The Future of Fund Management: Why Top Firms Are Switching to Co-Sourcing

Driven by market conditions, co-sourcing solves the problems associated with outsourcing

Private capital firms are under increasing pressure today to outsource fund administration. But outsourcing has its downsides. Specifically, when GPs outsource, third-party fund administrators collect their data, generate reports, and cover other functions within the fund administrator’s software platform. This arrangement leaves GPs vulnerable to a host of risks.

Without ready access to information in their fund administrator’s platform, GPs who outsource often practice shadow accounting, or keeping a separate set of books, wasting resources. For similar reasons, they frequently worry that their fund administrators won’t help them in a pinch when they need to satisfy demanding LPs who expect more transparency and communication. Greater compliance burdens have only made these concerns more urgent. Switching service providers when a relationship isn’t ideal, meanwhile, can be a daunting task.

With co-sourcing, on the other hand, GPs retain control, as the 4Pines Fund Services Definitive Guide to Co-Sourcing explains. They hold the license to their firm’s software platform and grant their outsourced fund administrators access to those systems. The fund administrators simply use the GP’s login credentials to work within the GP’s software. Priced typically between ordinary outsourcing and in-house accounting, co-sourcing significantly diminishes the risks associated with offloading one’s data to a third party.

Volatile market conditions, the proliferation of more complex funds, new regulations, and greater compliance burdens are driving interest in co-sourcing today.

Volatile markets conditions

The banking sector is under pressure, credit markets are tight, and a financial tech revolution is underway. At the same time, re-shoring, remote work, and human resources bottlenecks are disrupting workplaces. Co-sourcing allows GPs to face these challenges head-on.

As a cloud-driven, software-centered approach, co-sourcing gives GPs access to their data in real time and the ability to more competitively select the best fund administrators who can innovate, leverage flexibility, and adjust quickly to emerging challenges.

More complex funds

Private capital firms are offering more diverse ranges of products to more diverse ranges of clients. New financial instruments such as carbon credits and other ESG tools, for example, have added to this complexity.

Co-sourcing fosters innovation and increases cooperation between GPs, fund admins, and third parties such as auditors, lawyers, and compliance teams. This cooperation cuts costs, delivers efficiencies, takes advantage of digital tools, and offers more return on investment in the form of new ways of extracting value from data for new financial products and services.

New regulations

The outsourcing boom of the past few years has fueled a drive toward greater regulation. Ostensibly to protect investors’ privacy, the SEC is now seeking to enact several new rules that would force GPs to conduct more due diligence and monitor their external fund admins and other service providers more closely.

Because co-sourcing GPs retain control and grant fund administrators access to their data, co-sourcing offers a flexible framework for maintaining this ongoing due diligence.

Tougher compliance

Other recent SEC regulations demand that large hedge funds and private equity advisors report certain “triggering events” within 60 days of the end of each quarter as well as GP and LP clawbacks every year. More transparency rules are in the pipeline, a shift happening in other jurisdictions around the globe, too.

The best fund administrators have excellent compliance teams. Co-sourcing allows GPs to integrate this expertise seamlessly into their firm’s workflows without compromising their data.

Co-sourcing offers the benefits of outsourcing but without the biggest risks and disadvantages. It allows asset managers to stay close to the data at the heart of their operations and, at the same time, draw on the best external human talent they can hire without becoming excessively dependent on a specific provider – no matter the conditions in the market.

Read the full definitive guide to co-sourcing here.