Tech steps up to enhance oversight in outsourcing

How has the pandemic influenced attitudes to outsourcing to asset servicers, and what are the motivations and concerns of GPs entering into these arrangements?

Iain Robertson: Outsourcing has been a growing trend in alternatives for some time. The pandemic accelerated this trend. Having to operate remotely has been a wake-up call for many asset managers who now realize they need technology that enables them to operate effectively with their asset servicer across the full fund value chain.

In the past, managers who were considering outsourcing were primarily concerned with the asset servicers’ industry expertise, track record, process and so on — not their technology. The technology used by the asset servicer has become more important, as has the focus on how managers can collaborate effectively with their asset servicer.

Ludovic Legrand: Historically, small and medium-sized asset managers thought they were going to either buy software and do back and middle-office tasks with in-house resources or outsource. Now, they are looking at a hybrid model where an asset servicer will bring the best technology combined with knowledgeable resources for each asset class to ensure the manager and the servicer can collaborate effectively. The importance of how asset servicers and their clients collaborate has increased exponentially during the pandemic, making technology one of the key elements of the overall value chain.

Furthermore, asset managers and asset owners are seeking to consolidate their relationships with a smaller number of asset servicers who they are asking to do more. This one-stop-shop trend started with European niche players and is expanding now to asset servicers that are part of large banking groups, where historically there has been a more siloed approach to service offerings across custody, fund administration and middle-office services.

Now, the asset servicers part of these large banking groups are emulating the niche asset servicers’ model and trying to catch up by investing heavily into their private capital operations and approaching the industry more holistically.

How can outsourcing support GPs concerned about oversight and transparent access to data? Are there additional risks?

IR: In the past, managers would duplicate many of the asset servicer’s tasks in the name of oversight. Technology has added clarity to the manager/servicer relationship, increasing trust and allowing managers to now take advantage of better operating models. It is still true that in private markets, getting access to data at the right time is difficult. The market is moving towards greater acceptance of sophisticated technology solutions and is evolving and innovating like never before — and we expect technology to drive change more rapidly over the next few years.

LL: Asset managers need real-time access to data to view operational activities performed by asset servicers and provide the corresponding oversight required. It is critical to streamline operations, including transaction initiation, record-keeping and the approval of documents such as capital call notices and invoices — tasks that still require a lot of back and forth via email. The market needs to move away from this model and really focus on timely, quality data accessible to everyone via a scalable and collaborative operating model.

IR: In terms of risks, data security is key. We have seen increased adoption of hosted services across all jurisdictions. That is a game-changer. Data security is part of this adoption; but, more broadly, good data governance around workflows and data exchange are in focus.

What is the right operating model to ensure outsourcing does not damage oversight?

LL: An important element is how all participants can collaborate on the same data to validate time-critical operations. That is at the heart of an efficient operating model combined with the required expertise in the asset class, which is vital in private markets. Asset servicers who offer the right platform, including collaborative workflows, will stand out.

IR: I agree. As managers become more comfortable with outsourcing and technology, they can take a more risk-based approach to oversight rather than having to replicate everything that the asset servicer is doing and review each single entry.

LL: Some asset managers are ‘paying’ for the services twice. For instance, they are shadowing activities, such as accounting, because managers lack real-time access to underlying data and only receive a report late in the process. Now, the collaboration model is evolving rapidly, and the new technologies will unlock the full potential of outsourcing in private markets.

What should GPs and LPs look for from a data perspective when embarking on an outsourcing relationship with an asset servicer?

IR: Timely, quality data is key. We are still talking about data quality — and often, about relatively simple data points. As data requests become more complex, there needs to be an effort to tackle inefficiencies around data sharing.

LL: Everyone needs access to timely, quality data. However, the question is how to remove data friction. The important part is the mutual validation
of critical operations and documents through workflows. Asset managers should stop sending data to their asset servicers via email and files and instead access data recorded by their asset servicer in almost real-time.

How do you see best practices evolving in this area?

LL: The outsourcing trend will contribute to the expansion of market best practices. There are still managers who have really customized approaches to recording data. Once we are all working with collaboration tools – with asset servicers and their clients using the same platform – then standardization will occur. Technology has empowered harmonization. Asset servicers want to operate at scale. So, while there will always be room for client specifics at an operational level, there is no reason why transactions should be recorded differently.

IR: These are exciting times in private markets. The fintech industry is booming for alternatives, and outsourcing is accelerating rapidly. It is great to be at the forefront of delivering innovative solutions that will enable greater adoption of best practices between asset servicers and asset managers.

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