To Outsource Or Not To Outsource: Private Equity Fund Administration

“To outsource or not to outsource?” was the lead question from PEI Editor Graeme Kerr for their Private Equity Fund Administration Special 2017. Although, in reality, the question isn’t whether to outsource, but rather to what extent?

CFOs and COOs are under increasing pressure from regulatory requirements and being asked for more LP transparency. And those factors are taxing their back offices to the max. 

As a result, new strategic goals are being set and a new emphasis is being placed on technology to help address the growing number of services needed to meet these demands. 

Purpose-built technology is also becoming more critical as the volume and complexity of data needed to provide exceptional service increases. 

To tackle this market problem, the Fund Administration Special brought together five technology experts to answer the big questions facing private equity firms. 

Altvia CEO Kevin Kelly is among the technology consultants featured in Ask the Experts. Paraphrased here are his insights on a couple great questions:

My role includes private equity fund administration. 

How can I manage our data better so that I spend less time in swivel-chair mode, switching back and forth between disparate systems?

Capturing data from multiple sources and combining it in a central system is one of the primary challenges for private equity firms. At the time of investment, LPs are seeking visibility into revenue multiples and other indicators that support the fund manager’s investment thesis. They are increasingly aware of the impact of multiples paid on expected returns and want the data to further inform this thinking and to be able to benchmark managers. 

For portfolio companies, LPs want to understand the numbers  the manager uses for the value of a company at any given time since that rolls into the net asset value of the fund. 

This is the puzzle that needs to be completed from pieces that are strewn about in several disconnected systems. And as noted in the question, the result is massive amounts of “swivel chair” work to pull the complete picture together from different systems and gain insights from the data. 

Unfortunately, tasking people with that type of busy work means you aren’t getting as much from their skills and perspectives as you could.

There are countless examples of disconnected data, ranging from investor transparency to ESG

Data management is the key. 

A central system that can capture, consolidate, and integrate data from these disparate systems is the cornerstone. 

As the data gets connected, private equity firms can have the full spectrum of data points to build models and benchmarks, and ultimately transform data into insights for better decision-making.

Private equity fund administration is getting more challenging.

As we’re being asked for ever-more-complex sets of data. How should we be looking to improve our data management

Fund managers are looking to the value that more structured data and better data management offers as a way to address the ever-increasing complexity of the data needed to fulfill regulatory requirements and investor demands. That complex data is also the source of the intel that firms need to compete for capital and deals. 

Improving a firm’s private equity fund administration typically involves a twofold process: 

  • Establishing best practice workflows and then identifying the right tools to support and drive these practices. 
  • Once you establish a baseline for the business, you can align the data management system to those processes. 

While there are a number of systems available, it’s important to consider the level of customization, integration, and scalability you need over the longer term so that the system can evolve as your business grows. 

You don’t want to adopt a solution only to have to make major changes to it or your processes later.

Moving to a more structured data management system comes at a price. The cost of lost opportunities as a result of failing to recognize and invest in the software is significantly higher than the cost of implementation. 

Private equity firms that invest in the right data architecture gain a major informational and strategic advantage.

Better Fund Administration Processes are Essential… and Achievable

As back offices feel the strain of increased regulatory and LP scrutiny, and improved fund administration processes are required, firms have to adapt. 

The private equity industry is helping to meet this need and address this pain point with innovative solutions. New technology is by far the most efficient and effective way to answer the call. 

That’s why private equity technology companies like Altvia play such a critical role for firms looking to gain a competitive edge.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

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