Just occasionally, a private equity player has such a negative experience of outsourcing its back office that it decides to bring all its administration back in-house. This is what happened at Aberdeen Asset Managers Private Equity, which outsourced its administration to BNP Paribas in Glasgow in October 2000. The move followed parent group Aberdeen Asset Management’s £150m acquisition of Glasgow-based fund manager Murray Johnstone.
“It’s fair to say they made a bit of a hash of it for a couple of years,” says Bill Kennedy, head of finance at AAMPE, who formerly worked at Murray Johnstone and State Street. A chartered accountant, he was persuaded to rejoin AAMPE in January 2004 with a brief to bring administration back in-house. “The decision was made to bring it back in-house because it simply wasn’t working,” he says.
Communication is key
However, Kennedy says the back-office support functions on Aberdeen’s investment trusts, unit trusts and institutional funds have remained with BNP Paribas. Kennedy says: “Outsourcing works fine for those sorts of things, but it works much less well for private equity funds. It can work, especially if you build strong relationships, and if the communications are good. But there can be real problems if there are lapses of communication, for example when the private equity manager neglects to tell the outsourcer something. The blame is not always with the outsource provider!”
There are benefits to outsourcing. For example, deal flow is unpredictable in terms of timing. An independent and focused administrator is able to allocate staff to cover busy periods and there is also the advantage with some providers that the client doesn’t have to pay for activity when there is a lull in activity. The service provider will also cover the cost of employment, training and premises costs. The main reason an investor makes a decision to outsource their back office administration is in order to keep their own senior partners focused on the job of investing their funds’ money for investors. Limited partners demands for more detailed reporting requirements means that many GPs choose to delegate the more time-consuming administration to independent service providers so there is not too much impact on their own support staff. And, increasingly, UK GPs are outsourcing payroll functions and UK tax returns to specialist service providers in an effort to keep their business lean.
But some firms have enough money and manpower to make outsourcing a pointless exercise. A criticism of outsourcing is that the staff will generally work normal office hours and if an investor wants some information about a fund they are invested in or a particular deal, they have to do it within those hours, which can obviously present some problems for those LPs based on the West Coast of the US or in Asia. By keeping a team in-house, the information is always a call away and LPs are reassured that they can pick up the telephone at any time and speak to someone to find out what they need to know.
Kennedy says that, from his perspective, one of the biggest advantages of handling accounting and fund administration in-house is that his seven-strong team “sits right beside the [investment] team, which inevitably leads to better communications.” He adds: “Another advantage is that the in-house team is focused purely on those internal funds, can gain an expertise on them and staff are not having to cover for other funds or clients which can happen when things are outsourced – priorities are just different. Finding quality, experienced private equity accounting staff is a challenge for everyone and therefore we normally have to train our own staff. Thankfully the working environment tends to lead to high staff retention rates.”
Something that is critical when dealing with a business that manages a portfolio of over £256.2m for a variety of client funds. The private equity team at Aberdeen Asset Managers Private Equity is more complex than many private equity fund managers which may only have a few funds. They focus on mid-market deals valued between £10m and £50m throughout the UK, investing from a range of Venture Capital Trusts, Limited Partnerships and Local Authority Pension Fund clients, with a particular emphasis on support services, specialist manufacturing, consumer and leisure and financial services.