One of the key findings from CSC’s Distribution Waterfalls survey for 2024, is that the constituencies on both sides of the GP and LP divide in the private funds industry appear overwhelmingly in favor of outsourcing.
General Partners (GPs) and Limited Partners (LPs) in private funds both have their separate reasons for advocating outsourcing of services around waterfall distribution modelling and calculations.
For GPs, this can be part of efforts to enhance services to their LPs or simply to achieve better and more efficient results with the help of specialists. LPs, meanwhile, can expect more transparent calculations when they’re delivered by third-party expert sources. What is striking is how unanimous the consensus is across the industry in favor of outsourcing—both present preferences and future expectations.
Our Distribution Waterfalls 2024 survey, which collated responses from an equal number of leading players from both constituencies, 200 GPs and 200 LPs equally allocated between North America, Europe, and Asia Pacific, determined that three quarters (75%) of GPs plan to outsource more services around waterfall modeling and calculations over the next two years.
Meanwhile, among LPs, 43% of respondents said they would definitely, and 43% would probably, be more likely to invest with those GPs who do outsource. Only 10% of LPs said they believe that GPs should keep waterfall distribution calculations in-house.
What are GP motivations and considerations when it comes to outsourcing?
GPs are outsourcing waterfall distribution modeling and calculations to expert third-party service providers like CSC to keep their LPs satisfied and deliver a suitable, effective proposition – and for their own operational and budgetary reasons. The drivers are many that are pushing GPs towards outsourcing.
According to CSC’s survey, fund managers saw multiple benefits for outsourcing waterfall distributions, including:
- Delivering better quality information to LPs
- Diminishing risk of calculation errors
- Enhancing clarity around complex fund terms
- Accommodating multiple distribution systems
- Facilitating more complex fund structures
- Building trust with LPs
- Gaining a competitive edge within the industry
As already noted, around three quarters of GPs are planning to outsource more waterfall services over the next couple of years. Some already are, but the figures show plenty more room for adoption:
- GPs planning to outsource more services over the next two years—75%
- GPs expecting to keep waterfall calculation services in-house—17%
One predominant reason for GPs to commit to outsourcing may be the cost and resources required to accommodate increasingly more complex waterfall calculations and increasingly demanding LPs. This requires GPs to commit to regular and costly tech upgrades to support their operations and distribution calculations to keep pace with the growing demand.
As fund structures become more complex, stricter regulations are enforced, and higher technology standards are required, GPs are inevitably moving towards outsourcing as the guiding light for their business needs and competitive positioning.
CSC’s research found that half of all GPs have already invested in technology infrastructure over the past two years, while 61% are planning significant technology infrastructure upgrades over the next two years.
What are LP expectations and preferences around outsourcing?
Our respondents confirmed that LPs have very clear expectations around the growth of outsourcing waterfall modeling and calculations to specialist third parties by their GP counterparties.
Indeed, 29% of LPs said they strongly expect more GP outsourcing in the next two years, whereas 63% said they are probably expecting more GP outsourcing in this period.
What are the preferences and needs driving these figures? Why do only 10% of LPs believe that GPs should keep waterfall distribution calculations in-house? Here is what LPs are looking for.
LPs stated that outsourcing will help them fulfil several needs including:
- More accurate calculations
- Closer alignment with fund contract terms
- Greater clarity and transparency in presentation
- Building trust with GPs
- Easier regulatory compliance
- Better basis for investment decision-making
LPs want to have a strong and trusting relationship with their GPs. They are also fiduciaries with specific needs that require clear, accurate and timely reporting on distributions. To achieve this, our respondents show, they favor those funds supported by outsourced waterfall distribution services for the best results for both sides.
The trend towards outsourcing waterfall distribution modeling and calculations is not only prevalent but is expected to grow significantly in the coming years.
Both GPs and LPs recognize the advantages that specialist service providers bring to the table—enhancing transparency, reducing errors and fostering trust. For GPs, outsourcing addresses both operational and financial needs, while for LPs, it ensures a higher standard of reporting and clarity.
As the private funds sector continues to evolve, with increasing complexity and regulatory demands, outsourcing is emerging as the most viable solution to meet both sides’ expectations effectively. This shift underscores a broader industry consensus: outsourcing is no longer a mere option but a strategic imperative for future growth and competitive advantage.
CSC has expertise in complex waterfall distribution modelling
CSC is uniquely positioned to support both GPs and LPs as they navigate the growing complexities of waterfall distribution modelling and calculations. With our industry expertise and dedicated resources, we provide the transparency, accuracy, and operational efficiency that GPs need to enhance relationships with LPs while meeting regulatory requirements. Our tailored solutions help reduce the risk of errors, streamline complex fund structures, and ultimately build trust, giving both parties a competitive edge.
Download CSC’s Distribution Waterfalls 2024 report to explore how outsourcing waterfall services can enhance your operational efficiency, transparency, and regulatory compliance.
