Nick McHardy, our Head of Funds, recently shared his insights on enhancing performance by developing and improving operating models in our ‘Outsourced Models are Changing’ series. As a refresh, you can read back over those articles here:

1. A response to marketing conditions
2. Four value drivers that underpin an operating model review
3. Considerations when changing your operating model
4. Same scope of services, different outcome

Across the four articles, we covered the evolving nature of outsourced models in the private capital fund industry, emphasising the current need for fund managers and general partners (GPs) to reassess their outsourcing arrangements due to market conditions, technological advancements, and changing investor expectations.

Historically, significant adjustments to outsourcing models have coincided with market downturns, such as the post-Global Financial Crisis era. Today, challenging fundraising conditions and the emergence of alternative service providers with advanced technology and tailored services are prompting another wave of operating model reviews.

Key value drivers for reviewing and potentially changing operating models include cost reduction, operational effectiveness, risk management, and enhancing the investor experience. Fund managers have two main routes: insourcing activities previously outsourced or increasing their existing level of outsourcing.

Critical considerations in this process include regulatory permissions, expertise and resourcing, opportunity costs, systems and data strategy, risk management, relationship dynamics with service providers, contractual obligations, and the timeframe for onboarding additional services.

As we conclude the series, it’s clear that even without changing the scope of outsourced services, fund managers can achieve improved outcomes through tender processes, feedback mechanisms, and technology solutions. Ultimately, adapting outsourced models can enhance performance, reduce costs, and improve service quality, making it potentially beneficial to switch to a new fund administrator in order to achieve long-term growth.

Belasko offer tailored, full scope fund administration, focused on delivering the highest quality solutions across the entire fund lifecycle and across multiple asset classes. We’ve worked closely with our clients on developing and improving their operating models to enhance their performance. If you’d like to discuss further, get in touch with Nick McHardy, Group Head of Funds at [email protected].

In today’s evolving financial landscape, private capital fund managers and general partners (GPs) face increasing pressures to enhance performance, reduce costs, and manage risks effectively.

Outsourced models have long been a cornerstone of the private capital fund industry, offering solutions to these challenges. However, market dynamics, technological advancements, and changing investor expectations are driving a need to re-evaluate existing outsourcing arrangements.

Download our new whitepaper which addresses the pressing question: Is now the time to upgrade from your existing fund administrator?

Here, we delve into:

• Responding to marketing conditions
• The four value drivers that underpin an operating model review
• Considerations when changing your outsourced model
• Key benefits of changing your fund administrator – it’s easier than you think!

You’ll also discover why clients of ours, including Syntaxis, Riverside Capital, RTP, RCapital and Apera, have all made the seamless transition to Belasko – and why they’ve never looked back…

If you’d like to discuss how we can simplify administration solutions for your business, get in touch.

Belasko’s Chief Commercial Officer, Ross Youngs, recently worked with the British Private Equity and Venture Capital and Association (BVCA) to support their Accelerate conference aimed at providing advice and guidance to the UK’s venture capital community, those raising funds to deploy across Seed and Series A as well as innovative start-up companies seeking funding. Both communities have something in common – they’re searching for the minimum viable product. Ben Cocoracchio, a fund formation partner at Addleshaw Goddard, was also in attendance and we’ve teamed up to share our views on the key considerations for determining the minimum viable product for an emerging venture capital manager.

Introduction

If you’d have asked what MVP was a few years ago, the answer would have been Most Valuable Player with Kobe, MJ and Lebron first springing to mind.  However, having worked with our venture capital client community, it has become clear that finding the ‘minimum viable product’ serves as a critical success factor for first time fund managers and portfolio companies.

But, as an emerging venture capital manager, what key factors should you look out for to determine the minimum viable product (MVP)?

Right-sizing your fund

A very common struggle for first-time venture capital funds (VCs) is deciding on an appropriate fund size. This is a delicate balancing act between choosing a fund size that can be realistically raised while also making sure the size is appropriate for the investment thesis.

“When right-sizing their fund, first-time VCs really need to think through the construction of their target portfolio, i.e., what cheque size they’re aiming for, how many investments will they make and how much capital they want to reserve for follow-ons” says Cocoracchio. “It’s also important to think about fundraising dynamics – can the VC raise a decent portion of the fund size at the first closing (which is crucial to build momentum)? Does the proposed fund size rule out certain investors (e.g., institutional investors find it hard to commit to smaller funds)?”.

