As Maltese regulated companies turn to third-parties for back- and middle-office support such as risk management and compliance, choosing the right partner becomes increasingly critical.
In particular, the middle office landscape has begun shifting dramatically as a result of steadily evolving best practices, heightened institutional due diligence requirements and the expansion of alternative products and strategies.
All of these changes have resulted in both fragmented communications and high fixed costs. Outsourcing part or all of your middle office operations is not a straight-forward decision and requires a great deal of reflection and investigation. And for those still questioning the added-value of outsourced middle-office services, it's important to start with the basics.
What middle-office functions are typically outsourced?
In the alternative investment industry, middle office functions generally consist of:
- Performance fees and management vehicles administration
- Treasury management at fund level
- Transaction support
- Investor relations
While each of these functions are cornerstones of every middle office in the industry, many managers are ill-equipped to perform them in effective and cost-efficient ways.
Funds can certainly acquire the tools necessary to achieve enhanced inter-operability, but this option requires not only a great deal of capital, but a great deal of time and expertise as well. Rather than investing copious amounts of capital towards data management and security, alternative managers who outsource their middle office functions benefit from streamlined processes and procedures executed by teams of experts.
Outsourcing these activities to a specialist third-party
relieves pressure on managers' middle office while also
providing them with access to a range of invaluable services such
as custody, fund administration, oversight and safekeeping.The fact
is, enhancing the middle office means more than integrating the
right tools to get the job done. It requires strict adherence to
evolving guidelines and regulations and the assurance of
flexibility in a perpetually changing marketplace.
It's no doubt that asset managers are highly-skilled in what they do, from closing deals to generating returns for their investors. Any function that pulls them away from these core duties actually hinders the manager's ability to perform effectively.
On the other hand, third-party administrators with middle office outsourcing capabilities are far more experienced with the function, having established streamlined products, processes and, oftentimes, seamless delivery. What's important to note, however, is that no two third-party administrators are created the same. It's critical for asset managers to consider several factors when choosing a long-term partner.
Factors to consider
When making the decision to outsource certain key middle office
functions, managers should consider several factors.
First, does the provider offer specialised services?
According to Chris Casapinta, Country Executive Malta at Alter Domus, specialization is crucial. "It's important for managers to choose providers who are flexible enough to adapt to changing scenarios. Managers know that the alternatives market is constantly evolving, so they need to choose a provider who's able to keep up with these fluctuations."
Second, is the service offering adapted to fit the requirements
of specific jurisdictions?
While many administrators can offer a range of middle office services, what's more important is that those services are catered to the specific needs of the fund's jurisdiction. Otherwise, there becomes a value strain rather than a value-add.
Chris explains, "It's paramount for services to be location-specific with on-the-ground teams. It wouldn't make sense for a manager in Malta to be receiving a set of services which have been generalized to fit managers in Hong Kong and the United States as well. Managers need specialised services to ensure they get the most value out of the relationship."
Finally, it's important to seek an administrator with
Whether the manager operates in one, three, or ten locations, there may come a time when they look to expand the scope of their outsourced functions. When this time comes, the administrator must have the capability to scale. Otherwise, the manager will be faced with hiring multiple administrators, ultimately creating a fragmented web of incompatible service providers.
Benefits to expect
When managers choose a flexible, international, and scalable
administrator for their middle office work, the benefits received
The right partner allows the manager to remain focused on their core business. This is a commonly expressed notion and for good reason; by adding value to the middle office, the right partner gives the manager room to add even greater value to their fund.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.