Fund accounting has been transformed over the past decade. Ten years ago, an investor might receive a handful of emails a year with a few spreadsheets or PDFs attached detailing how its investment in a private equity fund was doing. These days, investors expect a lot more. Many want access to granular information about portfolio performance on a near real-time basis.
That transformation has placed a greater burden and cost on the finance function at private equity firms and means many more firms are considering outsourcing the difficult but crucial work of fund accounting. The stakes can be high. If firms get it wrong, it can lead to problems with regulators or disgruntled limited partners that think twice about reinvesting. Affiliate title Private Equity International picks out five key considerations for CFOs looking to outsource finance functions.
Do your homework
Unlike lawyers or accountants, fund administrators and outsourcers are among the few service providers that deal directly with a firm’s all-important investors, so doing your homework on an outsourcer before it has been appointed is crucial. This can be developed through personal relationships with an outsourcer or through references from other private equity firms.
David Sims, finance director at mid-market firm Tenzing Private Equity, says: “The administrators are an extension of myself and of the firm, so building that trust and relationship is really useful and important. If the administrator mucks up, then that reflects badly.”
Sims recommends not just considering what you will get from the outsourcer but putting yourself in the shoes of the outsourcer and “thinking about what you mean” to it as a client. Are you significant enough for it? Will it take the time to properly foster the relationship? Is it going to work for both of you?
James Duffield, group head of business development at Aztec Group, agrees that one of the most important aspects of making the outsourcing process work effectively is picking a provider that fits the firm and its ethos. “It’s about partnership,” he says. “Take your time over selection. Do your research, ask your peers for their experience and recommendations. Proper due diligence needs to be undertaken to ensure there is a fit [with an outsourcer]. It is not just down to finding the cheapest option.”
Be clear about exactly what you need
Knowing exactly what is required of both the CFO and the outsourcer before the relationship has begun is another key way to ensure that everything runs smoothly.
Stacey Relton, head of North America at Sanne Group, recommends CFOs write a list of all the tasks the outsourcer is responsible for – from the high level, like keeping on top of emerging regulation, to granular detail, such as when and who will communicate certain information to investors.
CFOs should “overcommunicate with the outsourced fund administrator and never assume”, says Relton. “We sometimes see the internal CFO just assume that the entire bucket of services is being handled by the outsourced party, and the outsourced party is
assuming the CFO is doing it. So, I see that as the number one thing – not having clear expectations of what is needed and who is doing what.”
Relton says that alarm bells should ring if an outsourcer does not ask enough questions of the CFO before it is appointed to understand the scope of its requirements. “If you are interviewing outsourced third parties and it’s feeling like a vendor relationship, then you need to run, because it has to feel like a partnership,” she says.
“It needs to feel no different than if the team were down the hall in another office. It needs to have that same response time, same partnership approach – it needs to feel seamless between the internal and external team.”
It is also important to consider how a private equity firm’s business might change over the next five to 10 years and to choose an outsourcer that can adapt to those changes.
Edwin Chan, director of UK funds at Intertrust Group, advises firms to “plan ahead” and pick an outsourcer that can grow with a private equity firm. Chan cites the example of one of his private equity clients that expanded into real estate investments and found its
existing accountants and reporting systems did not work for this new asset class.
Outsourcers also need to be able to cope with the demands of more sophisticated institutional investors that may invest in a later vintage fund, as well as reporting requirements in new jurisdictions that a firm may decide to invest in.
Think about the technology
Traditionally, private equity firms have owned the servers that their data sits on and used internal teams to look after their IT systems. But for a lot of firms, buying and maintaining servers, as well as investing in new software and technology, is expensive and time consuming. It means that at the outset, CFOs need to consider what technology they need to have in-house and what can be outsourced.
Intertrust’s Chan says that considering “whether [a firm] needs to own their own internal infrastructure to house their data is one of the first questions” that a manager must think about when it comes to outsourcing.
Chan adds that firms can benefit from economies of scale by moving their data to the cloud, which can improve cybersecurity and means they are less likely to be burdened with out-of-date technology.
Tenzing’s Sims agrees, pointing out that one of the biggest strengths of outsourcing can be access to expensive technology that would otherwise be out of reach. “Technology makes my role a lot easier,” he says. “One of the benefits of the administrators is to lean on their use of the latest PE-focused software, which would likely be too expensive to bring in-house ourselves.”
Rethink what the finance team does
Outsourcing may take some of the day-to-day activities off the desk of the CFO, but it does not mean the department is any less important or that the team can cut headcount. Aztec’s Duffield says: “The most common mistake I see is thinking that, by outsourcing, the finance issue is solved and no more resource or time is needed from the team. It remains an integral part of the firm’s operations. It does not become simply someone else’s problem.”
Instead, it can be an opportunity to rethink how the in-house finance team works. Instead of junior accountants compiling spreadsheets, the team can improve systems, get ahead of regulatory changes and fundraising challenges, or provide higher-quality analysis to internal teams or investors.
Relton says: “They can spend a lot more time being forward thinking. If you get out of doing the really granular stuff, then you can actually use your analysis skills and be a bit more high-level.”