Scaling up in private markets: The quantifiable benefits of using a trusted partner
The Private Equity market continues to go from strength to strength, challenging firms to keep pace while controlling costs.
According to Preqin’s Global Alternatives Report 2022, the $13 trillion assets under management by alternative assets fund managers at the start of this year is set to climb to over $23 trillion by the end of 2026 – with Private Equity and Venture Capital (“PE and VC”) accounting for almost half of that.
Accordingly, many PE firms are looking for growth opportunities through diversification of strategies and/or expansion into international markets, but with that comes an additional set of operational pressures and risks. The reality is that firms that scale up, face managing larger volumes of data, greater regulatory complexities and in-house teams that are likely being stretched to their limit.
A Total Economic Impact study of large PE clients using Apex Group services, carried out by Forrester Consulting, confirmed that many have been struggling to manage their funds in-house as they scaled. Among the key issues highlighted was a lack of international regulatory knowledge, using out-of-date technology and finding skilled staff to meet the extra demands.
These challenges are why many PE and VC firms are now following what hedge fund managers have done for a while, turning to trusted partners for additional business support and guidance, not only for back-office functions, but front office too. Over three quarters (79%) of PE and VC firms surveyed by Acuity Knowledge Partners are currently doing so, and of the remaining 21%, nearly half (46%) stated that they are likely or willing to consider it.
There are clear and quantifiable benefits of drawing on a dedicated, external financial or operational resource. It can improve efficiencies, control costs – particularly human capital and technology costs – and ease the burden of managing increased regulatory and investor scrutiny.
Whether firms are looking to scale up or down, using a service provider provides the flexibility of being able to manage resource levels and add necessary skillsets quickly and easily. Trying to maintain and build a fixed headcount in-house can be challenging and costly. This is particularly pertinent given that one of key success factors to scaling, according to an EY survey of Chief Finance Officers at PE firms globally, is finding and retaining talent.
To add to that, a recent LinkedIn poll by Apex Group revealed that the biggest growth challenge for PE firms in 2022 was recruitment and resource costs (56%), followed by managing regulatory complexity (17%) and having limited new market knowledge (15%).
Drawing on a third-party service provider that has a global footprint means asset managers can focus on their core investment strategies, while their provider, acting as an extension of their team, can do all the heavy lifting to support and, in many cases, improve the efficiencies of their back and front office functions.
As by way of confirmation, those PE firms that took part in the Total Economic Impact study saved on average $3.8 million on internal staff costs over a three-year period by drawing on Apex Group services.
Just as important as having the right resources in place, is having the right technology to provide the rich sources of data needed to make informed decisions, meet the increasing obligations to regulators and investors alike, and boost operating efficiencies. The right partner can provide access to the latest ‘best-in-class’ technology stacks that can be tailored and integrated to specific needs.
PE firms that are using advanced technologies are reaping the benefits, with a study by Deloitte’s finding that nearly two in five (39%) companies using AI or automation technologies have improved their operating margins.
Finally, expanding into new markets can be a minefield of challenges for firms that don’t have the knowledge in place to deal with often highly complex local regulations and processes. A global partner, with people on the ground, can make sure firms respond quickly to any regulatory requirements and ensure they are compliant wherever the next opportunities lie.