When VCs are seeking to raise their first fund, there’s generally considered to be a minimum fund raise to power the investment platform for the duration of the investment or divestment programme.   It’s very challenging to make the economics work below a certain size of fund, particularly when it comes to covering staff overheads and operating costs over the life of the fund. But so-called “micro funds” are successfully being launched, it just takes a degree of nimbleness, creativity, and compromise.

Choosing the right jurisdiction

A reputable well-regulated jurisdiction is essential to provide comfort that an investor’s capital is adequately safeguarded by regulation, but choosing the right fund jurisdiction involves considering a multitude of different factors.

“In the emerging manager space, we typically see clients favouring the simplicity, investor familiarity and speed-to-market of Channel Islands and UK, with European domiciles being reserved for situations where particular investors demand a European structure or, if needed, to market in some of the trickier European jurisdictions”, says Cocoracchio.

At Belasko, we see a similar trend and the factors cited for this leading share are the familiarity for European and US investors, lower cost and being less administratively burdensome than popular European domiciles.

Standardising the term sheet

Raising capital is a time consuming and intensive process, often lasting between 12-24 months (or longer!). For emerging mangers in particular, any deviation from what investors perceive as “market standard terms” runs a very real risk of adding friction to the fundraising process.

In developing their MVP, emerging managers would do well not to stray too far off-piste with the terms of their fund and to really focus on what’s important to executing their fund strategy. For example, some fund terms are still fairly standard (e.g., most venture funds in the market have a life span of 10 years, an investment period of around five years and for the fundraising to be concluded within 12 months of first close).

Interestingly, new themes noted in Addleshaw Goddard’s Spotlight on Venture Capital Report highlight a range of approaches being taken by VCs when it comes to calculating management fees and carried interest. “These “premium fund terms” can have a material economic impact – but they’re of no use if they deter investors and prevent the fund from being launched”, says Cocoracchio.

Fund administration: finding the right fit

There are lot of options available to new managers to raise a fund such as:

• Full tech automated solutions: Low-cost base but rigid self-service solution.
• Boutique customisable administration: Experienced staff supported by technology.
• Global administration brands: Multi country standardised service models often with centralised resources that use industry standard technology.

As a first-time fund manager, working with an experienced fund administrator can add real value to fundraising and day to day running. They can ensure the investor experience is seamless, provide guidance and support on the expected reporting and can provide the flexibility and agility to accommodate the ad-hoc nature and complexity of venture capital along with shorter deal cycles. By applying a goldilocks approach in the detailed due diligence performed when selecting your administrator will ensure you find just the right blend of cost and quality.

Building a strong team

Every fund launch requires a strong team. The venture capital market is a tight nit community and selecting an experienced team of service providers will add value the credibility to the fund offering and ensure that terms and structures are not over-complicated, and costs are carefully managed.

“When it comes to working with first-time managers, the key for us is to use our collective experience to provide the simplest solutions with the greatest impact – no over-engineering and no unnecessary (expensive) bells and whistles”, says Cocoracchio.

MVP: the foundation of venture success

The concept of seeking an MVP transcends beyond the start-up realm and becomes a vital baseline for emerging venture capital fund managers. It serves as a tangible checkpoint, ensuring that resources are effectively utilised, risks are mitigated, and paves the way for sustainable growth and for leveraging innovation from the venture capital ecosystem.

Belasko works with first time and experienced venture capital fund managers across the Channel Islands and Luxembourg. We provide tailored, full scope administration services, underpinned by expertise and technology solutions to provide the perfect MVP in venture capital. Get in touch with Ross Youngs ([email protected]) to learn more.

Addleshaw Goddard is an international law firm, whose private funds team advises a broad range of managers (from first time managers to established global institutions) on both onshore and offshore fund mandates, across all sectors including venture capital and private equity. Addleshaw Goddard’s Spotlight on Venture Capital Report and Funds Trends Report are available here.

Ross Youngs, Chief Commerical Officer, Belasko
Ben Coccorracchio, Partner, Addleshaw Goddard

In this final article of our series, we turn our attention to the possibility of achieving your objectives from an operating model review and in doing so a different outcome to the current setup whilst maintaining the same scope of services for your outsourcing arrangements.

