Outsourcing gives GPs time to focus on deal-making
When Augentius first opened its doors in 2002, it was the only business in London providing outsourced fund administration to the UK general partner community. There were administrators in Jersey and Guernsey but nobody in mainland UK.
Consequently, the UK GP community had no choice other than to do their own fund administration and build their own in-house back-office teams.
Much has changed since that time. Augentius has grown, on average, 20 per cent year-on-year to become one of the largest global private equity and real estate administrators, and has, in many ways, been leading from the front as PE groups have steadily embraced outsourcing.
“Almost overnight, every new PE manager came to us because whilst they were good at doing deals, they knew very little about accounting and back-office functions,” says David Bailey (pictured), Group Head of Marketing and Communications.
“That was the genesis for how our business grew. Fast-forward to today and no start-up manager will think about doing their own fund administration.
“Also, PE groups who used to do their own in-house administration are increasingly saying, ‘I’ve got a team of six people, it’s costing a fortune but my core business is buying and selling companies. Why doesn’t someone else do the fund administration?’”
In that regard, the penny has dropped, certainly among European entities who have had to contend with a raft of regulations over the last five years or so.
This has allowed Augentius to scale its business offering, using a single accounting platform to meet the complex demands of PERE funds, especially as general partners develop multi-jurisdictional products to accommodate different investors. To date, Augentius has more than 490 funds on its books representing USD145 billion in AuA, spanning 12 domiciles.
“The days of an administrator having one office in one location and substantially attempting to grow their business are over. We have US clients doing business in Europe, Asia clients doing business in Europe and so on. The world is a small place. Therefore, it is important that different domiciles can create competitive products and compete against one another. But it’s also important that GPs have the facility to take advantage of those products for the benefit of their LPs, without using tax avoidance schemes,” says Bailey.
Deciding to outsource one’s back-office is a massive decision for established managers who have become accustomed to maintaining control within the four walls of their organisation. Breaking that hermetic seal is not something that GPs take lightly. Loss of control is a real fear.
However, the reality is, there is more regulation, more reporting and the world is getting more complicated.
“At the same time, LPs have, for some time now, been challenging GPs on their management fees. If you’re still doing in-house administration, all those costs come directly out of the management fee. The more back-office staff one hires, the more the management fee gets eroded. A number of years ago, Augentius were approached by a property group who had decided to outsource their administration on the basis that their back-office had become larger than their front-office.
“More recently, we took a whole raft of funds out of a fund management group in order to help them downsize,” confirms Bailey, who has no doubt the outsourcing trend still has plenty of legs.
Augentius pays close attention to addressing the control aspect referred to above.
If the CFO in a general partner wants technology to deliver all of the necessary fund data to their mobile device, Augentius is more than happy to oblige.
“We’ve developed a tool that will not only allow people to remotely access fund data but also see workflows, meaning the CFO can see where the quarterly reports are in the back-office process, how the drawdowns are being done, and they can also initiate new workflows from their remote device.
“If you can put all the fund data and workflow information on someone’s mobile device they feel like they still have control because they can see exactly what is going on at any time.
“A lot of this, however, is to do with giving managers confidence in our people (as much as it is using technology). It comes down to whether they trust us to do a good job. There are often long one-on-one conversations to establish trust with our people, and with us as an organisation, before we onboard a new client,” explains Bailey.
Establishing that level of trust is typically easier with new managers. Indeed, Bailey suggests that the default option among most start-ups today is to go the outsourcing route. They might be a small team of deal experts but collectively they are unlikely to know much about the compliance and regulatory requirements.
As they outsource legal work to their lawyers, compliance work to consultants, outsourcing fund administration becomes the next logical step.
“They just want to focus on sourcing and doing deals. That’s how they make their money,” says Bailey, who emphasises the point that Augentius is not just a remote entity doing fund accounting but rather a hands-on partner that supports its clients in many different ways, from regulatory reporting to depositary services and investor services.
As Ian Kelly, Group CEO says on the Augentius website: “Fund administration has changed. And so have we. It’s now much more than just accounting.”
“Every client has their own accountant,” remarks Bailey. “This is not a cookie cutter business. Despite the merits of ILPA, GPs still want to maintain their own identity. This includes the way they do their own reporting, especially as elements such as their carry model might be unique, for example.
“I think they are right to want to maintain a level of customisation. Private equity is still a relatively small (and young) industry compared to the wider financial industry and it can, and should, remain boutique. It is to the investors’ advantage that they are able to do that.
“That individuality requires some accommodation in the back-office. As a result, each client has their own accountant to deliver reporting the way that they want it, with their own look and feel, before delivering it to their LPs.”
This is a good illustration of why outsourcing has become a popular option among PERE groups. The more they can lean on their trust partners to deliver institutional quality reports and services, the better equipped they are to focus on deal making and generating attractive IRRs in their funds.
Expanding on the investor reporting point, Bailey says: “If you’ve got 20 or 30 investors in your fund, you can quite comfortably sit down with each one of them and ask what reporting they need and how frequently they want it. The vast majority of LPs that I’ve spoken with are satisfied with the level of information they receive but they all have individual wants and needs; a pension fund will have different requirements to an insurance company. Some investors will want the ability to drill down into the fund and receive a greater level of detail in the report.”
Ultimately, the main benefit to outsourcing is that it removes operational risk. It doesn’t matter if the CFO is off sick, or on holiday. Outsourcing negates key man risk in that sense.
“It enables the general partner to focus on the things they are good at, which is doing deals, rather than focusing on the things that they have to do, to stay compliant,” concludes Bailey.