Our Vice President of Product Management, Adam Hoit, recently participated in a panel of emerging Private Equity Managers at the PartnerConnect Midwest event here in Chicago on June 26-27, an event marred by inclement weather at O’Hare, which resulted in lower than usual attendance. In case you were one of those diverted to a neighboring airport, we thought we’d recap Adam’s insights captured from his panel session, titled, “Don’t Neglect the Back Office: Step-by-Step Instructions on How to Set Up the Critical Functions of Your New Firm.”
Outsourcing does not equate to letting go of responsibility.
When starting up, emerging managers look to outsource, especially in an environment where many find themselves being questioned on fees. But while outsourcing may provide scale for the initial launch, it’s important to remember that outsourcing a function does not mean letting go of responsibility for that function, so emerging managers need to think about how outsourcing decisions may evolve over time. It’s a good thing that many outsourcing options do allow for seamless transitions. For example, one panelist mentioned that they had originally outsourced to an OCFO to build scale for the initial launch, but then brought that person onboard as CFO when operations matured.
Investors will have their own preferences on what should (and should not) be outsourced.
Operational Due Diligence (ODD) is putting increasing scrutiny on managers and taking up more of their time. Many LPs have their own opinions on the degree to which certain functions should be performed inhouse vs. by an external party. Adam noted that, in general, “LPs are focused less on who performs a function, and more on why a particular decision was made to outsource, and how that decision fits into the overall strategy of the firm.”
Outsourcing is not always less expensive.
When it comes to costs, Adam encouraged thinking beyond just the back office, and including leverage and efficiency for the front and middle offices into the overall calculation. “At Backstop, we often see the firm’s client services and marketing teams spending time sorting through back office data that is not readily accessible or standardized,” he explained. This can be especially exacerbated when those back office functions are outsourced.
Costs aren’t the only consideration; so are regulatory changes and compliance demands.
The panel discussed the rapid pace of regulatory change and evolving compliance demands. They agreed that in today’s landscape of increasing scrutiny from the SEC and from investors, private equity managers need greater agility than ever before. This is especially important for GPs who value the ability to respond quickly to audit requests and LP reporting requirements within acceptable timeframes.
In a nutshell –
The panel’s advice can be netted out into three bullets:
- Have a vision for what you want to become and why.
- Note the realities of the challenges that you face today, including time, money, and resources.
- Do your best to prioritize those that speak the most toward your vision, and move in that direction.
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