Throughout this series, we have covered how managers are responding to market conditions through reviewing their operating models and outsourcing arrangements, the four value drivers that underpin an operating model review, and the key considerations when changing the scope of services outsourced.

Now, we explore whether meaningful improvements can be realised without altering the outsourced scope of services.

Running a tender process

Running a tender process to validate pricing levels or empirically support a reduction. Apply caution to significantly lower pricing because new providers won’t understand the requirements in the same way as your existing service provider(s).

Following a robust process and having a consistent methodology is key to reducing the time on your team to run a process, for example the BVCA[1] provides a template for running a Request for Proposal (RfP) for fund administration services that could be requested from a tendering party.

Feedback and service improvement monitoring

Any material outsourced provider, particularly your fund administrator should have a mechanism in place for feedback to be provided. If there isn’t one, request one is setup and identify areas of improvement well ahead of time to ensure the best possible outcome.

Once the meeting is held, there should be a reporting mechanism agreed whereby the service provider can demonstrate whether they’ve met the agreed service improvements requested and/or explain the action they’re taking.

The stronger the relationship, the more this type of meeting will be encouraged particularly if there’s an opportunity to champion examples of outperformance.

Technology

Are there technology solutions that can be deployed to achieve your objective(s) whether cost reduction, operational efficacy, risk reduction or an improved investor experience?

These solutions may be available under your current service provider(s) or may some direct require investment.

Recap

In this ‘Outsourced Models are Changing’ series, we hope we’ve emphasised how adapting and evolving your outsourced models can enhance performance, ensuring that your business remains responsive to changing market conditions and are partnered with the best outsourced providers to meet operational demands. Maintaining a balance between cost, quality, and strategic alignment is key to deriving maximum value from your outsourcing arrangements.

Belasko offer tailored, full scope fund administration, focused on delivering the highest quality solutions across the entire fund lifecycle and across multiple asset classes. We’ve worked closely with our clients on developing and improving their operating models to enhance their performance. If you’d like to discuss further, get in touch with Nick McHardy, Group Head of Funds at [email protected].

[1] bvca.co.uk/policy/Industry-Guidance-Standardised-Documents/RFP-for-Fund-Administration-Services

As we hit the 2024 halfway point, challenging fundraising conditions continue to persist (noting a contraction of 22% in global private capital fundraising in 2023[1]), as well as a high degree of fundraising concentration to the biggest managers and general deal inactivity.

Here we provide a pulse check on the key themes within the private capital funds industry as we all collectively plot a course forward for our respective businesses and specialisms. The key industry themes of note are around liquidity, ESG, operational performance and post-COVID considerations.

Liquidity

80%[2] of the capital raised by UK based fund managers and GPs in 2023 were housed within 10% of the funds, further to this, over 60%[3] of the funds that were raised were less than £100m.

The industry has responded to the liquidity gap through innovative liquidity solutions seeking to address GP and LP-led market demand for liquidity. 46% of the $112 bn[4] in global secondary volume in 2023 was fund manager or GP-led.

Improvement in secondary pricing
Following a significant rise in valuations within public markets during 2023 and macro environment stabilisation, there has been an improvement in pricing.

Across all strategies, pricing for LP positions were estimated at 85% of NAV in 2023 compared with 81% in 2022, but still trailing behind the 92% seen in 2021.

Rise of continuation funds
Continuation funds have emerged as a prominent trend in the private markets landscape, particularly within the private equity strategies.

These funds allow fund managers and GPs to extend the holding period of their most promising assets beyond the typical lifecycle of a fund by transferring these assets into a new vehicle, the continuation fund.

They provide an effective solution for fund managers and GPs to navigate market dynamics by offering liquidity to investors and extending the period of value creation by a manager with deep knowledge of the assets with a view to optimising overall returns.

Democratisation and tokenisation
Democratisation (also referred to as retailisation) extends the offering of private capital investment strategies into less institutional routes and has been the subject of exploration for some time. There are number of barriers which appear to still permeate the industry from a regulatory and infrastructure perspective, and much is still required to educate a wider investor base.

Political perception connected to private capital investment is also relevant as there needs to be effective political will and the resulting government policy to support.

