The emergence of co-sourcing in private capital operations is reshaping the middle and back-office outsourcing landscape and driving efficiencies across the industry. Why is this and what are the benefits of co-sourcing?
The private capital industry has always been innovative in terms of new operating models. And one trend in particular has gained significant traction in recent years—that of co-sourcing, otherwise known as hybrid fund administration.
The two vastly different operating models that private capital firms have traditionally relied on—fully in-house teams or complete outsourcing to third-party providers—both have their strengths and weaknesses.
The in-house model is often resource intensive, requiring significant investments in technology, personnel, and ongoing training. And while it offers control and potentially a greater ability to tailor processes to a firm’s specific needs, keeping up with regulatory changes and technological advancements can sometimes become overwhelming for internal teams.
On the other hand, outsourcing offers cost savings, scalability, and access to specialized expertise, although some outsourcing models can lead to a loss of control and potential misalignment between the service provider and the fund manager’s objectives.
Co-sourcing, however, represents a hybrid model that combines the best of both worlds.
What is co-sourcing?
The co-sourcing model allows private capital firms to retain control over critical functions—including their data—while leveraging the expertise and scalability of a third-party service provider.
In a co-sourcing arrangement, the fund manager and the service provider work collaboratively within the fund manager’s operating structure, sharing responsibilities based on each party’s strengths. It may be, for example, that the fund manager retains control over investor relations, while the service provider handles accounting, reporting, and compliance. However, it could be the opposite in another firm’s co-sourcing arrangement—crucially, co-sourcing is very customized, built around a firm’s specific pain points but without interrupting its overall operating process or technology platform.
What are the benefits of co-sourcing for private capital firms?
Co-sourcing in private capital operations brings five key benefits:
- Enhanced flexibility and control: Co-sourcing allows firms to maintain control over critical operations while gaining the flexibility to scale up or down as needed. This adaptability is crucial in an industry where fund sizes, structures, and investor demands vary widely.
- Access to expertise and technology: Partnering with a service provider through a co-sourcing arrangement provides access to specialized expertise and cutting-edge technology that may be cost prohibitive to develop in house. This includes advanced data analytics, compliance tools, and investor reporting platforms.
- Cost efficiency: Co-sourcing can lead to significant cost savings by reducing the need for large in-house teams and expensive technology investments. It also enables firms to pay for services as they need them, moving from a high fixed cost structure to a variable cost structure.
- Improved risk management: By partnering with a service provider, private capital firms can benefit from the provider’s risk management practices and industry insights. This can help mitigate operational risks, ensure compliance with regulatory requirements, and improve overall governance.
- Scalability: As firms grow or launch new funds, co-sourcing allows for seamless scaling of operations without the need for extensive hiring or infrastructure development. This is particularly advantageous for firms managing multiple funds with varying strategies and requirements.
How great a role will co-sourcing play in private capital operations?
At CSC, we firmly believe the co-sourcing model will continue to gain traction and become increasingly widespread among private capital firms, providing them with a competitive edge in a rapidly changing landscape. Co-sourcing will undoubtedly play a key role in reshaping the future of private capital operations, helping firms navigate the complexities of the modern investment landscape while maintaining the agility they need to succeed.
Rather than incurring the cost and burden of the in-house model (or perhaps the inflexibility of some outsourced models), by combining the strengths of in-house teams with the capabilities of trusted service providers, co-sourcing enables firms to achieve greater efficiency, reduce costs, and ultimately deliver better outcomes for their investors.
How can CSC help?
CSC delivers outsourced services with worldwide capability, providing complete solutions that bring together software, expert operational staff, and domain expertise. We’re committed to truly managed solutions that bring insight and efficiency to the fund management process.
Our co-sourcing offering sees CSC work hand in glove within our clients’ operating structures to deliver whichever our services they require. These could be offered as a specific standalone service (e.g., treasury management or loan administration), or alternatively, some clients want to access parts of one of our comprehensive services such as fund administration (e.g., just our AML and KYC and investor onboarding offerings).
Discover more insights and how CSC can assist with your needs, here.
