The private equity industry has grown quite substantially over the last decade, attracting only the brightest of minds to participate in this highly competitive market.
Due to the rapid growth of the industry and need to consistently remain relevant and competitive, private equity funds have been leaning toward the outsourcing of their administrative and portfolio management functions in order to increase overall organizational efficiency.
Here is an in-depth description of the private equity industry and the reasons and advantages of outsourcing in private equity firms.
How Does Private Equity Work?
The appeal of investing in private equity is that you are able to achieve high returns on investment (ROI) that are less correlated with indices, which is the case when investing in publicly listed shares. The only trade-off with investment in private equity is that it requires a much longer waiting time for returns and is much less liquid than public shares.
Due to the higher returns, the private equity industry has seen immense growth over the last few years, with an increased number of investors and employees.
However, private equity managers need to have their attention centered around trading, as this function of the business is pivotal to profit generation. As such, private equity firms have started to outsource the non-investment functions of their business in order for their internal focus to lie solely in their investment functions.
What are the Advantages of Private Equity Outsourcing?
Previously, private equity firms were hesitant to outsource non-investment functions of their business due to the complexity of the industry within which they operate.
However, numerous advantages occur in the case of private equity firms that outsource non-investment functions and the portfolio management of their business. This operational method has gained traction in recent years.
Some of the advantages that have resulted from outsourcing include:
- the reductions of variable costs
- increased portfolio profitability
- providing private equity managers with more time to focus their attention on the firm’s core business
The Reduction of Variable Costs
An in-house call center can be a source of high variable costs for a business. This is because something as simple as call volume variation can result in an unpredictable telephone bill from one month to the next. Additionally, there are other fixed costs and overheads that occur, such as salaries and utility bills.
In an industry as complex as private equity, the talent requisition process for call center agents would need to be quite stringent. Operators need to be well-versed in the technicalities of the industry in order to engage with clients.
The in-house management of administrative functions can also result in an increase in variable costs incurred by the firm. Fluctuations in sales can have cascading effects on the need for office supplies and utilities.
By outsourcing non-investment and administrative functions to a third party, private equity firms are able to remove these internal variable costs and transfer them to the third party for a more fixed cost.
Due to the rapid growth in the private equity industry, standards and best practices have been implemented, especially from an administrative perspective. This is especially true as a result of asset class diversification and the increased stringency in regulatory reporting.
For an existing private equity firm, this would theoretically mean that all administrative staff would require constant upskilling in order to perform their functions in line with the industry standards and requirements.
In the case of outsourcing, this cost is incurred by the third party and they would have to ensure that their staff remains well-versed in the most updated industry standards and best practices.
The Role of Institutional Investors
Institutional investors tend to invest in alternative markets that comprise of unconventional types of equity (with conventional equity being stocks, bonds, and cash), which, due to their level of complexity, carry a higher level of risk.
As such, an emerging trend in the case of institutional investors has been to outsource their administrative and portfolio management duties to third-party administrators and managers in order to focus on the core of the business, due to its high risk and competitive environment.
Based on the success of outsourcing in the industry of institutional investment, private equity firms have also started to partake in this practice, as it reduces internal overheads and allows for an external, neutral third-party administrator to manage the firm’s books.
Additionally, institutional investors have also started to display interest in increasing their exposure to private equity markets, as they have been outperforming public equity markets and other asset classes. In order to gain the support of institutional investors and inspire confidence in these investors, it is important to show that all administrative matters are well managed and up to date with the latest standardization methods and best practice protocols.
As such, by applying the same principle of outsourcing to third parties as they do within their own industry, these goals can be achieved.
Transparency Through Reporting
Transparency has been a contentious issue in the private equity industry for many years. Industry standards such as GIPS 2020 and ILPA 3.0 have been put in place in order to ensure that firms are transparent with regards to their operations.
The benefit of transparent and thorough reporting is that this can also be used to provide firms with a competitive advantage from a PR perspective. The use of a third party for fund administration and reporting can result in more accurate reporting, as they have first-hand experience through their fund administration, as well as honest and unbiased reporting.
Efficient Use of Internal Human Capital
Fund administration and portfolio management can be demanding business functions in terms of resources required, both human and intellectual capital. In light of the increasing demand and stringent protocols of reporting, and the advanced technologies being utilized, the feasibility of having this function within a private equity firm has decreased substantially.
Private equity firms are opting to outsource fund administration and portfolio management to third parties in order to improve internal operational efficiency and resource allocation and to ensure that all industry standards and protocols are followed at all times.
In the case of companies, it is important to focus on the core activities of the business, and this can sometimes not include the management of the business’ portfolio. By outsourcing the portfolio management of your company to a third party, you are assured that their focus is solely on the growth of your portfolio.
The third-party would also focus primarily on doing the necessary research and due diligence to ensure that your funds are invested in stocks that are most likely to result in positive returns, and, therefore, increase your overall portfolio profitability.
Furthermore, collaboration can occur between company founders and outsourcing resource managers to utilize the skills and services of offshore staff to make the best decisions for company portfolios, resulting in increased profitability for your company.
Why You Should Outsource
Successful businesses are able to demonstrate high levels of adaptability in order to cope with, and thrive, in times of immense change.
The world has become more appreciative of transparency and responsible business practices; characteristics that are most often displayed through thorough reporting. All of these features can contribute to a business’s competitive advantage and can set it miles ahead of its competitors.
Aside from public image, internal operational efficiency is key to sustainable business management and profit maximization. In order to focus on the core aspect of the business that leads directly to revenue generation, it may be worthwhile to consider outsourcing functions that, although vital, can still be performed in a satisfactory manner by the third-party service provider.
It is important to ensure that third-party service providers are aware of the requirements and are able to fulfil the required tasks in line with organizational and industrial standards.
Private Equity Outsourcing – the Figures
The private equity sector has performed very well in recent years, with private equity firms having almost $1 trillion at their fingertips. As a result of the increase in investors and funds, a large percentage have become inclined to outsourcing their administrative and portfolio management functions.
In Europe, 70% of private equity firms are outsourcing while, in the United States, between 30 – 40% of firms are outsourcing. This figure is on the rise. Outsourcing to a third party can allow you to focus on the core aspects of your business and you can rely on the experts in their respective fields to attend to their tasks.
Furthermore, from a financial perspective, outsourcing can be a more cost-efficient option, as the costs incurred from outsourcing tend to be more fixed than they would be if these functions were in-house.
From the perspective of risk reduction and aversion, outsourcing allows for external administrators to implement controls, processes, and technologies that minimize concerns around privacy, errors, and procedures.
As external administrators and portfolio managers would be solely focused on performing their functions in line with regulations, they are consistently documenting and auditing their policies and, as such, there is an overall improvement in quality assurance and profitability. Outsourcing the risk is both cost-efficient and time-saving.
What Noon Dalton Can Do for You
We are a company that focuses specifically on back-office administration and customer care. The services we offer include recruitment process outsourcing (RPO), eCommerce, business owner services, real estate assistants, general administrative services, portfolio management, as well as voice telemarketing.
As a company that may be experiencing rapid growth, it is important to focus on the core aspects of your business. Our team of highly skilled and experienced consultants can assist you with all of the non-core functions of your business operations.
Our consultancy is free to all our customers, with trained professionals ready and waiting to help. So read our case studies and contact us today and let us develop a meaningful relationship with your business, so that you can focus on making your business grow.