COVID pandemic considerations with respect to administration outsourcing in private equity
28 May 2020 - While no one is exactly certain about how the COVID pandemic will affect the world, be it economic, socially, environmentally or otherwise, early indications all point to the notion that what was business as usual prior to the pandemic will either take a significant turn or, in many cases, cease altogether.
So what does change look like for the business of outsourced administration in a post-pandemic world? To be sure, the uncertainty that has gripped the rest of the world with respect to impending change will also apply to outsource providers. What was already a significant shift in practice away from an internal administration function will only accelerate the outsourcing of administration in the private equity sector going forward. The principal considerations contributing to the existing mind-set - such as efficiency, scalability, leverage and cost reductions – will be further enhanced in the post-pandemic world.
A study we commissioned early last year showed an approximate 40% third-party saturation point for fund administration services across the private equity industry. While our experience has shown that the saturation point for fund administration was steadily increasing, we anticipate that the COVID pandemic could accelerate the increase. Ultimately, we believe that the outsourced administration saturation point will ultimately peak at over 90%, with significant increases occurring over the next two to five years.
Even though our private equity fund administration revenues have remained solid throughout COVID, GPs may not have fared so well and their situation may worsen: we have seen that portfolio company valuations have dropped between 10%-20%, with significant risk for additional decreases if lock-down and its after-effects persist over the longer term. Even in an eventual recovery scenario, reduced valuations will further serve as an impetus for managers to lower their cost profile across the various aspects of their business in the near future.
The move towards a more automated administration model had been gathering pace in private equity in recent years, particularly on subscription processes associated with fund raising, including AML and KYC – which will only gain further traction in a full or partial remote-working environment. While virtual data rooms have already largely replaced human interactions when it comes to data room management and paper-based documentation processes on subscriptions, the continued automation of other administration functions will further decrease those interactions (this time inclusive of the third-party administrator personnel). This will benefit both GPs and LPs via substantial time savings, cost reductions and a more seamless overall experience.
Time – and its associated costs – is of the essence in this challenging environment. A sizeable number of LPs have reported to us that they have at least halved their time on due diligence after their GP transferred its administration function from in-house to a fully outsourced model. Investors do not want to spend time on blocking and tackling, irrespective of returns. In fact, outsourced administration may move over time from a positive factor in GPs’ favour into an outright prerequisite.
The time saved through solutions offered by the Citco group of companies are not just of benefit to LPs; for example, we have been able to fully digitize the process of preparing for a board meeting for GPs, while hosting it and signing all documentation through the use of an online board pack production and presentation tool. We must remember that accurate data provision also frees up GPs’ time to do what they do best – generate returns – as well as support their ability to do so.
The opportunity bell that signals greater automation through technological expertise will begin to ring very loudly for GPs.
When it does, we will be here to listen to their needs.
By Nikolaos Perros, Head of Private Equity, Citco Fund Services (USA) Inc.