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The Transformation of Private Equity Operations

By Katelyn Orrok | Thursday, September 22nd, 2016

Private equity firms have been slow to embrace outsourcing, but managing data and technology is more complex than ever. With increasing regulatory requirements and a growing urge to focus on core competencies, middle market firms are shifting their views of the back office. As such, we're examining the changing tide for private equity operations and how CFOs, CTOs and fund managers alike can control operating costs, maximize efficiency and better perfect operational workflows.

Drivers for change.

The number one reason for managers to make the switch to an outsourced solution is the desire for managers to get back to their roots. The idea of back office transformation is really founded in that managers have found themselves spending much more time doing everything but raising money and investing money.

Beneath this layer, back office transformation is also driven by regulation, investor transparency, the lifecycle of a private equity firm, and global reach. Slow adoption, fast results. The private equity sector has been slow on the uptake when it comes to outsourcing, and we contribute this lag due to lack of education on the process and benefits of outsourcing. In the past three to five years, adoption in the PE space has increased because it is cost effective, secure and feature rich. Private equity firms that have made the switch wonder why others are not doing the same. The idea of leveraging an experienced managed service provider is one that private equity firms have really embraced because there is no burden for firms to hire and attract talent, which can be challenging and expensive.

Opportunities outweigh risks.

When outsourcing, firms can not only control costs, but also take advantage of a leverageable model that is scalable and globalized. You are given a controlled environment with an organization that already has infrastructure and experienced people. Outsource to a firm that is an expert in what they do - then comes the opportunity to focus on what you do.

What to outsource.

Typical functions that are outsourced depend on the size of the firm, in many cases. Mid-sized firms want to streamline across the board. These firms are not interested in hiring or training IT staff so they often opt to fully outsource their technology to a managed service provider. Larger private equity firms often have operational infrastructure in-house to run day-to-day operations. Typically these funds are looking for an added level of expertise in a niche area or project. They want to feed off of the talent and infrastructure that they already have in place without the burden of hiring and training additional IT staff. Large firms are typically looking to solve workflow or business process issues and are most concerned with cybersecurity and data privacy.

Addressing risks and opportunities.

People, processes and technology. Start with people who are experienced in this particular part of the alternative sector then move to process and technology. Your firm needs technology that is fit for your purpose and that considers the unique investment approach that private equity firms take.

In-house IT, inherent risk.

Whether a firm chooses to outsource IT or manage it in-house, it is in all private equity firms' DNA to mitigate risk. Managing all technology in-house means that you have to make critical investments in your IT staff, infrastructure, and cybersecurity protocols which is not always easy, efficient or cheap. Constant investments are also needed to keep up with ongoing and changing regulatory requirements, cybersecurity threats and changing technologies. There is always a risk whether the function is managed internally or externally. Technology is not infallible, but how your firm approaches the risk to reduce general exposure is what matters.

Oversight of third parties.

Private equity firms need to have accountability for managing relationships with outsourced service providers. You can outsource the responsibility of certain functions or duties to another firm but not the accountability. At the end of the day the firm itself is accountable to its employees, clients, investors and regulators.

Threats.

Hackers are savvier than ever, so it is important to utilize active threat protection for external threats such as ransomware and zero day vulnerabilities. Internal threats, whether unintentional or malicious, also pose a serious threat to private equity firms. It's cliche, but your employees can either be your weakest link or your strongest line of defense. Phishing scams, for example, can lead to serious consequences for a firm and its employees. It is important to train and educate employees so they don't fall into security traps. One way to combat these threats is through the use of managed phishing simulations, whereby firms can test their employees.

The bottom line.

What's the bottom line with private equity outsourcing? In most cases there is an overall cost reduction and net increase to bottom line due to the advantage of scaling and leveraging people and technology. When switching to a cloud infrastructure, for example, firms reduce capital upfront capital expenditures and have a monthly, predictable per user cost which helps streamline budgets. No matter the cost, in-house or outsourcing, with risk as a hot topic private equity firms need to make critical investments in technology.

Read more about private equity technology, operations and risk: 

Private Equity Operations Survey

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