In or Out? Tackling back office complexities

By Fraser Irving

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The age-old back office dilemma of working out what to outsource and what to keep in-house rumbles on for many CFOs and COOs. However, could private equity be entering an age where the decision no longer needs to be made?

A whitepaper recently published by private equity software provider AltaReturn looks at how GPs can work alongside fund administrators to drive efficiency and merge both outsourced and insourced models.

AltaReturn says that by “reverse outsourcing”, the GP can use their own accounting and external reporting technology, with the administrator using the GP’s in-house system through a cloud-based model. “The admin becomes a true extension of the GP’s back office team,” the whitepaper reads.

The service provider claims there are a number of advantages to both parties through this set-up, citing control, integration, scaleability and security.

Outsourcing can sometimes be disruptive to a GP that already has established workflows and processes in place, says AltaReturn, but for firms struggling with internal processes, outsourcing can improve efficiency. However, outsourcing can often mean relinquishing control over how the back office is governed.

For firms that want total control of the back office, but also drive efficiency, the whitepaper suggests adopting the reverse outsourcing model, which can provide the best of both. “A GP that opts to retain the fund accounting technology in-house can still maintain full control over their data and workflows while still outsourcing any routine processes through an administrator. This model also provides independence from any one administrator and reduces switching costs should the GP wish to change providers at any point.”

Operating systems in-house efficiently depends on how compatible a firm’s software is. If systems are not able to speak to each other, then the data being passed across could be prone to errors, increasing operational risk as a result, the software provider argues.

Using a single, centralised platform which pulls data from a single source will reduce this risk. Using a cloud system will bring more benefits, stripping away the need for maintenance as well as bringing location agnostic accessibility, the whitepaper adds. By reverse outsourcing, the GP stays in control of the data and reaps the efficiency benefits by offsetting the challenges of having to maintain records between the GP and the administrator.

As firms grow and take on new types of investors, layers are added to the operating model of a fund. Alongside this, co-investment opportunities are also often offered by fund managers which further adds to the complexity. AltaReturn claims that by adopting a reverse outsourcing model, the GP can offload fund accounting and regulatory work to a fund administrator while maintaining control over their information and onboarding new clients.

Through an insourced model, all accounting activity would need to be carried out by the firm itself, which could mean bringing in additional technology and personnel, while a fully outsourced model could mean that maintenance of LP relationships would be managed by the administrator, the whitepaper claims.

The outsourced model can put data at risk, says AltaReturn, with attacks often occurring when information is passed from party to party via email.

Maintaining an in-house model for this process, or adopting a reverse outsourced model minimises the need to share data outside of a GP’s domain. In a reversed outsourcing model, the fund administrator would log into a GP’s fund accounting platform, meaning the need to email clients’ information reduces, the white paper adds.

AltaReturn concludes that while both insourced and outsourced models have benefits, the reverse outsourced model “ultimately captures the best of both worlds, providing efficiency, scale and control.”

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