The Private Capital Strategy Series Episode 13: Why co-sourcing is surging now
The term ‘co-sourcing’ is more than mere industry jargon. It signifies a pivotal strategy in private capital management.
Listen in as industry veterans Mike Trinkaus, CEO of 4Pines, and James DiCostanzo, Global Head of Growth Equity Sales at Allvue Systems, shed light on co-sourcing’s growing prominence. They unpack its benefits, highlight potential stumbling blocks of delayed implementation, and show how to gain buy-in from the team.
Mike Trinkaus 00:02
I’d like to thank everyone who joined us. Today’s a great webinar, our third webinar on co-sourcing. We first talked to Bob Chowaniec, COO at 4Pines. We wanted to get his perspective as somebody who’s been in the fund administration space for about 10 years. Everybody comes at this a little bit differently. We’ll see throughout the conversations that we triangulate to many of the same reasons for believing in the co-sourcing model. The second webinar that we did was with industry CFO and heavyweight Josh Cherry-Seto, with his perspective from the GP side. And today we have James DiCostanzo. He represents the third leg of the Triple Crown, so to speak. There are three very important pieces to the puzzle when it comes to co-sourcing: how you define it, how you determine whether it’s right for you or not, and James is that third leg. James is the head of global growth and equity sales at Allvue.
James DiCostanzo 01:33
Thanks for having me. Mike, I’ve never been part of the Triple Crown race, so I’m excited to be doing such in this co-sourcing discussion. For those who aren’t familiar with Allvue, we’re a private capital markets SaaS provider. What we focus on for GPs is we automate the full fund life cycle – everything from fundraising, to deal management, to portfolio management, your investor communications. We provide a suite of software that automates and integrates those full workflows. Underpinning all of that, which will be a big part of the discussion today, is our fund management accounting capabilities. In a nutshell, that’s what Allvue does. My team, specifically, that I lead is really focused on GPs in the startup, emerging, and growth space. At Allvue we split up our go-to-markets for the private capital world into the growth equity worlds – and then our enterprise approach for the titans of the industry, so to speak. My team focuses on those growing and really rapidly emerging managers. Just as a bit of history, before joining Allvue, I pretty much kicked off the pandemic. I joined in March of 2020. And it’s been an exciting and ever-changing time to join the private capital markets industry. Before that I was at Thomson Reuters, dealing with information technology, and data sales in the public market for about 20 years.
Mike Trinkaus 03:39
Allvue is one of the first firms in the software space that really, in my opinion, has started openly talking about co-sourcing. As a firm, we’ve leaned into this a bit more than some of the other providers that are out there. How does Allvue define what co-sourcing is?
James DiCostanzo 04:31
It’s like an age-old question that we face all the time from GPs, which is: “Should I look to bring my administration in-house? Should I self-administer? Or should I focus on what I do best and leave it to the likes of 4Pines and others to administer for us?” Co-sourcing is a new option to what previously was a kind of black-or-white type of question. Co-sourcing is where the GP will own the infrastructure or the technology from Allvue, but still have the ability for a fund admin to come into their instance of the software. Traditionally, when you outsource to an admin, they would administer you on their own set of technology. And so that data or that ownership was just a little bit further away. So co-sourcing is the ability for the GP to own the technology and the fund administrator to come into the GP’s version of that technology. It is one shared environment that both parties have access to, which is a new development.
Mike Trinkaus 06:08
I would agree. What’s interesting, from my perspective, is I’ve been in the co-sourcing model for about 10 years now. There are new reasons to do it. The reasons for doing it continue to expand and evolve, and very few have fallen off because they’ve become dated. So it’s a really interesting data set, as I look at the pros and cons of co-sourcing. Do you have a sense as to the number of firms that are co-sourcing today – that’s probably hard data to get – even from a trend perspective that you’re seeing from your time at Allvue starting in March of 2020?
James DiCostanzo 07:11
Data points are a little bit hard to pin down or have at my fingertips. If I had a pretty educated guess, right now, probably we’re in the range of 30 to 40 clients that are co-sourcing. But what’s more interesting – why we said it’s such a new development – is that a little less than half of those probably came on board with us just last year. It started, I would say, probably just before I joined Allvue, in 2019, maybe the tail end of 2018. A little bit of a slow adoption to start, but I think there are recent trends that are really driving the adoption. Allvue is one of those that supports co-sourcing openly. I would say the same for 4Pines. You’re doing this webinar, you have a lot of white papers on it on LinkedIn. It’s also been the adoption, not only for 4Pines, but as you know, other fund admins are starting to come around to the idea of co-sourcing as well.
