By leveraging advancements in fund administration, audits, and treasury management, CFOs can increase efficiency in a competitive fundraising environment.
Within the current fundraising environment, mangers of private equity and venture capital funds are looking for ways to gain an edge. Increasingly, they look to the back-office, where creating efficiency through outsourcing can potentially lead to lower costs or increased operating capital that can be used to explore new markets. But how do you create these efficiencies without losing control of your processes?
At the Private Equity & Venture Capital Forum held at JTC’s Boston office in October 2024, an industry panel discussed operations, outsourcing, and how finding ways to mitigate risk and improve operational efficiency can make all the difference in private equity and venture capital fundraising.
Why outsourcing doesn’t have to be an all-or-nothing proposition
JTC Senior Director Jeff Drinkwater encouraged fund managers to “focus on the core” of their businesses. By outsourcing elements that do not relate to their primary expertise, they free themselves up to focus on what they do best – deal sourcing and fund raising.
“Do you really want to be in the human capital business? Turnover, hiring, training, etc.?” asked Drinkwater, who explained that a focus on people, processes, and systems can drive efficiency while lowering risk, potentially making the fund more attractive to investors.
“When you think about outsourcing, it is attracting capital and managing risk – how do you do that?” said Drinkwater. “People are coming to us more to say, ‘How do I get more efficient in my back-office?’”
While working with an experienced fund administrator can enhance efficiency, reduce staffing needs, and take unnecessary elements out of the manager’s purview, many emerging managers or those managing smaller funds are hesitant to work with a fund administrator because they do not yet know the level of service they’ll need a few years down the road. But rather than building out a back-office, which can be time-consuming and costly, there are other options.
The key is to avoid spending on services you do not need until you actually need them, while putting key functions in the hands of those who understand them best. That is why JTC operates on a bespoke service model, enabling clients to select the specific services they require and seamlessly expand their options as their needs evolve. Functions they feel they can handle best in-house can remain, while for others, they can outsource to proven solutions and an experienced team.
Drinkwater recommended for those selecting an administrator to “look at their expertise, their specialty and how long they have been established.”
The evolving role of CFOs and trends in the treasury function
Drinkwater explained that a major benefit of outsourcing is to eliminate overburdening CFOs, who have seen their responsibilities grow in recent years.
“They have a lot on their plate,” said Drinkwater. “Maximizing the integration of technology, processes, and people will significantly enhance your business.”
Alex Bolton, Senior Managing Director at Citizens Private Bank, discussed trends in treasury management, particularly changes that have come in the wake of the high-profile bank failures of 2023.
“Something that proliferated last year that has really stuck is funds having multiple accounts at different banks,” he said. “What I think is interesting, though, is account holders perceive this strategy to be a safety blanket. They have their primary bank account, and then either a nil balance or some surplus funds hitting the other accounts.” The motive behind diversifying across different institutions is often additional FDIC protection and to mitigate concerns if there is an issue at one bank. However, managing multiple accounts across institutions can present operational challenges if both sets of accounts are actively used daily.
Managers that employ a diversified banking solution can achieve potential yields and leverage the enhanced flexibility as a compelling advantage for the benefit of investors. When trying to cater to the needs of today’s investors and find the efficiencies that provide a competitive edge, the panel emphasized that funds must stay current with industry advancements.
That said, what many don’t realize is the value of bringing your whole self to a primary banking relationship, especially one that can effectively safeguard your assets. Financial institutions with a longstanding history of strength and stability can help navigate even the most complex economic environments.
Using technology to create operational efficiencies
James D. Milkosky, Audit Principal at BDO, covered some of the tools managers can use to improve the audit process. He stressed the importance of a document portal for organization and management of the wide range of information funds need to have at the ready.
“We are in the technology age, and having a portal that is easy for all to access and manage documents should be straightforward,” said Milkosky. However, he pointed out that with regards to valuation of investments, it is more complex than it appears, noting, “It’s an art, not a science.” His advice to avoid year-end issues is to “start early.”
Kwame Lewis, Co-Founder of LewisLevy Consulting, agreed, stressing the importance of documenting policies and procedures at an early stage. In terms of making back-office processes more reliable and efficient, Lewis encouraged the use of technology.
“There is definitely a lot of tech out there that you could use to improve those processes,” said Lewis, who mentioned the advantages of workflow software that can help avoid communication issues or the hunt for documents that have gone missing when passed back and forth over email.
“Instead of just putting your documentation in a Word document or putting it on somebody’s desk, you can actually make that a live thing and put it in a workflow tool,” he said, pointing out that the right platform can allow for collaboration, ensure documents are accessible, and help with management by making it easy to see who has been assigned a task and what its status is.
Drinkwater conveyed his strong opinions on fund managers who continue to use Excel for waterfall calculations.
“Excel is the worst tool in this business,” said Drinkwater. “88% of Excel spreadsheets contain errors.”
When integrating its solutions with a fund manager’s systems, JTC uploads existing spreadsheets, whether created by the in-house team or previous administrators, and thoroughly checks them during the transfer process.
“We hired a third-party software company with specialized coders,” explained Drinkwater. “We collaborate with the manager to understand the intricacies of their waterfall, incorporate it into our system, and produce accurate results. Through this process, we frequently uncover numerous errors.”
Ways to leverage operational efficiencies in fundraising
In an environment where capital is scarce, managers must cater to new segments in order to fundraise. Enhancing efficiency is vital to enabling managers to lower costs, increase fee margins and gain a competitive advantage.
“Expenses is one of the key things that people focus on,” said Lewis.
Drinkwater explained how a global company like JTC can assist funds in testing the European market. Typically, managers would need to establish a vehicle in Europe under the AIFMD or register with each individual country where they intend to fundraise. However, because JTC is already established in those jurisdictions, managers can efficiently explore market opportunities.
“As a global provider, our approach is to create a template that allows you to test marketability,” said Drinkwater. “By using our AIFM license, you can market in Europe and gauge your experience before making a full commitment.”
The panel also discussed the rise in retail investors and the difficulty in appealing to this segment.
“Raising capital through broker-dealers and wealth planners isn’t as simple as flipping a switch,” said Drinkwater. “They require more immediate and timely reporting.”
Lewis agreed that this is not an easy shift, particularly moving from quarterly valuations to the daily NAV expected by a retail sector. But the panel agreed that the way to meet these increased demands is through finding efficiencies elsewhere. Greater efficiency in day-to-day operations gives managers the ability to lower fees, test other markets, or cater to new types of investors. With the right outsourcing solution, CFOs can create that value for their funds.
If you are interested in discussing this article, or if you would like to find out about JTC’s fund administration solutions, please contact Jeff directly.