These barriers appear to be starting to reduce; for example, the EU introduced a new ELTIF 2.0 legislation which became effective in January 2024 and is a more flexible and inclusive framework supporting a less institutional investor.

Tokenisation is often discussed in the same breath through providing fractional ownership with the use of blockchain technology that could support smaller investment sizes.

“The GFSC (Guernsey Financial Services Commission) [Commission] supports innovation and recognises the role tokenisation could play in improving efficiency within capital markets. The Commission is aware of growing interest, locally and internationally, in the application of this technology within the funds sector and this is an area of focus for fund regulators globally.” (14^th May 2024 – Policy Statement – Approach to Fund Tokenisation)

Blockchain technology could also have wider implications for the industry by facilitating a more efficient transaction.

ESG

Environmental, Social, and Governance (ESG) continues to intensify within the private capital funds industry as a result of market expectations, regulatory and government intervention.

The emphasis on ESG stems from:

• Sustainability goals: Increasing pressure from stakeholders to adhere to sustainability and ethical investment practices.
• Regulatory requirements: Stricter regulations are pushing funds to integrate ESG criteria into their investment processes. Expected policymaking is anticipated to force rapid decarbonisation in the near future, driving funds to adopt more rigorous ESG standards.
• Investor engagement: There has been a massive increase in engagement from investors on ESG issues. The due diligence performed by investors is now extensive and this heightened scrutiny reflects a broader commitment to responsible investing.
• Performance metrics: Growing evidence suggests that ESG-compliant companies can outperform their non-compliant peers over the long term.

The EDCI (ESG Data Convergence Initiative) formed in 2021 and represents 425 + GPs and LPs from private equity, 4,300 portfolio companies and $28 trillion AUM.

They published data[5] which indicates that private equity ownership has a significant impact on ESG topics however performance for privately owned companies under private equity ownership on areas of sustainability is mixed relative to public companies, with some interesting themes that include:

• Decarbonisation – Private companies held for two of more years triple their use of renewable energy.
• Job growth – Private companies made 4% more net hires than public companies.
• Diversity – Private companies lagged public ones by 33 % with at least one woman on their board.

Operational performance

Market conditions are influencing a trend for private capital fund managers and GPs to perform an operating model review in pursuit of performance.

• Professionalising fundraising: Fund managers and GPs seek a route to professionalising[6] their approach to fundraising as a means to differentiate. This is likely to involve the provision of an enhanced data set to pre-empt questions and leverage technology in some way to support the consumption of that data set. Technology solutions also seek to support an enhanced investor/LP experience.
• Cost reduction: Adjustments to existing operating models and service provider change in the pursuit of cost reduction is a trend that will continue particularly if fund managers and GPs have a trajectory of reduced fund sizes and management fee pressure.

Post-COVID  

COVID is gone but not forgotten as the significant impact of the pandemic still heavily impacts working practices.

There was clearly a high spike in growth capital invested during the COVID-19 period with global growth capital invested in 2021 at $910bn, compared with $399bn in 2019 and $470bn in 2023.

Emerging fund managers who launched in 2021 would expect to find a cooling of the reception received by prospect investors when fundraising this year and into 2025.

Positive outlook for the private capital landscape

Despite the observed fundraising challenges, the private markets remain vibrant and full of opportunity as the industry is adept at adapting and innovating to offer solutions and products to challenges and market demand.

As we go into the second half of the year, there’s a cautiously optimistic outlook with interest rates expected to start reducing supported by falling inflation. This being said, as 49% of the global population is subject to an election this year, including the USA, UK and EU there will be plenty of uncertainty to navigate.

At Belasko, our full scope, tailored fund administration solution is designed to drive performance throughout the fund lifecycle. With experts based across the UK, Channel Islands and Luxembourg, and leading technology that’s customised to you and your needs, we’re well positioned to provide you with responsive, accurate and consistent support.

Please get in touch with the Belasko team today to discover more.

[1] McKinsey Global Private Markets Review 2024 – March 28 2024

[2] BVCA Report on Investment Activity 2023 – 14 of 131 Funds equated to £47bn

[3] BVCA Report on Investment Activity 2023 – 83 of 131 Funds less than £100m

[4] Greenhill, Jefferies, J.P. Morgan Asset Management. “Global Secondary Market Review,” Jefferies, January 2024.  Data are based on availability as of February 29, 2024.