Mike Trinkaus 08:40
The way I’ve described it to folks is: We’re all swimming upstream together, the GP, the funds administrator, as well as the software. We’re all aligned in the incentives that are in the proper direction, and that will make all of us successful. That’s one of the big reasons why I think co-sourcing is a movement that’s here to stay. It’s a movement that’s going to continue to gain traction because we are all aligned. It’s clearly documented in the market; it has been around for a long time now. But I do think this evolution has been a little bit eye-opening for some folks when you start to dig in and understand where those incentives are across those three legs. So let’s talk about co-sourcing and maybe some of the consequences of not doing it. Is it a mistake now to not co-source or at least not consider co-sourcing?
James DiCostanzo 09:55
I don’t think it’s a mistake to not co-source. The thing that we’ve been really big advocates for here at Allvue is that it’s a missed opportunity if you don’t know about the options. One of the things that we’re considering is our GPs’ or prospects’ or clients’ needs. As clients are deciding whether, “Should we in-source, or should we look to an administrator?” it’s just a missed opportunity if Allvue, myself, my team, and yourself, don’t make them educated about this new option in the market. That is that hybrid solution like we just talked about, the flexibility. If you’re bringing something in-house, you’re usually doing that because all the data is at your fingertips, you have control of that data, and you have real-time access to it. You might not have the individuals to bring a service in-house and be able to maintain that in real-time. And that’s why you would go to an administrator. So co-sourcing gives you the best advantages of both worlds. And that’s why you said we are all swimming upstream together – to not at least put that option out there. I don’t think there’s a mistake in not going with co-sourcing. But I absolutely want everyone to be educated and aware that this is an option.
Mike Trinkaus 11:49
We couldn’t agree more. The conversations that we have with clients and prospects really are around, “What do you need? What are you trying to solve for? What’s the end game? And let’s talk about the best model that fits your needs.” Because it’s not for everybody, but I think it should be at least part of the equation, and evaluate the pros and cons of that opportunity. Things evolve. As they evolve, you need to be up to speed and current with what the market options are out there. Why are you convinced that firms are making the move to co-sourcing right now?
James DiCostanzo 12:55
The biggest thing we hear is ownership of data, and knowing the role that you and 4Pines play in it. They’re still turning to best-in-class administrators. But sometimes what’s lacking – not with 4Pines, but across the industry – is real-time access to data, whether that’s to respond to LPs in a timely fashion, ad-hoc queries, whether that’s for internal or external stakeholders. That by far is the biggest driver that we have. That is what GPs are talking about. When we educate them, it’s refreshing to know that another aspect of it is flexibility. Flexibility means a lot of different things. We have prospects that are coming to us because they’re considering an administrator change, whether that’s because they made a selection when they were launching their first fund, and they’re kind of evolving strategies or evolving directions. They might be just launching a new fund and considering adding a new administrator who specializes in real estate or PE or Europe. And then sometimes it’s just the needs today or into the future aren’t being matched by that current administrator. It’s kind of like a prenup, if I can make a bad analogy.
When you make that selection on an administrator, you don’t enter into it thinking there might be a chance that we go in a different direction. But what co-sourcing does is allow you that flexibility because you own the data. You can bring more administrators in, and we can entitle that, and everyone has access to only what they’re supposed to see. Or you can completely switch that administrator or even bring it in-house. Now we have clients that are using administrators for certain funds and different strategies and different locations. A lot of times now they’re using their same co-sourcing environment to do some of their SPVs in-house. Flexibility in terms of multi-strat and how they’re going to do it is a huge option. The last driver that I would highlight is just technology. The GPs focus on what they do best, which is servicing their clients, making investment decisions, and ultimately returning maximum profits. Fund administrators do what they do best, which is administer those funds. And then you leave the technology to someone who’s solely focused on cutting-edge technology, security concerns, and all the enhancements that are needed over time for workflow. It’s a perfect tri-party agreement, where everyone is laser-focused on what they do best. And it’s going to result in the best LP experience that I can think of.
