The co-sourcing model – How to achieve efficiencies for fund managers

Due to higher costs, maintaining an internal middle- and back-office has prompted private capital managers to seek alternative fund administration models. These models must allow managers to maintain control over their data while still reaping the benefits of partnering with a third-party fund administrator. This white paper, created by Petra Funds Group—an expert in fund administration for private equity and debt funds—and FIS®, a global leader in financial technology, explores how private capital managers can unlock innovative technology designed to optimize their operations. By adopting a co-sourcing fund administration model, established managers can make their investment money work harder to streamline processes without sacrificing oversight, enabling smarter, more efficient fund management. 

Increasing global regulatory and investor demands are making it essential for private capital managers to have access to their data to respond timely to requests. This dynamic has led private capital CFOs to not only engage a reputable fund administration partner to streamline their middle- and back-office operations, but also explore alternative fund administration models, namely co-sourcing.

According to the Private Equity International 2024 Private Funds CFO Insight report, 72 percent of CFOs are partnering with a fund administrator. However, the traditional fund administration model is not the right fit for every manager. In recent years, hybrid fund administration models have emerged, providing CFOs with options when assessing the right solution for their firm.

Co-sourcing is a hybrid fund administration model where the fund administrator augments the manager’s internal teams, working off the same systems to manage all operational aspects of the fund. The firm retains possession of their data while gaining the expertise of a third-party provider to manage all fund administration deliverables, making it appealing to CFOs. Co-sourcing middle- and back-office operations enables private capital managers to unlock operational resources, freeing up valuable time to focus on what truly matters - portfolio management and fostering relationships with LPs. Investment capital works harder when innovative technology streamlines operations so that managers can redirect their time to manage and grow their investments.

For established private capital firms, co-sourcing eliminates the need for complicated and time-consuming system conversions. The focus is on building a fund administration team to work alongside the client’s existing internal team – one that works in harmony with the client and supports its existing processes, workflows and investor reporting requirements.

"Engaging experienced fund administration and technology partners early in the evaluation process can inform decision making," notes Paulo Nunes, Senior Director, Product Management at FIS. "The decision to partner with a third party provider for middle- and back-office functions is not straightforward for every manager due to the complexity of their internal operations. Consulting with experts helps firms determine whether a fully outsourced or co-sourcing fund administration model is best for their needs."

To succeed at co-sourcing, a fund administrator needs a team working in harmony, with deep in-house private fund accounting knowledge, who understands the complexities and nuances of each client’s accounting processes.

Co-sourcing model drivers

Managing a private fund’s internal operations has become increasingly complex. The acceleration of global regulation, increased frequency and complexity of investor requests, challenges with retaining talent, and expense management have led CFOs to examine fund administration solutions more closely. 

A primary driver of the increased complexity is more frequent and data-intensive investor requests. From bespoke reports to nuanced capital account statements to lengthy DDQs, operations teams are under intensified pressure to provide discernable data swiftly. 

These increased demands lead to staff attrition, another driver of the push toward a co-sourcing model. Retaining experienced staff is challenging in today’s labor environment. With limited opportunities for upward mobility within private capital firms and increased workloads, middle and back-office employees often seek advancement opportunities elsewhere. 

CFOs can manage these variables through a co-sourcing model where the fund administrator’s experienced team becomes an added resource during peak reporting cycles or to tackle ad hoc projects.

This flexibility enables CFOs to manage costs while adding experienced resources to help their teams during high-volume reporting periods. 

In addition to examining various fund administration models, CFOs are leaning more heavily on their technology partners to identify areas where processes can be streamlined, security can be tightened, and data can be accessed quickly and transposed into a report friendly format.

Private capital managers are increasingly leveraging cloud computing and software as a service offerings to enhance and unlock operational efficiency and increase data security. By adopting cloud-based solutions, these firms can streamline processes, enabling seamless collaboration between the manager and the fund administrator through real-time data sharing and integrated communication platforms.

The transition to cloud environments also bolsters cybersecurity measures, as Service Organization Control certified cloud service providers invest heavily in advanced security protocols and continuous monitoring to protect sensitive financial data from cyberthreats. As a result, private capital managers benefit from reduced operational costs, improved data accuracy and robust cybersecurity protocols, all while ensuring timely responses to investor and regulator requests.

Gaining efficiency and expertise

Co-sourcing creates a single central source of truth, making responding to investor requests more efficient. Compared to a traditional fund administration model where CFOs and fund administrators keep separate books and records and perform "shadow accounting", a co-sourcing model has all parties working off the same systems and policies, ensuring money invested in technology works harder to eliminate the need for complex data reconciliations and processes among systems.

Additionally, co-sourcing keeps data centralized at the private capital manager rather than being passed between the fund administrator and manager. This approach unlocks a cohesive financial ecosystem view with insights for strategic decisions to expand operations while optimizing performance.