Alternative fund managers are increasingly outsourcing their fund administration services to third-party providers, with 96% planning to look for external support over the next three years, a new report from Ocorian finds.
The research revealed on 30 August underscores the growing trend among alternative fund managers to seek enhanced services and alternative fund administration approaches, despite the challenges involved in switching providers.
Key drivers for change
Among the motivations to make changes, the primary driver is the pursuit of improved service levels (75%). Following closely behind are aspirations to enhance data and reporting quality (69%), embrace superior technology (63%), and integrate ESG capabilities (31%) into their operations.
The report shows that 23% of alternative fund managers are actively exploring a shift in their fund administration provider within the next 18 months. Within this subset seeking changes, more than 13% will switch to an alternative third-party service provider, 7% are contemplating to bring it back in-house, and 3% are planning to engage an additional third-party service provider.
For the subset of the 13% fund managers considering a switch to a new service provider, the dominant driving factor is cost (75%), followed by considerations of the level of service (67%) and the overall reputation of the provider (50%) are as followed.
Different fund administration approaches
According to the report, there’s now an equal split between those managing administration in-house (40%) and those leveraging third-party administrators (39%). Another 21% adopt a hybrid approach, combining both in-house and third-party solutions. Nevertheless, research reveals a rising trend towards using third-party expertise over the next three years.
Additionally, when multiple services are required, such as alternative investment fund management, depositary, administration, special purpose vehicle, and corporate services, 68% of managers express their preference to hire a single provider, emphasizing efficiency and streamlined operations.
Challenges in switching providers
While the inclination towards third-party administration is evident, the transition is not without its challenges. The top three challenges when it comes to switching to another provider are how to migrate the data quickly and accurately, the perception of investors and the market, and the impact this could have on the reporting cycle. These concerns indicate the delicate balance that managers must strike as they seek to optimize their operational frameworks.
Benefits of outsourcing
One of the key advantages of outsourcing fund administration lies in freeing up bandwidth for investment managers. Rather than dedicating valuable time to overseeing administrative tasks, outsourcing provides access to specialized professionals who can handle these responsibilities. This allows investment managers to redirect their focus towards portfolio growth and core competencies of the business.
Outsourcing offers compelling benefits in terms of cost optimization, enhanced efficiency, and risk mitigation. In-house back-office teams grapple with resource-intensive tasks that require office space, manpower, IT infrastructure, and continuous training. As cost pressures mount, outsourcing emerges as a more efficient alternative.
Moreover, third-party fund administrators can seamlessly integrate with the internal fund team and operating model, serving as a natural extension of the organization. They bring an additional layer of expertise, well-established processes, and robust regulatory compliance frameworks, offering enhanced safeguards to mitigate and reduce risks.
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