Mike Trinkaus 16:26
It’s the best-in-class of your expertise, all coming together to deliver to what are ultimately the owners of the information, which are the investors. I couldn’t agree more with you. For you personally, was there a watershed moment where you said, “My goodness, we need to lead into co-sourcing. I think there’s something here, that’s not being talked about enough in the market”? Or was it an accumulation of three, four, five, six things that made you pause and say, “We need to start thinking about co-sourcing a little bit differently”?
James DiCostanzo 17:20
We’ll look at it in two different ways. For me, interest from GPs was always there, to kind of give them the best of both worlds. That portion around flexibility – meaning, from a 4Pines perspective, in a co-sourcing model, it does allow the GP a little bit more flexibility to say, “If we’re not doing what we’re supposed to, we can move.” So to me that watershed moment was the interest was always there from the GPs. Co-sourcing, Mike, even yourself, and other fund administrators started to realize, ”Hey, this helps us as well. We were going to endorse and get on board with this because we actually see that this could lead to fewer queries from the GP coming to us.” And we all were in it together. That was really the watershed moment for me. That happened in the US, I would say over the last two years. I even look at what’s going on in Europe now. The interest is there, but we’re waiting for more fund administrators to adopt that model. But to me, that was the watershed moment, Mike, when you started viewing it equally as an opportunity. That’s when it became powerful. And we’re talking about that, you know, Triple Crown or third leg when they all came together.
Mike Trinkaus 19:03
That makes a lot of sense. When we first started doing this 10 years ago, the outsourcing market was maybe 35 percent and our view was that we needed to get GPs to start paying attention to what’s out there, because there’s the traditional fund administration model that put everything out of their control after so many years of being able to control that data. And for us, it was a pretty clear idea, though. It really wasn’t being utilized much in the market. Let’s take that fund admin risk off the table by saying, “Hey, you know what, come to us and use this software. And if you don’t like us, you can get rid of us.” And we’re betting on our sales. It goes back to those aligned incentives, where we’re all on the same page with regard to execution, with regard to deliverables, etc., all the things that we deal with in our world. For me, one of the biggest “This is here to stay” watershed moments was when we started to see the smaller firms become interested in the co-sourcing model. They had a very forward-looking approach to data, a forward-looking approach to technology that maybe hasn’t always been here. So now we need to get out and start educating folks about the pros and cons of it to see if it’s a fit for them. It’s been an interesting journey, to say the least.
James DiCostanzo 21:10
It makes you sit up straighter in your chair, from the fund administrator perspective, as well as from the technology perspective. It shows that there’s skin in the game on both sides. That’s something, at least in my experience with clients, that’s been well received.
Mike Trinkaus 21:33
I want to lead into a little bit more nuance. We believe we’ve seen some growth in emerging manager firms taking the lead on co-sourcing to a certain degree. And to me, that’s a little bit counterintuitive, because substantially all of the co-sourcing engagements that I’ve worked on have been my largest clients. But what we’re seeing is a market now that is being embraced by some of the smaller folks. What do you think is going on here? Why are they leading into technology, more than, say, some of the larger firms?
James DiCostanzo 22:29
Speaking of my own experience, and it’s going to be a sample set, the first thing with emerging firms is that they’re going to look usually to outsource. Because it’s not always easy or possible, especially with all the movement now – CFO and controller level – to decide whether you want to bring that technology in-house. You want the benefits of the technology, which include a fully branded portal and access to the data. So that’s appealing – that’s going to be useful today, as well as I have growth plans, so I’m going to need that in the future. But the problem is, do you have the ability to actually bring a technology in-house and have people that support it and actually use it? At the emerging level – at least the success that we’ve seen – it’s a perfect combination: an administrator who’s going to come in and still administer the funds, which is exactly what we needed. You de-risk that, and am I going to have a single point of failure on people or personnel, and then at the same time, you have that best-in-class technology. The ability for a fund administrator like yourself to scale – that’s been the big combination that’s helped us at the emerging level, is people and technology.
