Celeste Barone and Mike Trinkaus have built careers cutting through the complexities of fund operations, outsourcing and strategy. Celeste is the former CFO of Commonfund, and Mike the former CFO of Portfolio Advisors. They were recently joined at 4Pines Fund Services by Mark Toby, former CFO of Auspex Group and Maximus Capital. This webcast is a practical live analysis of going from self-administered to outsourced in light of today’s realities. If you’re looking at when to make, or revisit decisions on outsourcing, what the most important catches and caveats are, and to update your notes on best practices from your peers, you will want to watch the webcast below. If there are topics you want to make sure Celeste and Mike tackle, please feel free to reach out to us.
Mike Trinkaus 00:02
For Celeste and me, this is our first webinar together. So, I’m very excited to finally put her in the hot seat. Today we’re going to talk about how you go from being a self-administered GP: the things to think about, the things to consider as you move to an outsource model; some of the obstacles that you need to overcome; and some of the nuance as it relates to the process of going from one to the other. So, we’re really excited to have that conversation with you today. I would strongly suggest that if you have questions throughout the presentation feel free to put them in the queue. We’ll get to as many of them as we can.
Without further ado, I’d like to introduce Celeste. Celeste, if you wouldn’t mind, spend a couple seconds here – maybe minutes – going through your bio and the long, distinguished career that you’ve had so far in the PE space.
Celeste Barone 01:00
Thanks, Mike. I’m Celeste Barone, and Mike’s partner in crime here over at 4Pines Fund Services. I have spent the better part of 25 years in this space and in the back office, starting from a junior accountant and working myself way up to the distinguished CFO seat. My last position was at Commonfund, where I was the CFO. Initially I was brought in to be the CFO of the private equity group, which consisted of $15 billion in committee capital under management, and many, many funds. I think when I left, there were close to – let’s call it 60. Then I went up to the parent company and became CFO of the nonprofit asset manager that sat on top of a group of companies. Before that I was at Pomona Capital. Pomona is known for its secondary business. That’s what they do. They are also very successful. I worked there for many years, had a terrific team and partners there. So, I’ve spent a lot of time, Mike, in the space, as you know.
Mike Trinkaus 02:22
Indeed. We’re really appreciative of the time you’re going to spend with us today, because I think what’s most important is the practical experience that you bring to going through this process. You went through that process, and for everybody’s background, Celeste and I first came across each other in a meaningful way back in 2007, when she was at Pomona and our firms did a joint deal together. We first met each other as part of the GP world, then I went into the fund administration world, and Celeste went through the process of selecting a fund administrator. We’ll touch on that a little bit later.
What that transition was – from being self-administered into the outsource world, to where we are today, which is partners at a fund administration firm that we run here at 4Pines – it’s a great journey. We have lots of friends in the space: finance executives, other CFOs, former colleagues that we’ve worked with over the years. If we dispense with generalizations and things our peers already know, among those former colleagues, friends, and other folks in our network that are still self-admin, today, why not stick with it? What do you think? What are your thoughts around that?
Celeste Barone 03:53
It’s a great question. I think that if it works, you should stick with it. What we’re finding, amongst not only our clients now but certainly when I was at Commonfund, is that things have gotten complicated and require more support. So having an extension of your team can be very useful. At Pomona I had my own self-administered team, and we did everything in-house. It truly worked very, very well, up until a point. When you start thinking about and dreaming about what else you can do for the firm and the data that you can collect and utilize, it becomes more challenging. It’s also very expensive. So, as you build out your team, it’s a cost to the management company. It can be very expensive.
In other situations, if people are thinking about outsourcing – I had a situation at Commonfund where I had 20-plus accountants sitting outside my office. We had great people, but we didn’t have any solid systems or the ability to capture the data from all the underlying investments, and that was really important to the investment team. The old model that I know and grew up in worked really well, but the industry has gotten more sophisticated. It’s gotten more complicated. People want access to whatever it is about their fund, their investments, they want to run cash flows every which way but loose, and they also utilize what’s in their portfolio, perhaps, to look at and value deals and investments.
Mike Trinkaus 05:52
I guess in both of those particular situations, there were different reasons for the decisions that you made. Some supported that self-admin model, and in the other situation, perhaps it supported that outsourced model. It’s really a matter of looking at your individual situations and weighing all the different factors as a starting point to see whether it makes sense to outsource or to not outsource. Is that a fair takeaway?
