Market Conditions for Co-Sourcing: Navigating the New Era of Fund Management

Increasingly demanding investors, the accountant shortage, and cloud-based solutions that foster transparency and collaboration have made co-sourcing into the powerful next-generation solution for the many challenges facing private capital today. As the 4Pines Fund Services Definitive Guide to Co-Sourcing explains, co-sourcing offers faster, more efficient fund administration and seamless LP experiences while also mitigating the risks associated with traditional outsourcing and in-house back-office functions.

In-house fund administration gives GPs more control but entails greater costs and limited scalability. Outsourcing is more affordable and scales easily, but GPs traditionally give up control of their data when hiring third-party fund administrators, exposing them to added risk. When co-sourcing, GPs hold the license to their firm’s software platform, retain control of their data, and permit service providers to work within their systems. This approach blends the best of both in-house fund administration offices and outside expertise without the downsides.

Market conditions are driving the need for co-sourcing. LPs expect better service, particularly access to information as close to real-time as possible. At the same time, however, as firms need the best professionals to handle this greater pressure, a shortage of accountants is rocking the financial industry, leading to more demand for flexible fund administration that makes the most out of the newest technologies. Luckily, cloud computing has arisen, giving GPs tools that they can use to solve these problems.

Investor pressure

Wealthy individual investors’ holdings represent about half of global assets under management, according to Bain & Co.’s 2023 Global Private Equity Report. Alternative investment funds, though, oversee only 16 percent of that total. Private asset managers who seek high-wealth individuals’ resources need to provide the speed and transparency expected by those team members. The increased prevalence of ad hoc reporting requests is a tangible example of this shift.

Co-sourcing offers streamlined data operations that can help GPs more quickly and efficiently access and share information with LPs. Because they have their data at their fingertips, they don’t need to wait for their fund administrators to communicate with LPs.

Accountants wanted

The accounting profession is in “severe crisis,” according to CPA Journal, as the number of new candidates sitting for CPA exams has plummeted and a large segment of the industry’s seasoned professionals are reaching retirement age.

Co-sourcing can’t solve that problem directly. Indirectly, however, it provides valuable workarounds for GPs seeking security and flexibility. Co-sourcing, for example, can help private capital CFOs deploy technology such as automation and machine learning to bridge the human resource gap.

Team cloud

Co-sourcing wouldn’t exist without the cloud. It enables all team members to access real-time information in a seamless, secure way. Outsourcing relationships sometimes provide this capability, of course. But co-sourcing takes the collaboration to another level. Cloud-based IT systems allow GPs, LPs, auditors – and other partners granted access – to obtain real-time information and to interact with one another, wherever they happen to work. Everyone who needs to be empowered is empowered.

Co-sourcing’s technology can, among thousands of other tasks, instantly and securely deliver subscription agreements to investors, drive due diligence, and stamp electronic signatures. More exciting still is the cloud’s untapped potential. Early experience with multi-cloud systems involving more than one vendor suggests even greater potential for cost and service efficiencies.

Private capital flourished for decades with outsourcing that powered the back and middle offices. Co-sourcing professionals like the 4Pines team are building a model that puts all partners in a tech-forward virtual office built on security and collaboration. Firms looking to take advantage shouldn’t feel as though they’re abandoning outsourcing, an approach that worked for years and years. Instead, they should consider how co-sourcing will further answer today’s demands, and those far into the future.

Read the full definitive guide to co-sourcing here.