Mike Trinkaus 24:22
I agree with those who have a slightly different perspective on this as well. But it all kind of aligns as the market evolves, because really, what we’re talking about here is the evolution of this market, from education to the number of people that are using the model, to the types of GPs that are using the model. We’re sort of institutionalizing here every day as we move into the future. But any time that we ever talk about co-sourcing, folks look at it and say, “Oh, my goodness, that sounds fantastic. How do I do that? And oh, by the way, I’m very worried. I read about cost here.” The market from a cost perspective has evolved such that emerging managers can now consider it, because the pricing schemes and what comes out of the box today are a bit different from five years ago, from 10 years ago. Because of that, it’s now a real conversation about the pros and cons of spending money because as you know, emerging managers, they’re very, very tight lead management, very cost-conscious. And they want to make sure that the ROI is there on the dollars they’re spending, because they have only so many dollars to spend. The evolution of that pricing matrix, I think, has been a real differentiator with regard to emerging managers considering the co-sourcing model. And because of that, we’re seeing a lot more folks that maybe a few years ago wouldn’t have been interested in it.
James DiCostanzo 25:56
On the Allvue side, for our technology, we’ve certainly put together specifically, with the growth equity team, a standard out-of-the-box, or let’s say, foundational, solution that includes implementation and what you need to get up and running, which is at a more attractive price point and consideration for emerging managers. When we work with administrators, many times, they’ll take into consideration that technology is being delivered elsewhere. And we’ll take that into their cost model as well. I do think, while the cost is different, it’s not to the point where one would expect the benefits of co-sourcing.
Mike Trinkaus 26:51
We do have a couple of questions. From a GP perspective, owning the technology adds responsibilities and costs that sometimes are the responsibility of the administrator. What are the cost differences to the GP of the two models? And then, with the co-sourcing model? What are your comments about a GP insourcing when they have outsourced, or outsourcing or having their staff lifted out? When do they perform the work internally? Let’s focus on that first one.
James DiCostanzo 27:39
From a GP perspective, I think we just touched on this, but to get more specific, especially on the emerging side, Allvue has a bundled offering around funding, counting an investor portal, with implementation included. The price point in and of itself is more attainable. There is a separate cost for fund administrators. But conversations that we have will take into consideration if we’re not using our technology and we’re using someone else’s. There are economies of scale, and there are two different kinds of contracts that you’ll have to sign for the software as well as for the administration. There is a partnership with everyone. I do say that we approach it as one solution and like you say, a tri-party or a three-legged solution.
Mike Trinkaus 28:52
I would add just a little bit more nuance. It is more expensive to be in a co-sourcing relationship. But I look at it as the insurance premium to have access to the data and to have downside protection against moving data if for some reason your fund administrator didn’t work out. It’s a cost that sometimes isn’t appreciated until you need it. But there is a little bit of a difference there. A couple of other questions. It appears that co-sourcing can protect us from the high transfer costs of moving from one admin to another. Absolutely. One hundred percent. I talked about this a lot. It’s as easy as turning off Fund Administrator A on Friday, and turning on Fund Administrator B on Monday. If you want to switch now, practically speaking, it’s a bit more than that. But that’s really truly how easy it is to switch from one to the other in the big savings areas. You don’t have to migrate data again. And that’s important in our view. Another question: What reasons do GPs typically choose not to co-source? Is it just cost?
James DiCostanzo 30:11
Cost is one of them. But honestly, the biggest reason: I think this is always at the heart of change. To be fully transparent, there is an effort to migrate, to get your data into a technology as well as with an administrator. The point is, many times when we’re talking to prospects, they’re talking to us for that very reason. They’re launching a fund and they say it’s too manual, what they’re doing right now. And what we always say is, while it will take a little time and effort, it’s never going to be easier to make a change than it is right now. Your amount of data is going to grow, complexity is going to grow, and investors are likely going to grow. And so there is a bit of effort involved. But the long-term reward of it has always been worth that. So that is the No. 1 reason – it’s just, you know, “Let me get past this fund launch. Let me get past this fundraising. It’s audit season, it’s reporting season”. All those things get easier, I think, as you have dissolution in place.
Mike Trinkaus 31:32
With that, James, any parting words, you want to leave everyone with?
James DiCostanzo 31:46
If you follow Mike, LinkedIn, and 4Pines, as well as all of you, we’ve been passionate about co-sourcing. It won’t be right for everyone. But it’s a new solution that is really great, gaining fast adoption in the market. If anyone has any questions on the site or just otherwise, I’m more than happy to engage and provide details wherever possible on co-sourcing.
Mike Trinkaus 32:19
Couldn’t agree more. Thanks, everybody, on the webinar for their time as well. Very much appreciated. I hope everybody learned something today or took away something interesting.
James DiCostanzo 32:36
Thanks, Mike.