In the third instalment of a three-part series, The Drawdown catches up with AnaCap Financial Partners’ COO Michael Edwards to discuss his approach to selecting and working with service providers as well as his strategy for firm-wide compliance handling.
Look out for the first instalment, focused on the must-have traits of private equity COOs, and the second, where Edwards discusses the firm’s proprietary central intelligence platform – from its beginnings as Pulse, to its evolution into Minerva.
The Drawdown (TDD): What are your feelings towards outsourcing? Would you rather keep all systems (and therefore control and information) in-house? Or, are you happy to delegate certain processes to experts?
Michael Edwards (ME): Outsourcing definitely has its place, particularly for those elements that can be purchased as a utility i.e. limited competitive options, low decision making requirement and less expensive to outsource than to carry out internally.
The market for outsourcing has changed significantly in the last 10 years – previously those keeping administrative tasks such as fund administration in-house were in the minority as it required investment managers to heavily resource operational teams and invest significantly in then relatively expensive systems. It was a no-brainer to outsource to providers with teams and systems that used the economies of scale of servicing multiple managers. However, now, the evolution of systems and their impact on the depth of team needed means the decision margin has decreased significantly.
I would say our overall approach at Anacap is to outsource selectively and continue to review our stance regularly. For example, we may start with an outsourced option, to expedite roll out, and then bring it in house.
For some other functions, such as various services on the technology side, it just makes sense to use specialist providers. We use services from a mix of cloud service providers and IT MSPs (managed service providers). However, when we do this we will always take a direct administrative role with the cloud services we use and play an active decision making role to ensure a higher level of service from these outsourced service providers.
As a general rule, where day-to-day responsibility for a relevant matter is outsourced to an external service provider, responsibility for the outsourced function remains with AnaCap and our obligations to investors with respect to those outsourced functions remain unchanged.
It’s our responsibility to ensure that all risks associated with the outsourced function are addressed to the same extent as if they were performed ‘in house’. This responsibility includes retaining, or being able to obtain, sufficient technical knowledge and resources of the outsourced activities to avoid undue dependency on the service provider.
TDD: How do you go about selecting providers?
ME: Due care, skill and diligence is taken when choosing suitable service providers. Any service provider must be of good repute and have sufficient resources and the personnel with relevant skills, knowledge and expertise necessary to perform the outsourced function. The service provider must also have an appropriate organisational structure that supports the performance of the outsourced functions. In selecting a particular service provider, a thorough market due diligence review is undertaken.
TDD: Do you think the industry is served well in terms of outsourcing? Is the industry understood properly by those trying to service it?
ME: Yes, although in our industry best-practice is always developing and outsourcing is no exception to this. I believe there has been significant consolidation and evolution within the fund administration industry particularly, with service providers having to keep pace with a huge change to the regulatory landscape and adapt their processes to ensure their service is fit for purpose. The better administrators have had to become advisors in many of these areas.
On the technology side, there are many ITOs (Information Technology Outsourcing) providers and now a growing number of KPOs (Knowledge Process Outsourcing). Of course, the quality of the service offering can vary greatly, but many of these outsourcing providers have actually been formed by ex-private equity and financial services executives with a wealth of industry experience. They understand our industry very well and are well equipped to provide a high level of service in a cost effective manner.
TDD: Which regulations are top of mind for you at the moment?
ME: GDPR, Mifid II and the new Senior Manager Control Regime. We are also tracking changes relating to the marketing of funds across Europe and of course Brexit implications continue to be at the foremost of our minds.
TDD: How do you ensure compliance throughout the firm?
ME: Clarity of communication is key. The team need to be informed and aware of the frequently changing compliance regime and know who to turn to should there be a question. We have an internal team that ensures compliance is at the forefront of the investment professional’s minds and run regular sessions to inform and remind the business. New laws and changes are tracked through our relationship law firms and our retained compliance consultants all of which is overseen by a legal and compliance team of three professionals. We also participate in relevant industry forums and round tables. Where we need to respond to a new event, an external adviser is appointed and a project plan implemented to meet implementation requirements.
Having a financial sector focused fund means the organisation as a whole are close to changes and understand the responsibility.