Opportunity in Disruption – Rethinking Private Equity Management Company Models

Many Private Equity and Venture fund managers continue to capitalize on market events by raising additional – and often larger – funds. Forward-looking firms in this situation may recognize that more or larger funds bring increased operational volume and complexity, along with extra operating expenses. While this may be considered a “quality” problem, it is, nonetheless, worth pondering the operational aspects and the beneficial outsourcing options that can help with growth.


Addressing Rapid Growth

 

Management companies are tasked with keeping the investment management business running. As such, managers may want to think proactively about how their growth spurt will impact the management company’s ability to adequately control its operational needs.

Responsibilities of a management company are broad:

  • Hire and pay employees
  • Engage vendors, oversee the relationships, and pay expenses
  • Bill portfolio companies
  • Track and monitor accounts receivable
  • Handle regulatory reporting obligations
  • Pay ongoing operating expenses
  • Oversee the fund and fund-related expenses

Disruptions due to the pandemic have prompted creative thinking for accomplishing core operating functions: remote working arrangements, remote due diligence and videoconference annual investor meetings. This inspired thinking has prompted investment managers to consider how to gain efficiencies and scalability not only in their fund management responsibilities but also their underlying management company operations.


Outsourcing: As Relevant for Management Company Operations as for Fund Operations

 

Outsourcing reduces the resources needed to support an in-house accounting team and allows fund managers to focus on their core business. Management companies can opportunistically engage a service provider to handle day-to-day non-fund accounting functions. Service providers deliver flexibility by offering a full scope of support or ad hoc services. For example, providers can:

  • Maintain the general ledger
  • Process account payables, accounts receivable, travel and expenses
  • Prepare journal entries
  • Bill portfolio companies
  • Process payroll
  • Provide weekly cash reporting and monthly bank reconciliations
  • Prepare financial statements
  • Provide an independent review of all outgoing payments
  • Perform vendor callback verification and maintenance
  • Allocate expenses
  • Prepare and file 1099 reports

Benefits of Outsourcing

 

At Ultimus LeverPoint, we’ve seen fund managers benefit in significant ways by outsourcing all or some of their management company operations. Your firm size, fund complexity, and level of in-house resources will drive your specific requirements.  One of the most important benefits to outsourcing is that it allows fund managers to focus on their core business.

Staffing Benefits for General Partners

  • Reduced resources needed to support an in-house accounting team
  • Ability to quickly and effectively scale
  • Access to skilled, qualified accountants familiar with the private markets industry
  • Redirected focus on core competencies rather than accounting

Process Benefits for General Partners

  • Immediate access to operational best practices and established standard operating procedures
  • Burnished reputation through using an SOC1-compliant provider
  • Independent Treasury review for all cash movements
  • Ability to obtain synergies by outsourcing management company administration and fund administration to the same entity
    • Enhanced communication, transparency and efficiencies between accounting teams
    • Ability to perform management fee reconciliations, discuss fund-level activities and offer a secondary level of review of expense allocations to the various funds and investments
    • Reduced involvement from fund managers
    • More accurate accounting records on both the fund and management company

Technology Benefits for General Partners

  • Immediate access to best-in-class technology plus streamlined, automated processes
  • Access to multiple accounting platforms (depending on the provider), such as QuickBooks or NetSuite
  • Access to accounts payable processing software to minimize human-error risk

Models for Outsourcing

 

As with most things, one size does not fit all. A management company’s size, complexity and in-house resources influence the optimal outsourcing model, from co-sourcing to partial outsourcing to full outsourcing.

Co-source – With the co-sourcing model, service providers work within the management company’s infrastructure, using their technology, processes and procedures. The important benefit: alleviating or postponing the manager’s need to hire additional employees.

Partial outsource – Management companies can choose specific tasks to outsource. For instance, outsourcing payroll adds a layer of confidentiality by limiting visibility of firm compensation. Outsourcing simultaneously reduces the workload on in-house resources.

Full outsource – Management companies can choose a turn-key solution to outsource the full range of operational responsibilities to an external provider. The firms benefit from proven expertise and technology supported by a rigorous control environment.


If your firm is experiencing exponential growth, or anticipates doing so, and you want to gain more insights into the benefits of outsourcing your management company functions, consult with a trusted service provider. At Ultimus LeverPoint, we have performed management company services for over a decade and offer a full suite of management company administration solutions. Our team works in a consultative manner with private equity CFOs, Controllers, and General Partners to implement the best operating model for each firm to ensure that your objectives and priorities are addressed. We’d be delighted to discuss your particular situation and help determine the best outsourcing model to fit your needs in order for you reap the most benefits.

 

12373475  03/08/2021

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