Reshaping the Fund Administration Model: The Rise of Co-Sourcing in Private Equity Operations

Until recently, private equity general partners (GPs) have approached middle- and back-office operations as a choice between keeping the function in-house or outsourcing it. The debate surrounding these two options, each with distinct advantages and disadvantages, is well-known within the industry. While keeping these functions in-house grants GPs control over their data, it can be expensive and burdensome to maintain and is often heavily reliant on manual processes. On the other hand, outsourcing allows GPs to concentrate their internal efforts on higher value tasks, including managing their portfolio company investments and fostering relationships with LPs.   

A new approach has become increasingly popular among established managers: Co-sourcing. In this model, GPs still outsource to a fund administrator, but the difference lies in the fund administrator executing the accounting and reporting using the client’s own software, systems, and processes. Co-sourcing allows GPs to maintain complete control of their data and unique processes while accessing the deep bench of experienced private equity professionals who have worked in-house at similarly structured GPs.   

Co-sourcing may not be the solution for every GP. However, the model is a particularly interesting choice for established private equity firms managing multiple funds where proprietary data, systems, and processes (often with years of history) make a system conversion, at worst, risky and time-consuming and, at best, unappealing. 

Co-sourcing takes system conversions off the table and instead focuses on building a fund administration team to work alongside the client’s existing internal team, one that works in tandem with the client and supports its existing processes, workflows, and LP reporting requirements. To succeed at co-sourcing, a fund administrator needs a team with deep in-house private equity fund accounting knowledge who can understand the complexities and nuances of each individual client’s accounting processes. No two GPs are the same. 

Benefits of a Co-Sourcing Model and Why Co-Sourcing is Gaining Traction

In Petra’s experience, adopting a co-sourcing model offers several advantages for GPs:
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1. Access to Specialized Expertise: Co-sourcing provides GPs access to a team of experienced private equity professionals who can respond to the unique demands of private equity middle- and back-office operations and work alongside a GP’s existing internal team.
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2. Flexibility and Scalability: Co-sourcing provides flexibility as the GP can scale the fund administrator’s resources based on their specific project needs. For example, a GP may want to start small and then add funds and/or services to the co-sourcing relationship over several quarters or longer.  Working with a fund administrator who has demonstrated the ability to be flexible and has successfully scaled other GP co-sourcing partnerships is an important factor.  
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3. Maintenance of GP’s data in-house: Today, GPs gather and maintain data across various areas due to regulatory reporting requirements or requests from LPs. Aspects like ESG require GPs to capture more data in a format that can be easily analyzed and reported on. Moreover, an increasing number of stakeholders—investors, auditors, lawyers, consultants, and compliance teams—require access to data, increasing the need for easily accessible data. Co-sourcing allows this data to remain under the clear control of the GP.
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4. Streamline Data Entry and Reporting: Co-sourcing addresses the growing demand for swift and accurate information. GPs are challenged to respond promptly to information requests as it takes time and expertise to sift through the data and make sense of it. With the co-sourcing model, GPs maintain real-time access to their data and can also leverage the expertise of their fund administrator to fill any knowledge or people gaps.
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5. Increase Efficiency: In contrast to a multi-platform solution used in a traditional outsourced fund administration model, co-sourcing streamlines financial and investor reporting processes by conducting workflows within the fund manager’s software system. This reduces manual efforts and the amount of correspondence required between the fund manager and fund administrator.
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6. Risk Mitigation and Compliance: External experts engaged through co-sourcing can offer valuable insights into compliance issues, regulatory changes, and risk management strategies. This proactive approach helps private equity firms navigate complex regulatory environments more effectively, reducing the risk of non-compliance and potential financial or reputational damage.
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7. Better LP Experience: GPs frequently receive inquiries from LPs and have traditionally reached out to their fund administrator for the data to answer them. With a co-sourcing model, GPs can leverage their data to answer LP questions directly.  At the same time, the increased connectivity between the co-sourced administrator and the GP often allows for the administrator to lead communications directly with LPs behind the scenes, saving the GP time to focus on other tasks.
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8. Reduce Cybersecurity Risk: Co-sourcing keeps data centralized at the private equity firm rather than being passed between the fund administrator and the fund manager. This can reduce cybersecurity risk, especially as cybersecurity threats continue to grow exponentially.

Co-sourcing offers a compelling option for GPs seeking to minimize the strain on their internal operations team, reduce costs over time, and enhance the efficiency of processes and workflows while maintaining control of their data.

How Petra Can Help

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Petra Funds Group is uniquely positioned to provide co-sourcing services to GPs. Petra has successfully executed co-sourcing arrangements with large GPs and has a wealth of experience to draw on. On average, Petra’s fund accounting professionals have over ten years of in-house private equity accounting experience. As such, Petra can assemble a team of professionals who act as an extension of the fund manager’s existing team and can scale the relationship to meet a GP’s specific needs.

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Get In Touch

Please get in touch with Peter Haskopoulos or John Collins with any questions you have about co-sourcing fund administration solutions.

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