Celeste Barone 06:23
Absolutely. In the case of Commonfund, when I realized that finding the right outsource solution would solve an enormous amount of our problems, it took me well over a year of meeting with many administrators, and really learning the business for the first time, and understanding what’s available and what’s out there. I was in the market for over a year before I reached out to you. It had been some time since we had last spoken – I was in Wilton, Connecticut, and you were in Darien. I figured it was worth a call and a lunch to just hear about what you were doing, because through the grapevine I heard you started your own fund admin. I wanted to get a sense as to what you were doing. I think that was so valuable for me, because when we met for lunch, I was thinking you had a small shop and you were supporting your old firm. I wasn’t clear that you actually were building a real business and were very committed to much more than what I had in my mind.
There’s something about speaking to a fellow CFO and a peer that understands your language and what you’re talking about, and where your sore points are, that can together find solutions for you. That was an incredible moment for me, realizing I can partner with someone that knows what I’m talking about, and also value the firm in such a way that I needed at the time. I felt I couldn’t get it wrong. Commonfund had never outsourced to a fund admin before for its private equity group. We were growing by leaps and bounds. The growth trajectory – and the funds that were going to be raised in the next five years – was just tremendous. We needed a stronger foundation from an administrative perspective.
I wasn’t happy with what I was finding. I thought I needed a bigger firm, one that had been in the industry a long time. What I found and learned was that I needed the opposite. I needed a niche, special player that was going to pay attention to me when I called, that was going to understand the nuances of the funds, be able to deliver reporting, and be available when I needed to get something done. That’s essentially what we did together, which was also a big part of the decision-making: that we would build a timeline and workflow together with deliverables over 12 to 18 months to transition 45 funds to a new firm. You allowed me to be very involved in that, and I was very involved, including interviewing staff that was going to be working for you, moving a group of my accountants over to your shop and what that transition would look like in terms of compensation for them, and lots of other things that went into the transition. It was a heavy lift.
Mike Trinkaus 09:45
You did a perfect job segueing into the next question that I wanted to ask you and putting in a nice overlay of several things that hopefully we’ll get to during our time here today. Despite the first question being centered around why not keep the fund admin model in place, can you point to some of the obstacles that need to be solved when you get to an outsource solution that works? There are obviously obstacles that we all know about, and then there are ones that may be a little bit lesser known – folks maybe don’t focus on. What are some of the things that you had to work through as you went through your process? Can you take us through a few of those?
Celeste Barone 10:33
Sure. The process was a long one, and a thoughtful one. First, it starts out internally, having those discussions of what an outsourced solution would do for us that we’re not currently doing. Or, “What would we like that we’re not currently able to produce?” Really having a dialogue internally to make sure that everyone is committed to moving forward with an outsourced solution if that’s what the CFO is trying to achieve. At the end of the day, it falls on the CFO, ultimately, to make that final decision and be comfortable moving forward. After that, it’s finding the right partner. I think, for us, Mike, at 4Pines, our clients are our partners. They’re not just clients that we do work for. That is a very big distinction: you need to find the people at the fund admin, wherever you end up going, that you can trust, that you have confidence in, and that you feel are going to be available to you when you need them. Sometimes, that’s a lot. Certainly, I think, Mike and I were on the phone daily for the first year, making sure everything was buttoned up. I think that’s important.
Also, understanding who your team is going to be is important. If you’re outsourcing to me, you probably want to know who’s going to be supporting me, what does my team look like? You can get involved in the design of that too. We have some clients that we are staffed to service them at their peak period, not so much in-between quarter ends, perhaps. We have other clients that say, “No, we don’t want to do that, we want it to be a little less than that.” So, we do all kinds of things, and we work with the client to understand what it is they’re trying to build.
A big piece of this is technology. It is very difficult for a CFO to keep track of all the systems out in the world, and there are a lot of them. We don’t have an internal system to utilize per se. We have options for our clients, and we are agnostic as to what they decide on. But we can pivot and show them a whole bunch of options that we then build their technology stack for. That’s almost unheard of in the market. Of course, there’s co-sourcing, which I know we’re going to touch on in a bit. But if the ideal solution for what’s in the best interest of a CFO and GP is to own your data, you’re allowed to do that when you co-source with your administrator. I think those are some key points when thinking about how to go about this and what’s important.
Mike Trinkaus 13:38
I would agree. One of the things that jumps out to me as an obstacle are things like the service model, the partnership model – how do you prove that? It’s a very unprovable thing upfront. Everybody would like to say, “Hey, we’re partners, we do this, we do that.” But until you’re in the thick of it, until you’re on the firing line with everybody, it’s really hard to prove out. I think client references help to a certain degree. But my advice would be to lean in to really understand what that service model looks like and what that team looks like, because those are some of the bigger obstacles you need to get around and get comfortable with as you go through that process. That’s something I would just add to what you said.
