How and why private equity firms are transforming the back office
For private equity fund managers, the daily task list is growing in both its length and its complexity – and in many cases, these tasks fall outside the scope of a manager’s expertise or general interest. Technology, for example, is not a hidden skill most fund managers or C-level execs can tout. And as IT evolves and its complexity grows, many private equity firms are looking for opportunities to evolve the back office and leverage outsourced support – freeing up managers to spend more time on what they do best – raising and investing in successful funds.
Drivers for back office change
The private equity back office transformation is founded across a number of areas, including the aforementioned scenario managers have found themselves in –spending significantly more time doing everything but their investment responsibilities. Additionally, regulatory and investor pressures continue to grow, placing significant burdens on firms to meet growing requirements for reporting, transparency and IT security. Cybersecurity, in particular, has gained a lot of attention, as savvy hackers have evolved their hacking methods and prompted firms to re-evaluate their security postures across both infrastructure and policy levels.
Beyond these pressures, private equity firm professionals are also looking to improve efficiencies and leverage new technologies to expand their footprints and clean up workflows. The answer to all of these problems has brought about an increase in technology outsourcing across the industry. And while adoption of managed cloud services has lagged behind their hedge fund counterparts, today’s private equity firms are making significant investments in outsourced IT support and managed third party infrastructure platforms to meet the changing demands of an ever-evolving landscape.
The outsourcing case
There are a number of factors that come into play for private equity firms debating the prospect of outsourcing: risk, control, cost, management, etc. Many of these considerations are impacted by a firm’s positioning and size. For smaller, emerging funds, the choice is generally much simpler. Managing technology in-house for these firms is near impossible, without a seasoned IT professional or staff and significant upfront investments in infrastructure and security. Cloud environments are natural choices for these small to mid-market investment firms, who can rely on an experienced managed services provider to handle all of the firm’s IT management, support and infrastructure without the burden of hiring or training IT staff.
For larger, more seasoned private equity firms, there’s a separate, but equal case to be made. Often, these firms have operational infrastructure in-house to run day-to-day operations. Typically, they are looking for an added level of expertise in a niche area or with a project. They want to feed off the talent and infrastructure they already have in place without the burden of hiring and training additional IT staff. Managed service providers can easily and effectively step in to augment a private equity firm’s existing IT operation and assist in solving challenges including workflow and business process issues as well as growing cybersecurity and data privacy concerns.
Cybersecurity & third party oversight
As with any relationship, you want to ensure that the other side is doing what they say they’re doing. And so yes, due diligence and oversight of third parties is critical, particularly when it comes to technology and cybersecurity.
The SEC recognises that firms are using third-party service providers to outsource operational functions, but they’ve been clear to recommend to investment firms, including private equity funds, that there must be strict oversight of those relationships. We saw it most recently in the SEC’s investment management guidance on business continuity, which they issued in mid-2016. It calls specific attention to the use of critical service providers and advises firms to conduct thorough due diligence to ensure they are not taking on unnecessary risks through outsourcing. Due diligence questionnaires continue to grow in length and increase in complexity, and it’s a testament to how far investors have come in educating themselves on technology and IT operations best practices.
Changing regulatory requirements, investor due diligence demands, cybersecurity threats and evolving technologies – the list of responsibilities is growing for private equity execs. The burden of ensuring continuous, reliable and secure operations is difficult even for the largest enterprises that have vast time and budgets – and potentially insurmountable for small and middle market firms. Through outsourcing technology services and support, private equity firms are reaping the benefits of fully outfitted IT teams and virtual CTOs – and simultaneously maximising efficiencies in-house to support investment growth and operations.