow clients access to their data. Co-sourcing turns the tables on that, writes Celeste Barone of 4Pines Funds Services.

Have you seen your chief financial officer lately? If not, they may be trapped beneath an avalanche of data just when their teams need them most as the C-level’s newest stars.

That’s because today’s client-facing CFOs have more responsibilities than ever. They play a significant role in charting their organizations’ growth, have a seat at the executive table, work hand-in-hand with the investment committee, foster meaningful relationships with outside vendors, interact with investors, while also fulfilling the back-office operations of the firm.

Celeste Barone

To illuminate bold paths while still fulfilling their everyday duties, CFOs are increasingly outsourcing their fund administration. Many are discovering, however, that simply hiring a service provider doesn’t eliminate all their headaches. In fact, a stark divide exists between innovative fund administrators who use technology to optimize fund management versus shops that cling to legacy systems that hinder CFOs from reaching their potential.

Most fund administrators today, for example, possess and retain clients’ accounting data in their systems. This arrangement hampers the free flow of information between fund managers, LPs and others. Equally important, firms that seek to extract that data face major hurdles making it difficult to switch to another administrator.

Co-sourcing, a new type of service model where CFOs keep their data while a service provider works within their system, has arisen for CFOs who need outside expertise but insist on retaining ownership of their information.

Jerry-rigged tech stacks

Fund administrators need to embrace new financial technologies and solutions to handle their fast-changing core reporting and accounting needs. Most, however, still use jerry-rigged tech stacks that require accountants and others to manually maintain elaborate spreadsheets to fulfill their duties. Few are inclined to tackle the thorny project of migrating to another platform.

Among managers overseeing assets from $2.5 billion-$15 billion, for example, less than half deployed technology or outsourced to new service providers to address margin erosion in the last year, a potential sign of reluctance among some managers to change with the times, EY’s 2023 Global Private Equity Survey found.

Older fund administrators are stuck with their in-house legacy systems and dated service models. Rather than pursuing a new approach to fund administration like co-sourcing, which has become more popular in part because it avoids burdensome data migrations, they’re settling for less because the market hasn’t seen such a bold offering.

Interestingly, however, the survey also found that firms managing more than $15 billion were much more amenable to investing in new tech and fund administration. Seventy-two percent deployed new technology, and 62 percent increased outsourcing.

The larger firms are adapting to reality. From the lockdowns and the rise of remote work, the financial industry has learned that, while in-office collaboration is still essential, professionals can be remarkably productive virtually if they have the right cloud-based tools. This evolution in thought has bolstered the case for outsourcing, too. Team members don’t need to be on-site to deliver impact. They need the right people and the right technologies.

Far-sighted partners

As a result, far-sighted CFOs today are looking for fund administrators who can serve as their tech-savvy partners. They want service providers who will leverage new tools to help adapt or overcome whatever disruptions come their way. “Going forward, PE-owned companies of all sizes can consider outsourcing as a way to access technologies and capabilities that can lead to revenue growth opportunities, in addition to reducing costs,” according to an EY podcast.

Even the words we associate with the CFO role have changed, according to EY. Gone is the era when traditional financial terms described the CFO value set. The right words now for the role include “tech-savvy, flexible, analytical, adaptable, versatile, data-focused, dynamic, creative and commercial.”

Technology alone is not enough, of course. According to Deloitte’s 1Q 2023 CFO Signals survey, 64 percent of respondents said their leading challenge to deriving insights from data was inadequate technologies/systems. But almost 60 percent said a lack of experienced talent was also keeping them from taking full advantage of their system’s capabilities. Human talent, in other words, is still absolutely necessary.

Static on the line

In the past, when under intense pressure to perform, the old reaction among CFOs was to lean heavily on the back office. Today, however, successful CFOs are recognizing those back-office functions for what they are: static on what should be a clear channel. Executing those tasks more efficiently through outsourcing and technology, they’re realizing, helps them derive insights from their data and sets them free to shepherd big ideas to fruition.

Co-sourcing in particular is a version of outsourcing that boosts capabilities while affording firms maximum flexibility. Because they have constant access to their data, CFOs can quickly and efficiently gather information, easily perform external checks on functions like valuations and reporting, leverage their existing systems, streamline internal processes and cultivate deeper relationships between CFOs and their fund administrators.

With co-sourcing, PE managers retain the license to their financial software but grant their fund administrators access to their systems. They can easily change service providers, never lose possession of the data and not be held hostage by their fund admin.

Co-sourcing, however, is only one example of the advancements that CFOs in private capital can enjoy if they engage the most innovative fund administrators. By scaling service providers and the latest technologies, they can seize a world of opportunities and set growth trajectories for their firms.

Celeste Barone is a co-founder of 4Pines Fund Services.