When markets are flat, operational efficiency is a key differentiator. On a recent webinar, Marshall Saffer, managing director of CSC’s Global Fund Solutions, discussed strategic outsourcing with industry experts Gerry Polizzi, managing partner and COO of West Tower Group, and Bill Saltus, director of Hedge Fund Business Consulting, Wells Fargo.
These are uncertain times for fund managers. In many countries, high inflation and rising interest rates seem to have put the brakes on private equity deal-making. Hedge funds appear to be faring better, although many investors remain bearish.
In trying times, however, skilled fund managers can still forge ahead. Deals are more attractively priced, investors are expected to look to hedge funds to diversify their portfolios, and there remain plenty of opportunities to innovate and grow.
This is not expected to be the same exuberant growth of private capital as was seen in 2021—it is likely to be much harder fought. But solid returns are achievable with expert deal-making at one end and reduced costs at the other.
Operational efficiency plays a crucial role. Funds need operating structures that drive growth without suppressing returns, which leave managers to focus on vetting out the next great opportunity.
That’s the challenge, and it’s one that strategic outsourcing can help managers meet. Here are the key takeaways from a recent CSC webinar.
Fund managers want operating structures that minimise costs and maximise efficiency.
These objectives, however, can’t come at the expense of the ability to grasp new opportunities whenever they appear. In tough times, funds need to be agile above almost anything else.
To spread risk and explore new opportunities, some private equity firms are moving into private credit, while some hedge funds are eyeing private equity. Others will diversify depending on the wishes of their investors.
If and when they do, they’ll need the operational expertise and technology to manage new processes and meet unfamiliar contractual and regulatory requirements.
So, while we’ve seen some ramping down in back and mid-offices, the ability to ramp back up again quickly is essential.
That kind of scalability is one key advantage of an outsourced model. A good outsource partner can ramp resources up and down as your requirements change and provide specialised resources as funds move to new asset classes.
Fifteen years ago, funds would build their own technology to meet their own needs. The big advantage here was that the systems they produced were, by definition, bespoke.
The big disadvantage was that they had to build them—and then manage and maintain them as well. Specialists had to keep them secure and scale them as the fund grew.
As processes have become more consistent across fund sectors, and regulatory regimes more standardised, this Do It Yourself (DIY) approach has been replaced by something else.
Many funds now run third-party technology platforms with open-source APIs (application programming interface) that allow them to harvest data for their own data warehouses. They can then develop bespoke applications to use this data in a tailored way.
Here, the internal IT professional is the developer, building or customising applications based on the needs of the organisation.
At the same time, the management of a more standardised technology stack can be outsourced to provide significant cost savings, as well as freeing up internal resources for more creative tasks.
One size rarely fits all, and a good outsourcing partner will engage with a fund in an agile and responsible way to meet whatever way a manager requires.
What that is will depend on the size of the fund and where it is in the evolutionary cycle.
New managers may want a small but multifaceted outsourcing engagement, helping them quickly build expertise and manpower in a number of areas.
More established firms with sizable in-house teams will still see the economic and operational sense in farming out, say, basic reconciliation tasks to a trusted outsource partner.
Whatever the need, an outsourcer should be able to create a business model that meets it.
That might mean providing their own accounting and reconciliation tools for the client’s use. Or—if clients already have these systems—it may simply mean providing the staff to operate them.
In either case, operational outsourcers should be seen as partners rather than providers.
Managers should be able to trust an outsourcer implicitly in areas such as cybersecurity and data privacy. Of course, it’s always wise to check if a potential partner has the relevant certifications in place in crucial areas like these.
Away from technical specifications, however, it’s the human relationships that count. A good outsourced team will act and feel like an extension of a manager’s own setup. For his/her part, a manager should treat the team in the same way, and not as the hired help.
In a good partnership, everyone works towards the same goal. When that happens, strategic outsourcing can help to cut costs, drive efficiency, and enable growth, even in the most challenging of times.
For more insights on strategic outsourcing, read our report: Introducing the Halo Framework.