The Trend of Outsourcing is Finally Observed in the Private Equity Sector

Traditionally Investment Banks have been at the forefront of operations outsourcing. Almost all the biggest investment banks either have captives or have vendor arrangements in low-cost countries like India. Private Equity in comparison is the new kid on the block. Venture Capital is even newer. As the traditional model of a fixed management fee of the AUM comes under strain, Private Equity firms must look for alternatives to bring down the costs. Also for funds, that just invest along the bandwagon, with minimum analysis and fewer analysts to support operations, have started giving an impression to Limited Partners, that they possibly could do it themselves and save on the unnecessary fund management fee. Hence Private Equity needs to expand operations and expand it cheaply. That is where Private Equity Outsourcing becomes increasingly important.

Why Private Equity Outsourcing or Venture Capital Outsourcing is business-critical now?

Professionals commonly refer to Private Equity Outsourcing as Private Equity Back Office Outsourcing, Fund Administration Outsourcing, Research Outsourcing, Business Process Outsourcing, or simply Fund Outsourcing. On the Venture Capital side, they use terms like Venture Capital Outsourcing, Venture Capital Fund Outsourcing, and Venture Capital Business Process Outsourcing.

Outsourcing has produced long-lasting benefits as Investment Banks have been enjoying it for over a decade now. Here are the major ones:

Cost Savings: It brings in cost savings in the tune of 30-70% depending on the location of the fund operations. This allows the fund to book a higher percentage of management fees as profits or deliver greater returns to limited partners.

Skill Advantages: Private Equity operations are usually performed by small teams. Venture Capital teams are even smaller. All that leads to quick decision making and lower costs, but also results in a lack of business-critical skills. Outsourcing gives access to those skills for smaller Private Equity and Venture Capital teams

Extended Team: Outsourced team acts as an extended team that works on plug and play model. You ramp up when required and dismantle when not required. Just before an acquisition, have a higher number of analysts and after the investment, when work-load lessens, have a lower number of analysts. That leads to costs optimized as per the work-load

Time Zone Advantages: The work moves at double the pace. Teams when they leave work in evenings in the United States, United Kingdom, and parts of Europe, drop a message to the teams based out of India to carry on further work. Similarly, the India-based team completes and delivers the work in their evening, allowing client teams to find and continue working on it the next morning. Hence critical jobs move at effectively double the pace, day and night literally!!

Confidential: A due diligence does not always happen with the target knowing about it. Sometimes, firms need to act quickly and maintain confidentiality. In such cases, conducting due diligence discreetly becomes challenging for in-house teams. An outsourced partner can handle the process without revealing the name of the interested party.

So what all could be outsourced under Private Equity outsourcing?

We can divide Private Equity and Venture Capital outsourcing trends based on the functional specializations firms actively outsource.

Private Equity Outsourcing or Venture Capital Outsourcing practically works across the operational value chain of the fund operations and management.

You can outsource the following elements without compromising quality or productivity:

Fund Raising and Investor Relations: All operational aspects of fund-raising and investor relations could be outsourced. This includes pitch decks for funds and the portfolio companies, Investor reach-out programs, confidential information memorandums or Private Placement Memorandums, CRM data management, and Newsletters

Investment Operations: This is where the maximum potential of outsourcing is. Firms can effectively outsource nearly all aspects of investing, including industry and country analysis, target company profiles, due-diligence , financial modeling, valuations, and other ongoing or ad-hoc investment analysis tasks. Private Equity research outsourcing or Venture Capital research outsourcing is one of the fastest-growing areas here

Portfolio Management: If a Private Equity or Venture Capital firm takes a hands-on approach to managing its portfolio companies, it makes perfect sense to establish a ‘Centre of Excellence’. This centralized team can handle Strategy, Research, Data Analytics, Procurement, and Digital Marketing. Consolidating these functions in one place to support all portfolio companies efficiently. If that place is in a low-cost country, it brings in massive cost savings as compared to having similar functions separately in all portfolio companies. The centralized team can prioritize tasks around board meetings and quickly replicate successful projects across portfolio companies for faster execution.

Fund Administration: Private Equity Fund Administration or Venture Capital Fund Administration is something that has caught the fancy of limited partners recently. It makes sense to keep the financial reporting of a fund with a third party. This approach reduces financial risk, promotes best practices in fund management, and ensures unbiased financial reporting to investors. As a best practice, firms should consider outsourcing this function. Multiple elements of Private Equity Back Office Outsourcing or Private Equity Business Process Outsourcing like accounting and expenses form a part of this. This is quite similar in the case of Venture Capital Business Process Outsourcing or Venture Capital Back Office Outsourcing.

Firms usually outsource other aspects of fund management such as Strategy, Research, and Analytics.

About Magistral Consulting

Magistral Consulting (www.magistralconsulting.com) has helped dozens of Private Equity and Venture Capital firms in outsourcing their operations. With delivery centers based out of India, it has sales offices in New York, San Francisco, London, Oslo, and Singapore. To drop a business inquiry,  visit https://magistralconsulting.com/contact/

About the Author

Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries or clarifications.