In the straw poll of LPs conducted by EVCJ, 66% of LPs said they were neutral on the topic. These LPs claimed that, when choosing where to invest, they are unlikely to be swayed by the GP’s use, or otherwise, of outsourcers. Instead, they said that what matters is whether the information they are provided is robust, reliable and timely.
John Gripton, managing director and head of investment management at Zug, Switzerland-based Capital Dynamics, says: “As Capital Dynamics reviews reports for approximately 650 funds, it’s very important to us that the information is shown in a clear and concise manner. As the reporting service can vary between administrators, we have no preference as to whether the data is received directly by a GP or through an administrator.”
Gripton added that Capital Dynamics – which has some US$20bn (€13.3bn) under management and additional offices in the US, UK and Hong Kong – would never urge its existing GPs to outsource their back offices.
Only a minority (33%) of LPs said the use, or otherwise, of third-party administrators by GPs was taken into consideration when they are selecting GPs. Sam Robinson, a managing director at SVG Advisers, says: “The most important thing is whether the GP is capable of providing accurate, well-presented and timely data. Whether this is delivered internally or externally is less critical than whether it can be done at all.”
Gripton agrees with Robinson on this front, saying: “The use or otherwise of third-party administrators is not usually a factor when selecting GPs. We look for the quality of the reporting service provided, regardless of whether a third-party administrator is being used.”
Robinson does not believe the data provided by third-party administrators is any more robust, reliable or less susceptible to fraud than that which comes from in-house teams. “That is a bit of a red herring,” he said. “If the data they provide was hard-to-read or potentially misleading, it clearly wouldn’t reflect too well on a GP. However that is always a secondary consideration (to investment performance and philosophy).”
SVG Advisers, which manages €4.5bn of private equity funds, maintains close relationships with the former Schroders offshoot Permira Advisers, and manages eight private equity funds of funds, five public equity funds which use private equity techniques, five single manager funds and two collateralised loan obligation equity funds.
In the end, Robinson sees merits in both routes. He says that in-house administrators, if they are good at their jobs, “have the advantage of being more up to speed with current issues and developments within their sector.” However he believes that external administrators “will be more aware of best practice and how other private equity firms are doing in the areas of financial reporting and administration.” He says that one solution for GPs is to have a foot in both camps and use both internal and external administrators.
However, one disadvantage to the use of external providers, says Robinson, is that “they can be harder to pin down than a GP’s in-house administration team.” By this he means the person with the information the LP needs may be unavailable when they are wanted. This can be exacerbated by factors including whether reporting lines within the outsourcing business are hierarchical (it’s apparently better if they are), as well as levels of staff churn within the specialist company. Robinson believes staff turnover at third-party administrators – which even last year had reached problematic levels – has, if anything, increased over the past 12 months.
Robinson says that, if they had the choice, in the best of all possible worlds, most GPs would prefer to handle all finance and administration in-house. He says: “There are perhaps 2,000 private equity firms in the world. Only the top 50 to 100 of these firms can justify the expense of having an in-house investor relations and financial function. Effectively, this means the vast majority of GPs have little choice other than to go down the outsourced route.”
Gripton believes, however, that the use of specialist outsourcers by GPs can bring real benefits to LPs – especially if it is committed to scores of different funds. “The main advantage is the standardisation of data that is provided,” he says. “This applies especially where the same administrator is used by several GPs. It can also be helpful to have one point of contact for queries.”