2020 private investment fundraising is expected to surpass the $595 billion raised last year. In fact, 86% of LPs intend to allocate as much or more capital in 2020 than in 2019, signaling great opportunity for fundraising over the next ten months. However, this influx of LP capital also signals intense competition, especially for first-time fund managers, as a majority of funds raised will go to established, brand-name funds.
This, coupled with the rise in the number of managers raising $100 million or less (a record 1,078 in early 2020 compared to 850 at the start of 2018) means managers must do everything in their power to strengthen their fundraising efforts, sharpen their investment focus and operate a lean, efficient fund.
To accomplish this, private equity managers across the globe have been utilizing firms like MG Stover to outsource their back-office administration to not only increase independence and accountability in the fund’s reporting, but also gain a partner to build a strong foundation for growth.
FUNDRAISING
Apart from having more time to focus on the often burdensome task of fundraising, having the right lineup of reputable service providers on offering documents is a key part of successfully marketing the fund. LPs are taking a more active role in the due diligence process, demanding transparency, independence and accountability.
Investors are more likely to choose a fund that utilizes service providers with similar ideals and one that has proven experience working with counter service providers (audit & tax, legal, compliance, etc.) that work together in a cohesive manner, regardless of complex structure or agreement.
INVESTMENT PERFORMANCE
Outsourcing roles that are not part of a fund’s core business allows managers to focus on the main initiative of actually running a fund: investing. Rising portfolio company valuations and volatile markets make it difficult enough for managers to select top-tier investments.
The recent market instability brings even more of a sense of urgency and precision into their investment process for 2020. Lost time spent on administrative tasks could be detrimental to a fund’s success, especially at a time when dry powder is at a record high ($595 billion raised across 1,316 funds in 2019).
Additionally, and perhaps most importantly, of the funds in the top 1st and 2nd performance quartiles in 2019, 94% utilized a third-party administration firm, further proving that outsourced administration can improve fund performance.
ECONOMICS
As mentioned in the sections above, fierce competition and macroeconomic factors are forcing managers to embrace lean operations and cut costs wherever possible.
When evaluating costs of in-house back office functions versus an outsourced administration firms like MG Stover, managers that outsource typically save over $120,000 annually in costs such as personnel (salary, bonus, benefits), technology (portfolio and fund accounting systems, investor portal), operations (phone, computer) and real estate (desk space).
MG STOVER
At MG Stover, our private equity practice has followed the general trend of private equity AUM growth over the years [include chart in the margin]. Starting in 2007, we now service over 175 closed end vehicles. Our private equity team has an average of 12 years experience, subject matter experts across various investment strategies and low turnover in experienced staff.
Clients value our tight turnaround times, accurate reporting and hands-on, consultative approach.
In a competitive landscape ripe with opportunity, choosing reputable service providers is a crucial step during the initial stages of launching a fund. For inquiries or to learn more about our private equity services, please reach out to Lizzy Wente at wente@mgstover.com.
The data in this report is from Preqin Pro, the leading marketplace data provider for the alternative investment industry.
