Building an Infrastructure and Selecting Service Providers

November 20, 2019

By Yvonne Yang

This year’s Emerging Manager Forum in San Francisco brought together emerging managers, professional allocators and investors across all strategies and asset classes—including hedge funds, private equity, venture capital and real estate—to discuss best practices for launching and growing an alternative investment fund. More than 100 emerging managers attended the popular panel discussion, “Operational Priorities: Building an Infrastructure & Service Provider Selection.” Moderated by Matei Odobescu, Director at EisnerAmper, the panelists included Crystal McKeller, Managing Partner at Signum Investment; Greg Siemons, COO & CCO of Trinity Alps Capital; and Vikram Deshpande, Senior Manager at EisnerAmper.

Outsourcing

As emerging managers look for ways to scale and grow their funds, the question of whether or not to outsource operations often arises. While this decision is influenced by the individual and specific facts and circumstances faced by each fund manager, the panelists agreed that they are generally seeing an uptick in managers using outsourcing services. For many, it makes sense financially and strategically to outsource middle and back office functions. These functions include, but are not limited to, bookkeeping, fund accounting, CFO duties, human resources and even marketing, capital fundraising and trading. Communication between the outsourced provider and end user is being accomplished through the increased use of a secure portal that also provides independence and transparency for investors and other end users.  

Key Drivers

There are some major drivers behind the decision to outsource. The first driver the panelists addressed was cost. Being able to negotiate everything up front means that costs are more predictable. Prioritizing time and energy was another driver. Outsourcing can free-up time for top talent to focus on building a strong portfolio, rather than getting caught up in day-to-day operations. Flexibility was the third driver. Funds have limited options when a team member is unexpectedly unavailable. Outsourcing services gives managers access to a full team of resources, which can lead to increased reliability that there will be someone available to complete the work. One of the panelists commented that he believed the leading cause of fund failure is due to operations, not performance.

Service Provider Selection

Having a good working relationship with your select providers is important. Clear communication can help fund managers catch mistakes sooner and resolve problems more quickly. The panelists cautioned managers against assuming everything is getting done and recommended retaining overall ownership of the process and staying proactive by establishing ongoing monitoring through regular calls and meetings with service providers. Understanding the responsibilities of the service providers and being involved in the process will better position managers to step in when and if needed, so that deliverables remain on target.

Selection Criteria

Fund managers should consider the quantitative and qualitative aspects before selecting a service provider. A quantitative approach, for example, can rank providers based on risk factors, cost and reputation. Qualitative items in picking a service provider are also important. Questions that a fund manager might wish to answer include: Do you enjoy working with the person; are they responsive; is their resource capacity compatible with the size and needs of your fund; are you getting assigned the A- team? While performing this due diligence, a fund manager should also remember to ask about the availability of bundled services in order to save time and costs. 

The panelists concluded by agreeing that outsourcing will continue to be a popular option for emerging managers and selecting the right service provider can go a long way toward creating both short- and long-term success.

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