From providers to partners: a new era of vendor relationships in private capital

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Traditional third-party models are being replaced by co-sourcing partnerships and a deeper alignment between client and provider.

Managers of private capital funds with sizable assets under management (AUM) are no strangers to outsourcing. In our recent, extensive research for the Halo Framework of more than 150 heads of private capital firms, nearly all respondents (93%) said they outsourced some services.

While early-stage managers may try to cover everything in-house to keep on top of costs, most quickly reach a point at which outsourcing routine operational tasks simply makes sense.

While fund administration, SPV administration, accounting, reporting, and compliance are necessary, they are hardly core operations for managers who principally want to be originating and optimising investments. Outsourcing to third-party specialists is an obvious route to greater efficiency.

But as funds scale and expand internationally, the complexity of these tasks ratchets up exponentially. That's enough to persuade many asset managers of the need to move away from a traditional outsourcing model and embrace a new partnership approach.

Outsourcing in private capital

As funds scale, creating the right blend of outsourced services is clearly something that managers struggle with.

In our research, over half (53%) say that "achieving an optimal outsourcing mix" is one of their firm's top two priorities. So, what is that optimal mix?

The traditional client/vendor relationship involves contracting a third party to undertake a task or process of limited scope. If the client wants help in another area, they enlist the support of a further provider.

Some asset managers still outsource in this way, but there are important considerations to make. Funds can select a best-of-breed solution for every function that requires it. This method of outsourcing can lead to vendor management issues including compatibility problems, breaks in workflows and significant inefficiencies.

This model of outsourcing is still common, but for many funds, it's no longer optimal. As their worlds become more complex, so does their need for tailored third-party support.

Outsourcing and co-sourcing

Co-sourcing is a partnership model where outsourcers become trusted partners and extensions of the fund manager's team.

This model is becoming more common because the operations of private capital funds are increasingly complex.

Funds are looking to scale, and scale quickly. It's not unusual to find firms with significant AUM that want to double in size in three to five years.

As they grow, old challenges escalate and new ones emerge. For example, growth often involves globalisation as dealmakers cast their nets wider for both assets and investors.

Suddenly, managers are faced with the administration of fund structures in multiple time zones, all with different regulatory frameworks, legal systems and on-the-ground resources.

In the midst of all this, ambitious managers quickly reach a tipping point where doing what they've always done is no longer feasible. Resourcing their ambitions without piling on cost becomes an all-consuming imperative.

Data is the key to growth

For many, "doing what they've always done" includes traditional client/vendor third-party relationships.

As funds grow, overseeing multiple providers creates a serious administrative burden, especially when some of those vendors are overseas

In private capital, data is key to efficient growth. Data from multiple sources need to be collected, validated and presented in a commercially useful way. Harmonious data flows drive everything from better front-office decision-making to back-office automation.

Co-sourcing is increasingly popular because partners with a wide view and their own integrated technology can consolidate data and provide real value. By contrast, the use of multiple vendors with disparate systems creates data fragmentation.

With the benefit of coherent data and their own expertise, co-sources can become strategic partners. They can automate and optimise processes across the back office, allowing funds to scale efficiently.

They can help managers meet their objectives by helping to prepare for forthcoming challenges before problems emerge, allowing them to contribute positively to strategic plans.

In addition, global service providers can help managers with resourcing issues and provide local expertise in multiple jurisdictions.

In essence, co-sourcing partners align with their clients in terms of systems, processes and culture. They become the go-to source to support a wide array of requirements. As private capital enters a new era of scrutiny and success, this co-sourcing model is a natural development of the client/outsourcer relationship.

Why Intertrust Group?

• CSC completed its acquisition of Intertrust Group in November 2022. Together we offer a global solution for subsidiary governance, fund strategies, and capital markets transactions, and navigate the ever-changing compliance and regulatory environment that our clients face. With capabilities in more than 140 jurisdictions, we are capable of doing business wherever our clients are-and we accomplish that by employing experts in every business we serve.
• As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the lifecycle of a private capital fund.
• Our Halo Framework identifies and describes a next-generation fund operating framework for private capital. Download it here.