In private equity, back-office tasks can feel time-consuming and unpleasant, particularly if operational tasks fall firmly outside an asset manager’s expertise or area of interest. The back office is responsible for managing administrative, operational and financial tasks, a list that grows ever longer and more complex.
While asset managers don’t usually focus on the back-office function, an effective back office is key to driving delta and delivering operational efficiency.
Here are our top 7 recommended best practices to keep your back office functioning effectively as you grow:
#1: Leverage cutting-edge technology
High-quality technology and systems will streamline back-office processes, reduce manual errors, and help maintain compliance. GPs should partner with latest-generation fund technology providers for greater efficiency, data structure, and no- or low-code reporting tools. According to an EY survey (2022), among the largest asset managers interviewed, 63% said past technology deployments were allowing them to reduce cost.
If implementing technology directly is too great a burden on capital expenditure or internal teams, leverage an outsourced third-party administrator for institutional-quality technology and the latest innovations in proprietary tools. This provides your team access to technologies that might otherwise be out of reach, with the added benefit that you don’t have to implement, update or maintain them.
#2: Maintain, store and interpret your data with care
Data storage and management are key in an age where cybersecurity is a chief concern for both regulators and investors. Firms should invest in high-quality data platforms to reduce manual data exchanges, eliminate manual data entry, and improve efficiency for investors. Also, data can provide you with a competitive edge for deals, and interpreting your data is key. According to a recent survey by S&P Global Market Intelligence and Mergermarket, 83% of private equity senior executives reported that big data and data analytics have become more important in the past two years.
Data is also becoming increasingly important for GPs, and a data warehouse can give them that competitive edge. If you are a first-time or an emerging manager, consider using a cloud-based data warehouse that will allow you to get started managing your company’s data almost instantly.
#3: Manage liquidity
Private equity funds should pay close attention to liquidity management. When LP capital has been invested, private equity managers need to look at different financing tools to provide flexibility during the period that they will hold assets and create value across their portfolios. This can be done through a combination of subscription line financing, NAV financing, and carefully managed pools of liquid assets or money market instruments. An analysis conducted by Montana Capital Partners showed that credit lines improved IRR by 4% net on average.
Banks are the traditional lender in the space, but there are several alternative asset managers such as 17Capital providing NAV financing solutions. Since they share much of the DNA of borrowers, they can customise financing solutions to meet specific challenges. They’re therefore becoming established lenders in the space alongside traditional bank providers.
#4: Review and distribute reporting
Use specialised tools designed to provide timely, accurate and comprehensive financial and operational data to stakeholders. Data visualisation tools developed specifically for fund reporting are of particular value. In a 2021 survey conducted by IQ-EQ and the Drawdown, only 25% respondents said that they are utilising portfolio monitoring software. However, this was our respondents’ highest priority for technological improvements.
Whatever tool you choose, invest in reporting that eliminates the need for in-house developers to complete mundane regular reporting tasks that place added operational and capital demand on your business.
#5: Don’t neglect compliance
Don’t assume a single compliance officer can keep your fund fully up to speed with the rapid pace of regulatory change, especially if they are responsible for other tasks. Within today’s landscape of increasing regulatory scrutiny—and increased investor emphasis on proper governance—private equity managers must be able to respond quickly to audit requests and LP reporting requirements. Platforms are available to help you manage your compliance risks and reduce costs, and when you consider the cost of fines from global regulators, it’s clear why it is a worthwhile investment.
#6: Develop a collaborative partnership
Both large and small funds can benefit from outsourcing their back-office function to a third-party provider. Outsourcing provides numerous benefits, including speed to market, access to industry-leading reporting and technology, and sharing back-office costs with investors, freeing asset managers to deliver value to LPs through the private equity portfolio.
Ensure that you work with a trusted partner who will implement the correct structure and administer your fund efficiently with a steady eye on compliance. Choose a provider with experience launching new funds and the ability to scale globally, supporting your growing business across borders, regulatory bodies, and asset classes.
#7: Consider back-office providers an extension of your team
The most effective way to outsource back-office administration is to consider third-party service providers an extension of your team. Conduct weekly operational check-ins, quarterly operational reviews, and strategic relationship reviews semi-annually or annually, just as you would with an internal back-office team. The object is to ensure a unified view of your back-office function and to verify that your partners are working in concert with your objectives.
One effective way to retain visibility is to keep a strong senior team in situ to oversee and support your external service provider. This will also help satisfy LPs, who are increasingly likely to scrutinise back-office management as part of a holistic approach to good governance.
The top-to-tail expertise required to administer your back office effectively can prove more complex and time-consuming than many asset managers expect. Selecting the right partners to support your growth is a critical step toward effective back-office management.