Article

Why outsource fund admin now?

How outsourcing can help optimize a firm’s operational alpha and competitiveness

Aug 17, 2023
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Financial management Private equity Real estate Financial consulting

As alternative asset managers know, a firm's success depends on its ability to source investments and build lasting investor relationships. The satisfaction of finding unique opportunities and generating value for investors is why general partners start a firm—and how firms differentiate themselves. But the industry's growing complexity, from evolving regulations and reporting requirements to complicated fund structures, makes fund administration more challenging and expensive.

The emergence of sophisticated technology has enabled asset managers and service providers to meet demands for additional data and transparency. However, onboarding and utilizing these platforms requires significant financial and human capital and technical expertise. As a result, investment firms find themselves spread thin across tasks that are deeply important to fund operations but not directly related to deal sourcing or creating value for investors. These tasks include fund accounting, tax reporting, regulatory reporting, information technology (IT) management, data analytics and investor services.

Outsourcing fund administration allows firms to refocus on their core business and the features that make their funds unique. Indeed, approximately 50% of middle market investment firms currently use a third-party fund administration solution (up from 25% less than a decade ago). However, to truly maximize the relationship with service providers, firms need to understand the value the third-party administrators provide.

A complex operating environment

Investment firms face multiple challenges that threaten operational performance and reduce their competitiveness. As many firms have experienced, addressing these complexities requires increased financial and human capital as well as strong technological capabilities. The following reflects some of the most pressing issues affecting investment firm operations and fund administration:

Increased requests from fund investors

Investors demand increasingly detailed and customized reports and prompt answers to fund investments, performance, talent and efficiency questions. Meeting these investor requests consumes more time and staff resources than ever before. Firms are exploring advanced technology solutions that track and analyze enormous amounts of data to meet the current demands and enable flexibility for the future. However, firms also need access to a talent pool that can manage the technical aspects of these requests (in addition to the investor relations component).

We see an increased amount of complexity at funds that’s driven from both the regulatory side and the limited partner side—and it’s not just limited to reporting. It also reflects demands from investors for increasingly bespoke structures.
Adam DePanfilis, director, RSM

Regulations, regulations, regulations

The Securities and Exchange Commission continues to expand and amplify the regulatory requirements aimed at alternative asset managers. For example, many firms are raising concerns about the proposed rules requiring registered investment advisors to conduct specific ongoing due diligence on their third-party service providers. As with the investor demands, the additional compliance adds work to firms already operating at capacity.

Complex tax laws and related reporting

Increasingly complicated tax reporting requirements have only added to the prevailing number of investor requests and other regulatory requirements firms must handle. For instance, firm finance teams now need to include K2 and K3 forms along with their K1s. Such additions create increased demands in a deadline environment that’s already compressed. Fund structures’ broad range and complexity also bring more tax reporting considerations and challenges. Firms need access to industry-specific tax expertise to recognize, understand and navigate better the reporting complexity and multiple reporting deadlines, as well as advanced technology that produces data at a more granular level.

The tax laws continue to increase in complexity. In addition, requests from investors are becoming more tax-motivated—all of this increases the need for transparency and real-time reporting.
Christa Clark, partner, RSM

High-volume data, analytics and technology demands

Investment firms are leveraging increasingly capable solutions to meet these evolving investor, regulatory and tax reporting needs. The potential for improved data collection, tracking, analysis and presentation is essential for success in today’s data-driven investment environment. But the technology platforms also require a significant financial and human capital investment. New systems can take years to deploy and need maintenance and updates to remain relevant. IT staffing shortages exacerbate these timelines and may introduce new problems if tech teams fall behind. By comparison, incentivized leading fund services providers stay at the cutting edge of technology for the benefit of their many clients; they also invest more financial resources with technology vendors, giving them potentially more sway with those vendors. As such, fund services can offer sophisticated, out-of-the-box solutions ready to use on day one.

Talent shortages that impede growth

The deal volume that has characterized the past few years comes with a vital need for proficient talent. Consider that 78% of middle market firms plan to expand into new markets and need to hire to do so. The tight labor market, however, makes doing so difficult, especially when finding accounting and technical talent. In addition, many asset managers struggle to provide career growth to accounting professionals because they’re less focused on building internal operations teams. They also have fewer top positions that would facilitate career advancement, meaning that highly talented people often have to wait an excessive amount of time until the people above them leave to obtain a promotion.

One of the biggest challenges facing the industry is the well-documented war on talent. I don’t think there’s a company out there that hasn’t struggled with finding talent and retaining that talent. Outsourcing fund services to a trusted, well-staffed provider alleviate this burden and allow asset managers to focus on more strategic initiatives of the firm.
Louis Crasto, senior director, RSM

The takeaway

As fund administration becomes more challenging and costly to manage in-house, investment firms should consider outsourcing these complicated tasks to a credible and capable third party. One that can scale with the business to handle evolving investor, regulatory and tax reporting demands. The right service provider will leverage sophisticated technology to provide integrated data and analytics for enhanced decision making and transparency. By becoming free of the daily minutia of fund operations, alternative asset managers can focus on strategic deal sourcing and creating value for investors to stay at the forefront of trends and ahead of the competition.

RSM contributors

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