Traditionally, GPs choose between in-house fund administration and outsourcing. The former is expensive and difficult to scale, but gives GPs control over their data. The latter saves money and affords flexibility, but exposes GPs to the risks associated with third-party fund administrators holding their data. When co-sourcing, in contrast, private capital firms retain in-house control of their data and allow third-party fund administrators to work within their software platforms. They retain control and benefit from third-party expertise.
Private capital firms that practice co-sourcing enjoy five advantages over in-house operations and traditional outsourcing. They own their data, maximize flexibility and scalability, control costs, and boost overall efficiency, providing a unique combination of agility, flexibility, and peace of mind for GPs and LPs.
The Five Advantages of Co-Sourcing
- Data protection: Co-sourcing allows fund managers to maintain control over their data in a single source of truth, avoiding the risks associated with traditional outsourcing where a third party controls their information. Furthermore, by utilizing a centralized platform with the best technology and practices from third-party administrators, co-sourcing minimizes the wasted time and other headaches associated with data migration, ensures the protection of valuable data, and facilitates communication between internal and external stakeholders.
- Maximally flexible service: Forward-thinking co-sourcing partners enable fund managers to add processes that bring immediate value without compromising efficiency. These partners, who are specialists in mid- and back-office functions, can navigate the market to select tailored software solutions for the firms, ensuring faster due diligence, speedier recruiting, accurate reporting, and streamlined data operations. Co-sourcing helps firms establish world-class teams of service providers and tools to complement the front office.
- Scale with clients: Scalability is a critical factor in the current wave of outsourcing that is sweeping through the financial industry. Co-sourcing combines this scalability with in-house control. Overcoming challenges such as recruiting difficulties, high turnover, and technology constraints, co-sourcing deploys new tech strategically to deliver efficiencies to the investment side. This approach ensures that firms make the most of their resources, integrating automation, machine learning, and artificial intelligence for enhanced performance.
- Cost control: While the upfront cost of co-sourcing falls between in-house operations and traditional outsourcing due to licensing expenses, it offers substantial potential for ongoing cost control. Strategic data operations and the efficiencies delivered by dynamic technology solutions ensure that fund managers operate on cloud-based platforms without incurring costly upgrades. The long-term benefits to the bottom line, including streamlined data operations and increased client satisfaction, justify the initial investment. Since co-sourcing private capital firms control their license and data, moreover, they enjoy complete access to their spending and usage and can adjust their needs accordingly to avoid unforeseen costs.
- Boost Efficiency: Co-sourcing fund administrators are at the forefront of technological innovation, unlocking value in enterprise software often overlooked by investment managers. By automating tasks, streamlining processes, and reducing errors associated with manual operations, co-sourcing administrators bring sustained efficiency improvements. These perks not only address operational challenges like staff shortages but also help identify and eliminate bottlenecks, redundancies, and human errors that frequently result from manual processes, accelerating overall operations.
Private capital firms stand to gain a competitive edge by leveraging co-sourcing to modernize their back and middle office functions. The key to this success lies in partnering with experienced private equity professionals like those at 4Pines who understand how to harness co-sourcing for effective administration and reporting. As the industry continues to evolve, embracing co-sourcing represents a strategic move towards ensuring not only compliance but also efficiency and growth in the ever-changing landscape of private capital.
Read the full definitive guide to co-sourcing here.
