Unlock new levels of scalability and efficiency in fund administration by embracing lift-outs and co-sourcing—strategies that keep you in control while propelling your growth.
The concept of “lifting out” high-performance fund administration teams has become synonymous with scaling up. For private capital and fund managers, it’s a strategy well worth considering.
When lift-outs are combined with co-sourcing, they create an innovative approach with plenty of payoffs. Not only do funds secure capable partners and high-functioning back and middle office teams, they also retain continuity, eliminate risks associated with traditional outsourcing, save on costs, and present a surprisingly appealing incentive for employees.
Beyond traditional outsourcing
Outsourcing is still the go-to strategy among most private capital and venture capital fund managers looking for talent, according to recent research. That includes senior executives like CCOs. In 2024, 7 percent of the CCOs at SEC-registered investment advisors were technically employed by third parties, or outsourced. The trend is expected to increase. Outsourcing in this manner may not be the right move for funds that don’t want to offload their data to a third party or face other risks associated with outsourcing key members of their teams, however.
For managers who want to keep operational or cultural friction to a minimum while tapping into the advantages of robust partnerships, co-sourcing fund administration through a lift-out is a better bet. Funds maintain control of their data but gain the benefit of a high-functioning fund administration team that is already aligned and familiar with their operations while giving that team broader experience, which usually drastically improves the long-term scalability of the operating model.
Shared responsibility, control, and continuity
When co-sourcing, instead of handing the entire process (and data) to a third-party provider, an external partner shares responsibility and control. The co-sourcing fund administrator manages accounting and reporting needs within their client’s systems, providing support when it comes to evaluating risk, ensuring compliance, and other tasks.
The right co-sourcing partner also supplies expertise with a higher level of technology — like SaaS tools, automation, and machine learning — that make tasks such as improving metrics and setting benchmarks more accurate and efficient. Further, co-sourcing partnerships are structured to adjust flexibly according to fluctuating needs throughout the year.
When lift-outs are added to the mix, the co-sourcing fund administrators hire the GP’s support operations and finance teams and put them to work with the GP as a client. The same personnel, systems, and data move from the fund manager to the administrator, providing services back to the fund manager. This creates a tremendous advantage in terms of continuity. There’s no change in culture. The current internal team is preserved elsewhere as the fund administrator’s employees. They then continue to provide the same services to the GP as if they were in-house but gain the flexibility and broader teams necessary to build out and improve operational efficiencies over time.
The GP’s former employees — now the fund’s administrator vendors — continue to leverage their intimate knowledge of the GP’s system. They’ve already worked with it and, in some cases, may even have set it up. They know how to get the best out of it.
Cost savings opportunities
A combination of lift-outs and co-sourcing provides many opportunities for cost savings because it offers a nimble means to expand the organizational structure in response to growth, especially when the fund administrators already have ideas about improving efficiency.
The nature of lift-outs offers another means to save as well. Established fund managers can transition to an expense structure more consistent with current market practices while minimizing the disruption and potential risks related to traditional outsourcing. Outsourcing is usually treated as a partnership expense — albeit a tiny percentage — rather than an operating expense borne by the fund manager.
Fund managers can redeploy these savings toward other initiatives to strengthen their platforms. Regulators and LPs, in turn, value the independence of a qualified outsourced provider, while the latter are usually willing to bear the cost.
For employees, a fresh start
Lifted-out, co-sourcing fund administrators also give employees in less high-growth career tracts new opportunities to scale their skills. For instance, an employee who is part of a lift-out may find themselves acquiring a new branch of expertise related to compliance and transparency — invaluable in an era of increasing SEC requirements. Or they may shift from manual processes to the innovative, cloud-based platforms that are changing the sector today.
Thinking outside the box enables firms to better weather this era of rapid change and intense market pressures. The combination of lift-outs and co-sourcing is an approach in this vein. It provides the means to build a capable scaffolding of teams with the optimal range of expertise and skills without needing to expand within the firm itself. It’s business as usual, but better.