[5] Boston Consulting Group – Private Equity Sustainability Report 2023

[6] Bain & Company Global Private Equity Report 2024

Operating models are currently being reviewed by a number of private capital fund managers and GPs in the pursuit to enhanced performance.

Once your objectives have been established (see previous article), there are two primary routes that may be taken.

• Scope status quo: keeping the scope of work outsourced the same.
• Scope change: change the scope by increasing the undertaking in-house or increasing the scope of outsourcing.

In this article, we explore the considerations of changing the scope of outsourcing.

Reviewing the options

In-source activities currently performed by a third-party

This involves identifying and bringing activities that are currently managed by external service providers back into the organisation.

Outsourcing activities currently performed in-house

Increasing the level of outsourcing has historically been used an option by fund managers and GPs to enhance performance by improving operational efficiency, managing risk and reducing cost.

Considerations when changing the scope of services outsourced  

• Regulatory permissions – are regulatory permissions required to undertake the activity?
• Expertise and resourcing – what level of specialist expertise and/or resourcing is required to undertake the activity?
• Opportunity cost – is there a benefit of freeing up specific resource and/or an opportunity cost of allocating additional activities?
• Systems and data strategy – what’s the strategy around in-house system capability and the maintenance of data as an asset?
• Risk management and control – will a change in operating model require an investment in procedural environment?  
• Relationship with your service provider(s) – is it likely that your relationship will change as a result of an adjustment to scope of services? Could this change provide other benefits or represent any risks?
• Contractual position with service provider(s) – if services are being terminated, what is the notice period (typically 3-6 months)?
• Time for service provider to onboard the additional services – for additional services, what’s the timeframe to onboard and embed additional services? Is there a mechanism in place to ensure additional services are embedded successfully?

Fund managers have several strategic options to consider when changing their operating models. Insourcing and outsourcing decisions should be based on a thorough assessment of capabilities, costs, and strategic alignment.

As a next generation fund administrator, Belasko has developed a tailored service offering to support you in achieving your target operating model.

If you’d like to discuss your outsourced operating model in more detail, please get in touch with Nick McHardy, our Group Head of Funds at [email protected].

Next time, we explore how your objectives may be met by keeping the scope of services with your outsourced provider the same.

Market conditions are influencing a trend for private capital fund managers and GPs to perform an operating model review in pursuit of performance. This review considers the service provided by third-party service providers such as your fund administrator.

Following the introduction of this trend in the last article, we now explore the four core value drivers and objectives that underpin such a review to assist the determination of what benefits an operating model change could bring to your business:

• Cost reduction
• Operational effectiveness
• Risk Management
• Investor experience

Cost reduction

You may be able to achieve cost saving targets without compromising on performance or quality by working differently with your existing and/or transferring to a third-party service provider (such as your fund administrator).

A new provider may be able to offer fee reductions by taking a longer-term view on the relationship or be able to leverage a more efficient operating model themselves.

Operational effectiveness

Identifying the processes and/or deliverables that take up the weight of internal resource and time may help apply focus in the right areas.

A consideration of whether there have been opportunities missed because of sub-optimal reaction times may be relevant.

Risk management

What is keeping you up at night?

Are there historical errors and/or any specific areas of discomfort that your team has over legal, tax and regulatory change which may position an adjustment to a specific part of your operating model.

Identifying areas of risk may yield a different level of interaction with your fund administrator and other third-party service providers to help manage risk better overall.

Investor experience

Fund managers and GPs are generally seeking a route to professionalising[1] their approach to fundraising. This may result in specific objectives around enhancing the investor experience on an ongoing basis or there may be some direct or indirect investor feedback that needs to be addressed.

Adjustments to processes and experience enhancements through the application of technology may be a route to attracting new capital inflows.

At Belasko, we partner with private capital fund managers and GPs to offer a tailored and fully outsourced fund administration solution to support you in achieving your target operating model.

If this would be of interest to discuss further, please do get in touch with Nick McHardy, our Group Head of Funds at [email protected].

In the next article, we explore the different options that fund managers and GPs should consider in achieving the specific objectives of an operating model change.

[1] Bain & Company Global Private Equity Report 2024