Once again, 2022 brings huge growth opportunities for private equity firms along with a swathe of challenges – how does this impact their requirements from service providers?
Private equity still does what it has done for years, which is invest in a company, take it from point A to B, driving value for a variety of stakeholders and the company itself, to then participating in financial upside at the end of that journey.
Against a backdrop of rising interest rates, inflation, a strong M&A market and continued investor appetite for private capital, asset managers are faced with a series of new challenges and complexities. In a crude nutshell, the story is of growth and expansion –a lot of the same, but also new jurisdictions and asset classes.
To keep pace, they need highly skilled and trained staff that understand this dynamic shift of attracting clients in evolving structures, with increased portfolio and investor-level liquidity, all the while operating in a constantly evolving and complex regulatory landscape. Then all of this needs to be supported by technology that is fit for purpose.
This is nuanced when you look at different regions. In the US or in Americas, a vast majority of managers still do a lot of work in-house, whereas in Europe and Asia, it’s actually quite different.
We’re stepping in to deal with those challenges because of what many are calling ‘the great resignation’, the migration of staff, hybrid-working, or simply deciding they don’t want to be in a particular industry anymore. There is a dearth of talent from our clients’ perspective.
Outsourcing in its most traditional sense has always meant fund administration, transfer agency and some core regulatory reporting that we’ve done for eons that the industry appreciates and understands.
We’re now stepping into that middle-office for private capital, which looks different for different strategies, while ESG is also becoming more entrenched into the overall workflow for managers.
Alongside the operational benefits and being able to focus on their core objectives, have you been able to quantify the savings of working with a third-party service provider?
Forrester Consulting has recently published its independent report that reveals the type of savings that we are providing to clients, both qualitatively and quantitatively. On average cost benefits – in a future multiyear view – are about $5.4 million for an institutional client if they choose to partner with Apex Group.
If you look at the vast majority of where that saving comes from, roughly 72%, or about $3.9 million, is saved cost on internal staff. Another 16% comes from technology costs. Then 5% coming from recaptured productivity from our clients’ internal operations and finance staff. There is also the added qualitative benefit of satisfied clients and fulfilled internal employees, because they’re working on more high-quality aspects of the value chain. Lastly, there is 6% that we’ve mapped that saves cost on setting up foreign entities and ESG practices.
That business case is just too substantive to ignore. Everybody wants to double in size because the demand, or investor appetites continues to be there, but you need to overcome the not insignificant challenges before you can scale. You have to partner with a provider who has a truly global presence and operating model, the breadth and depth of product and technology, and the flexibility to tailor solutions.
Many of these firms will have traditionally performed the majority of their functions in-house. What factors should they be taking into account when considering whether to outsource some of those functions?
People tend to look at outsourcing certain ‘functions’, however, from our experience, it’s better to break the value chain down into ‘processes’. By this I mean, that a performed function will be comprised of multiple underlying processes, and then each process is managed through some permutation or combination of technology and operations.
It really is breaking functions and value chains down into those processes and looking at where we can – as a third-party provider – add value.
Take traditional private equity portfolio monitoring as a great example. Functionally, things need to continue to happen from a manager’s perspective, in the collection of mass financial data to run various models so that they’re comfortable with the numbers on a quarterly basis.
There are absolutely aspects of that we can take away: the collection, the scrubbing, the analysis of data and the feeding into a system that we have in a shared data format. We can share that information with clients and they’re still plugging it into their proprietary valuation models, but rather than spending time operationally on that data, they can rely on a third-party provider to do that and aggregate it for them.
ESG is an obvious other one, but it’s a wholly separate stack of data, expertise and information that needs to be gathered, recorded and analysed in a defined framework.
That brings us nicely to our next question. ESG rightly remains a key concern for this industry. What effect does outsourcing have on a firm’s ESG commitments?
ESG is particularly close to my heart and it’s a core philosophy within our firm. There are multiple aspects to ESG, but in the outsourcing context, managers today fall primarily into two categories. One sees ESG as a compliance checklist from a regulatory perspective to ensure they are compliant with their investors’ requirements.
The other, operates with ESG as a core strategy and philosophy and may have well done so for a long time. For them, it is genuinely about getting into a portfolio company or investment and driving a positive vector on ESG.
In those respects, our industry has quickly moved from a ‘nice to have’, to ‘need to have’, and with a changing regulatory environment – ‘required to have’.
In any case, there is a growing operations and technology requirement; therefore, you need people who understand ESG, to develop a sustainable framework, and can apply it to your firm, whether you have a 50-year track record or setting up for the first time. Importantly, ESG principles and applications are not standing still, so the team and infrastructure has to stay abreast with this evolution across asset classes.
Once you have your framework and strategy, and perhaps understood how you’ll capture all the ESG data and information associated with your investments – you have to think about ‘How do I report all of this data? How I will visualise it, understand it, dissect it, and feed it back?’
From our perspective, step one for us was ‘walking the walk’ from a corporate standpoint. Amongst a series of initiatives, we’re especially proud to have offset our lifetime carbon emissions going back to the inception of Apex nearly two decades ago.
The second part is what we’ve built out as our ESG Ratings & Advisory solution for our clients and core outsourcing function.
Again, going back to the report, around 6% of the savings are coming from clients using a provider like us for ESG, so there’s a direct cost saving associated with it, but there’s also an ESG output from it. I personally think it’s a higher value add, because what we’re doing is through a very distinct and separate team.
It’s not a risk-based approach to ESG, it’s a qualitative and value-add approach. We are tracking anywhere between 40 to 400 data points on underlying investments and then reporting back on the vector of progress across those ESG metrics with gap analysis benched to the industry, within which a private company might be operating.
Boards or managers can actually manage change because of the gap analysis that shows them that if you did these three things, the score would move X percentage points and you’ve moved from a laggard to a leader in this particular aspect – all this without having to make a fixed investment internally, other than in people who can absorb that information and drive change with it.
I’m heartened that our industry is broadening the scope of how we define ‘returns’ – paying quantitative and qualitative dividends for generations, and I’m pleased we’re in a leading position to support this drive.