Celeste Barone 14:31
I’d also add that I was at lunch with a CFO yesterday in the city, and we were talking about, “How do I know that you’re going to do what you say you’re going to do? How do I trust … you’ve given me a list of references, but are you giving me references that are only going to say nice things about you?” And one of the things I suggested to her was to go onto the PFO, CFO network and find fellow CFOs that have worked with not only 4Pines, but perhaps other administrators, and get independent references. That is something available to CFOs, and something I would encourage.
Mike Trinkaus 15:12
I think that’s a great part of the diligence process – to go outside what you’re being provided as a reference and try to independently verify your experience with anyone in the market that you’re considering. There’s no better reference than a colleague in the industry that’s had experience in one way or the other to share that with you. I think, generally speaking, the CFO community is pretty open about their experiences with service providers, so it’s a great place to go to learn a little bit.
Celeste Barone 15:49
Mike, let me just ask you: Are there any reasons that are perhaps less obvious than what we talk about publicly on these types of forums, or, perhaps internally, that our audience may be interested in?
Mike Trinkaus 16:08
From the standpoint of staying as a self-admin firm, I’ll start with some of the bigger ones that we often get. The first and most obvious is, “I’m losing control of my data and process.” You are – in some ways. But there are other mitigating factors. That is a big reason why a lot of folks don’t want to go from self-admin to outsourced. Part of that is, you’re losing that direct access to your information, to your data, to your process when you outsource to a fund administrator.
Some of the more obvious reasons: sometimes costs aren’t permitted to be pushed through to the limited partners per the LPAs. That’s less and less of an issue, as you know – here we are in 2024 – but we still do run into that from time to time. Parallel to that, depending upon the structure of certain GPs that may be concentrated in a few large LPs, you’ll see that costs are very important, even if they are permissible in the LPA. The other thing that you hear all the time: “Oh, I don’t have time,” or “I don’t want to go through” a data migration. That’s a very legitimate excuse. Migrating data is never fun. It takes a pound of flesh out of most people as they try to manage their day-to-day job but then move all of that data into a new platform. The reality is, this is coupled with data migration staffs who are usually very thin, and they are stretched in many different directions. As we know from our experience, and many of the CFOs that are with us today, we are sort of the dumping ground for many of the firm’s areas and tasks and whatnot that people just don’t want to deal with on a day-to-day basis. So, it ends up in the CFO chair. They’re stretched very thin, and it’s a lot of work to go through that process.
One of the other ones that I enjoy is, “Our funds and our process are just too complicated for a service provider to handle.” I think we see a lot of difficult things, and everybody and every GP has a sense that they’re different than everybody, and they are – they’re all very different. But there aren’t too many firms that we’ve come across where we couldn’t handle the complexity.
Those are common reasons why folks want to stay self-admin. Some of the less obvious reasons that we see: one is a GP just recently invested in a new technology stack, and they just went through a data migration internally. Because of that, they don’t now want to move to an outsourced service provider because of the time, money, and effort they have put into their new tech platform. Another thing we hear every once in a while is, “Hey guys, we love you, but we’re about to launch a new fund and we don’t want to disrupt anything” – and that’s whether they’re self-administered or if they are outsourced currently to another provider. They just don’t want anything to get upset prior to that new fund launch. Things like auditor changes and tax accountant changes sometimes impact why a firm will not make a switch right away, because it sends a certain message to the market. You’ve recently changed your auditor, now you’re changing your fund administrator. It does raise a little bit of a red flag when you go through that process. I think any kind of turnover at the executive level, plus that fund admin change, sometimes will raise certain flags. But it also creates opportunity as well. If a new fund admin comes in, and he or she’s had a successful relationship, that may be an opportunity where they say, “You know what? I know this group, they work really well, I want to get them in here right away.”
Some other nuances: not having the support from the senior team – the executive level – to make the switch is really hard. Because if you don’t have that buy-in, it’s very likely going to end or start off a little rough and it may take some time to get there. I think a lot of CFOs are bit risk-averse in owning that decision completely. So, you really want to make sure that the buy-in is from top to bottom. Those are some of the lesser-known reasons why folks have decided to stay self-admin versus outsourcing.
Celeste Barone 21:19
Just using my example with Commonfund: while it was a heavy lift, I think when that transition was over and we were operating on a day-to day-basis, the internal team that was left – which was much smaller at the end of the day – was just thrilled with and relieved by how much of the work was now being outsourced. Now they were just reviewing. A lot of the work was already done which they used to have to do.
You’re not going to always get 100-percent buy-in from the rest of the team. But you need a couple of good people that are going to support you and when you’re not in the room, know that they’re going to speak on your behalf and in good ways. And you have to prove your model. I couldn’t get it wrong at Commonfund, and I worked really hard finding what I was looking for. Never expected to end up where I did. But it was such a good solution for what I needed at the time.
