CASE STUDY: Cognetas

Cognetas, a mid-sized UK PE firm, believes that the key to outsourcing fund administration resides in a solid relationship of trust and a healthy personal connection. The CFO, Simon Brown, said when a PE firm believes that the offshore administrator actually knows the client in depth, and makes them feel that they work as their employee, then the recipe is convenient and beneficial.

The CFO explained: “Cognetas used to be Electra Partners Europe, which was a buy out from Electra in July 2005, although the origins go back to ‘old Electra’ days”. Cognetas now has two funds worth €2.26 billion and focuses on business services, the industrial, healthcare and the consumer sectors.

The first offshore fund was launched in 1999 and an offshore administrator was needed, so Guernsey was chosen. Brown said: “At the time, Electra had a back office function for its UK activities but Guernsey was different. The decision was taken by my predecessor to outsource everything initially. I’m sure I would have done the same, monitoring how it goes initially and bringing back in house any part which didn’t seem to work. But in the end we didn’t “insource” anything and when the 2005 buyout happened, at the time of the second Fund, there was no sensible reason to change anything.”

Today, both Cognetas funds are administered by IPES. Fund one closed in 2000 and its €1 billion are fully invested. Fund two is still being invested after its launch in July 2005, and currently has €1.26 billion in assets.

The CFO said that IPES does administratively almost everything, including much of the accounting, and the day to day contact with investors. This includes distributing information, asking for draw-downs, sending out emails, and looking after and updating their website. “It’s a full and comprehensive service that we are satisfied with”.

Brown clarified that IPES is not asked to value the portfolio. “We made a strategic choice because valuation is extremely technical and, like most GPs, we want to be in charge of that”. He said that they use IFRS accounting (International financial Reporting Standards) in conjunction with EVCA valuation guidelines because they are accepted and flexible enough to provide a sensible range of valuations. “It does however require an element of judgment that we want to control”.

IPES is also not asked to prepare the content of reports that go out to Cognetas investors. “They do provide lots of information included in the reports, but we want to determine the creative aspect,” Brown said.

The CFO admitted that the selection and negotiation process of finding a third party administrator was very short. His predecessor flew to Guernsey and interviewed a number of candidates. “He was persuaded to see IPES at the last minute and met with Executive Chairman, Connie Heylar. The very next day he told her that IPES had been appointed!”

Brown added he fully endorses that decision given his experience of IPES. “What you really need to look for is a personal fit because services offered are relatively similar. So the personal connection is very important. It is all down to the relationship”.

“At IPES we have a team that understands and is focused on our business. They deliver an extremely high quality service in a jurisdiction that we are not in,” the CFO said.

Cognetas prefers to have one main outside “reliable, keen and flexible person” to deal with on its day to day matters. But they need more senior contacts to discuss strategic issues.

Brown underlined that while their general partner is in Guernsey there are still many things they could do themselves in the UK. “But the service is efficient and done very well, so its suits us to have it outsourced. It is not because it frees up time, but because it works well”.

The CFO conceded that setting up a back office in Guernsey had been considered, and a number of larger houses have done it. “At this stage it’s not worthwhile for us. There may be cost savings, but they would be marginal. If we had three active funds running simultaneously it would make more sense, but I’m happy with the status quo for now.”

Cognetas’ major outsourcing benefit is that their whole team worries less about the back office function. “Our front office is almost completely segregated from our back office. The two don’t really interact much. It has not significantly boosted our deal making capacity, but has provided small fringe benefits”.

The downside of outsourcing, Brown underlined is the loss of control and “that’s why I stress the need to be able to rely on your administration partner”. The cost is not a substantial issue given “the marginal added expense than to do it alone for the moment,” particularly given the monetary scale of most mid-sized PE players.

What is more important is to “feel that they are acting as if they are working as my employees and not for a separate company”.

Brown advice on outsourcing is that: “You have to keep close to them, keep on top of what you expect and don’t take anything for granted. The relationship only works if you have one reliable contact, and it is important to be able to trust that person absolutely”.