Our recent research study, 'Private Equity: Where Challenges Meet Opportunities', revealed a growing appetite for outsourcing while uncovering some surprising trends. Caroline Baker, Managing Director at Vistra Asia, examines some of the findings in more detail
The study showed that an average of 72% of respondents currently outsource one or more functions to a third-party service provider. However, the figure for Europe alone was 82%, compared with only 64% in Asia. How do you explain these regional differences?
The maturity of the market certainly plays a part. While the Asian market is definitely maturing, it's less mature than in Europe. Because of this you do have a lot of smaller start-up fund managers who are in the process of professionalising – and when you're a small start-up, you either outsource fully or you try and do everything in-house.
I also think investors in Europe are more sophisticated – so LPs are demanding a higher level of outsourcing. They expect that the GPs will outsource, whereas a less sophisticated investor base in Asia doesn't push that as hard.
There is also a higher regulatory burden in Europe, whereas Asia isn't as stringent – for instance, fund admin is regulated in Europe, but isn't in Asia. If you need fewer people to manage compliance or fund administration because the regulation is less onerous, then the likelihood of outsourcing is smaller.
You mention LPs demanding outsourcing and the study found that was a main driver, with 84% of LPs saying they want their GP to outsource. What's more, 67% said they are keen to influence the decision of which provider to use. What do you make of these figures?
I think those figures are only going to go up, especially the latter. If I'm an LP and I'm giving my personal information to a fund which is then passed on to a third-party administrator, I need reassurances that my data is in safe hands. So, LPs are looking to providers who offer a higher standard of service. That is where we are seeing the LPs who want to influence the choice of service provider and ensure their information and assets are protected.
Do you think LPs will begin to mandate outsourcing of certain functions?
That's already happening. As part of the decision-making process, we are having to sit down with some of our clients' potential investors so that they can quiz us on the processes we have in place, how would we protect their data and their investment.
Before the financial crisis, LPs were less rigorous when handing over their money, but now they want much more control and involvement. You're also seeing a lot of the big LPs, such as the major pension funds in the US, really slim down the number of GPs that they're working with.
Is outsourcing more common among small-to-mid-size managers who can't afford to build in-house teams or functions – or is it happening across managers of all sizes?
I actually think it's everyone, and for a variety of reasons. The smaller managers are starting to understand that working with an outsourced fund administrator can give them more credibility – something that LPs are looking for. The smaller start-up managers want to have serious partners behind them so that they can fundraise more – so they are looking at outsourcing.
Then there are the big funds that already do much of the work in-house. They have massive teams that carry out fund administration, but they're starting to consider outsourcing – who do they want to have on their books as employees versus what they can outsource. A larger manager may be growing their investment teams, for instance – so do they really want to manage a team of 40 people doing their accounting?
Do they want to have seats in the office for them – do they want to have health insurance and so on? Is that what they really want, or do they want to outsource this and have five people who oversee the outsourced relationship.
Also, talent is really at a premium right now, we're seeing much more turnover in the in-house fund admin teams. Is this a problem a manager wants to have to manage or do they just want to set up the fund, manage their investments and outsource the rest?
It's interesting that you raise talent as an issue, because access to technology and talent were identified as the areas where outsourcing has had the most positive impact. How does this tally with what is happening at Vistra and the services you offer?
With regard to talent, managers are struggling to get enough people – everyone wants to be on the investment side and people in the fund admin team aren't necessarily viewed as equally important. But if you look at an outsourced service provider, it's what we do, it's our bread and butter – we provide fund admin services. As a result, we attract the talent, and it's that talent that we deploy on behalf of our clients.
As far as technology goes, we invest heavily so our clients don't have to. And you just don't get the economies of scale if you're a small fund manager – you need to leverage off your fund administrator to be able to provide that for you.
The general consensus from our survey is that outsourcing is set to grow in the years ahead. How do you see it evolving?
I think the level of data and reporting that clients demand is likely to boom – and our study certainly points to that happening. As a fund administrator, we may currently provide quarterly reports, onboard investors and do necessary due diligence, but the more sophisticated our platforms become, the more data we will manage. So how are clients' returns for this type of portfolio faring compared with their peers; what's the geographic spread of their investments? It will be about providing a more sophisticated and intelligent package.
And how do you make sure you stay on top of client requirements, which may be constantly changing?
In addition to our clients, we speak to other people at the forefront of the industry. We're in constant communication with the audit firms, the law firms, the advisers – so that we really have a thorough understanding of where this industry is going. We're doing the research, we're talking to LPs and GPs and trying to understand what they need, so that we can be proactive in providing solutions to our clients.
Despite a generally positive outlook, there are still certain barriers to outsourcing – including concerns around cybersecurity, lack of control and lack of flexibility. How do you address those concerns when a client or potential client raises them?
I understand how cybersecurity is viewed as a threat, because it's something clients come across in both their business and personal lives. But when they talk to me, one of the first things I explain is that we can invest a lot more in cybersecurity than they are able to. We take it very seriously and, as a bigger organisation, we can certainly do more than any of the smaller managers.
With regard to a lack of flexibility – there is flexibility in working with a service provider, you just need to understand why you want something, and what it is you need to be flexible about? I think it's more of a perception thing and you need to sit down and see what can be provided. It's the same with a lack of control – at the end of the day, a client can choose the level of control they want.
With all of this in mind, why would a manager choose to use Vistra for their outsourcing requirements?
I think we have a breadth and depth of service that is unrivalled in the industry. We have the ability to service our clients around the world – no matter where they are, we will have offices or partners. We can service them across their structures and we have a depth of knowledge – we have experience across practically every type of fund. For me, it's that breadth and depth that really makes us stand out.
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