This fast-growing, easily executed model of outsourcing fund administration keeps data secure and handy for due diligence, reporting, and auditing.
Safeguarding investors’ data is essential to meeting compliance obligations and reporting deadlines today, including proposed SEC rules that call for continuous oversight of professional service providers. Now a different model for private fund administration, co-sourcing, has arisen as the newest, most innovative way to fulfill these obligations.
Co-sourcing flips the usual relationship between firms, vendors, and data. Traditionally, when a firm outsources fund administration, the service provider keeps the firm’s data in their system. This arrangement might work well in the short term, but it opens the firm up to risk if GPs need easy access to their data or want to switch administrators.
When co-sourcing, in contrast, private capital CFOs keep their firm’s data while a fund administrator works within their back-office system. The CFOs can retain outside expertise – scaling up and down with third-party service providers as they need – while retaining full ownership of their information.
Following new SEC rules is easier
The SEC has proposed new rules that would require investment advisers to maintain much closer relationships with their professional service providers. Under the new rules, firms would need to conduct due diligence before outsourcing to vendors and monitor these third parties closely once they’re hired.
Fund managers seeking fund administrators who offer future risk-adjusted solutions in this new regulatory environment are finding that co-sourcing solves their dilemma. The firm, not the fund administrator, owns the software license when co-sourcing. That cuts the firm’s exposure to risk related to the new regulations.
Reporting and auditing are easier
Private capital firms sometimes practice “shadow accounting,” or keeping a second set of books, for compliance and auditing. Co-sourcing eliminates this wasteful duplication of effort.
Co-sourcing fund administrators work within the GP’s system. The GP has the only set of books. Innovative technology lets the firm “insource” their expertise to access information for regulators or auditors immediately when they need it.
GPs that co-source, furthermore, can flexibly bring in the expertise of new fund administrators to bear to ensure compliance without keeping a robust internal team. That’s the trend. EY recently found that “94% of private companies are more likely than not to co-source tax and finance activities over the next 24 months.”
Less friction
Co-sourcing is a different approach to back office functions that eliminates the conventional friction that arises between firms and vendors over data management. The seamless collaboration that occurs between co-sourcing firms and service providers using real-time data sharing creates maximum trust and transparency.
This innovation not only facilitates compliance as regulations and SEC rules on outsourced services evolve, but also streamlines SOC and other processes. It helps private capital firms navigate complex regulatory landscapes more efficiently through better due diligence and less exposure to regulatory risks. It eliminates redundant practices like “shadow accounting,” offering a streamlined solution for reporting and auditing.
For private capital firms navigating compliance challenges today, co-sourcing is the strategic and secure choice.
Discover more about co-sourcing and fund administration in 4Pines Fund Services’ Definitive Guide to Co-sourcing here.
