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Investment funds usually think of administration as something that they do in-house or that they outsource entirely. The choice between the two is a well-known debate in the industry, with pros and cons on both sides. For example, doing work in-house can be cumbersome and manual, but it gives funds control over their data. Outsourcing lets fund managers focus on portfolio management and building client relationship, but they lose easy access to their back-office data.
There’s another choice, though – co-sourcing. It’s a concept that allows funds to control their data while accessing the best technology, practices, and staff from third-party administrators. This article will look at the differences between outsourcing and co-sourcing, explain why co-sourcing works for many fund companies, and discuss the advantages of fund management technology.
In-house administration often starts with Excel and QuickBooks, which are not sustainable platforms for a growing investment business. As private equity firms launch new funds, their back-office operations become increasingly complex. Some managers, burdened by legacy systems and manual, error-prone processes, look to bring on enterprise level software that can help streamline workflows. Others, wanting to focus time and resources on portfolio management instead of accounting and reporting, look to outsource.
By outsourcing, a fund manager turns its back-office operations over to an outside fund administrator. This frees the manager from the administrative headaches. It can also, however, limit the access that the fund has to its data, making it difficult to quickly respond to investor queries or conduct in-depth data analysis.
That’s where co-sourcing offers a third path. With co-sourcing, a fund administrator executes a GP’s accounting and reporting processes directly on the GP’s software platform. This way, the fund manager’s data stays with the fund, but the back-office responsibilities are still handled by the fund administrator. The result is a win-win solution for fund managers and administrators.
Co-sourcing gives fund managers control over their data, with the flexibility to manage access to it. With co-sourcing, the data lives on the manager’s system, so it’s easy to move to a new service provider if needed. And, it’s a cinch to give LPs access to their reports. The fund’s staff can see the data as it is input because it is stored in a single golden record. More importantly, confidential data remains inside the fund’s domain – especially important as cybersecurity becomes an increasingly prevalent risk.
With co-sourcing, the fund administrator enters and updates the fund’s financial activities directly on the fund’s accounting system, so the data stays inside the organization.
Fund executives can see everything their administrators are inputting in real-time in their own system. They can validate this golden record against any other source (bank, custodian, deal team) any time they choose.
All confidential data remains safely inside the fund’s domain, and the fund staff or its administrators can create any ad-hoc reports they like securely within the system – without risk of sensitive or confidential data being exposed.
Co-sourcing has advantages for fund administrators, too. By allowing the fund client to maintain the data, it overcomes a key fund manager objection to outsourced back-office services. This leads to more customer relationships and more revenue. It also helps fund administrators scale. With co-sourcing, the data and software instance are kept at the client sites. Administrators can thus serve new clients without adding burden to their systems and databases.
With co-sourcing, the client works with their software vendor to determine how their data is accessed. The fund administrator is a trusted partner, not a middleman.
Because the client can check bank account balances, run fund financials, export an investor capital account, or validate IRR performance on portfolio companies, co-sourcing saves fund administrators time and resources that can be used on more value-added work.
Co-sourcing takes some of the best aspects of the outsourcing and insourcing models and combines them, overcoming fund managers’ concerns about controlling their data while creating a new revenue stream for fund administrators.
But to make co-sourcing work effectively for both parties, it is essential to implement the right technological solution. Allvue’s co-sourcing solution is revolutionizing the alternative investment industry, offering unrivalled flexibility, scalability, security, and data control. It provides a technological backbone that works for in-house, outsourced, and co-sourced fund administration. Fund managers know that no matter where they locate their back-office processes, they can have sophisticated technology and data access.
At a time when many leading funds are facing turnover in their portfolio teams, having consistency on the administrative side can go a long way toward maintaining firm stability. A strong infrastructure keeps the back-office functioning so that the firms aren’t hampered by manual, error-prone workflows.
For managers looking to combine the efficiency of outsourcing with the control of in-house administration, co-sourcing offers a great option. Allvue’s Software as a Service deployment stays current and is uniquely suited for a co-sourcing environment.
Allvue’s best-in-class accounting and reporting software can help streamline the process by:
To lean more about the benefits of co-sourcing, download our whitepaper, Co-Sourcing: A Win-Win for Fund Managers.
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