Mike Trinkaus 22:29
What’s interesting about that to me is that it really highlights the risk that the CFO faces internally. Because at the end of the day, you have to get that decision correct. I’m sure if we go back to your Commonfund days, you were meeting all of your deadlines going out the door. What does that do? It creates this perception that everything is fine. But the reality is that every other CFO out there knows – just because we’re meeting deadlines does not mean that the process is the right process. It doesn’t mean that there isn’t risk involved in the process. To now convince upper management that we need to go down this outsourcing path can sometimes be challenging, because they’re not in the day-to-day in the weeds, like you and I and others. It’s just, “Are things getting done? Have we met the deadlines?” That’s really many times what folks are looking at to decide whether or not things up things are working.
Celeste Barone 23:38
Absolutely. I agree with everything you just said. When it goes sideways, that’s never a good thing either. You have to know what you’re doing and be committed to the venture and working through it.
Mike Trinkaus 23:56
I think that’s exactly right. At the end of the day, there is a lot of internal risk. If you’re moving from the self-admin market to the outsourcing market, you have to manage it very carefully, proactively, because the reality is the data that sits and runs through the CFO group is essential to running the firm. Their data hits IR, it hits the investment team, it hits the executive team, and any disruption in any way, shape, or form across those three particular groups within a firm, it’s going to rest that responsibility on the CFO. If you make a change, it’s not going to be viewed favorably if it isn’t worked out quickly. And the reality is when you go from self-admin to outsource, it does take time. It’s a process – as they say, Rome wasn’t built in a day. Changing from the self-admin to the outsource, it’s a journey that you go on. Everybody needs to go in understanding that particular journey.
Celeste Barone 25:09
We’re doing so many things here at 4Pines with technology. One of them is something called co-sourcing that you and I know very well. But for the audience, maybe you could just remind everybody what it is, and then talk about how it fits in the framework of what we’re describing here today.
Mike Trinkaus 25:28
I’ll answer the last part first. From a framework perspective, when we talked about partnership when we started out this webinar, I think there’s no better way to demonstrate partnership than entering into a co-sourcing relationship. What it does is open up and expose what we do as a fund administrator to our clients. If you’re going to partner with somebody, you should expose yourself, and you should create an environment where you’re both incentivized to accomplish the goals together, as opposed to separately.
Co-sourcing is a way of collaborating. It’s a way of partnership. Well, what is co-sourcing? Historically, in the fund admin market, I offer a technology solution. My clients have to come and give me all of their information, and I run all of their operations with my technology stack. In the co-sourcing world, we allow the technology stack to stay with our clients, so they own the data. If they do have to migrate to a new technology platform, they get to keep that technology platform, and we bring our team and we operate within that technology platform. It really de-risks a lot of things when it comes to information, when it comes to access, when it comes to transparency. We spend a lot of time preaching about all of those things, and the best way that we can do that is to create an operating model that really sells and pushes those core beliefs we have about our operating relationship with our clients. Very big picture – there’s obviously a lot more nuance to it – but when you think of it at a big picture perspective, that’s what co-sourcing is.
Celeste Barone 27:17
For myself, I think this is a game changer for 4Pines. What it essentially does is turn the table on current relationships with other administrators right now. It holds us accountable for the work we’re doing. If you try to leave an administrator and get your data, they make very difficult for you, and they give it to you in some form of Excel and some data dump that’s probably not understandable. It makes the data migration for the next administrator very difficult, or even if you’re bringing it in-house.
This way, the technology sits with you. Our accountants log into your system every day, do the accounting work, log off, and you own that data and you own the accounting system. When you want to run a trial balance in the middle of a quarter, you don’t have to make a phone call and then wait a few days to perhaps get something. You could run all types of data for your investment team, investments, anything you’re looking for. It’s a game changer and it makes us sit up straighter in our seat every day, because the relationship can be ended quicker. It leaves the control with the GP, not the administrator. That’s what I love about it – I want to be accountable. I don’t want to ride on the GPs coattails.
Mike Trinkaus 28:50
It speaks to the partnership model, the collaboration model, so I couldn’t agree more with you. Unfortunately, we are right at 1:30. We did not get to the questions, but we do have some – and if you want to connect with us, if you sent a question, we do have I think six or eight of them here. If you want to reach out to us, I think Celeste’s and my email is readily available. Please send us the question because otherwise, we don’t know who we’re responding to. But we’d be happy to answer your question, so feel free to connect with us. We can set up a call and chat, or we can do it via email.
But Celeste, this has been absolutely fantastic. Way too short – I feel like we’re just scratching the surface here. Thank you for your insight. Thank you for your wisdom. We absolutely need to do a Part Two of this in the near term. So, thank you everybody for joining, and we will hopefully see everyone soon.
