Private Equity Firms Turning to Outsource IT Services

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Private Equity Firms Turning to Outsource IT ServicesPrivate equity firm professionals are looking to improve efficiencies and leverage new technologies to expand their footprints and clean up workflows. Indeed, changing regulatory requirements, investor due diligence demands, cybersecurity threats and evolving technologies – the list of responsibilities is growing for private equity execs.

Regulatory and investor pressures continue to grow about fraud and cybersecurity, placing significant burdens on firms to meet growing requirements for reporting, transparency and IT security. Cybersecurity, in particular, has gained a lot of attention, as savvy hackers have evolved their hacking methods and prompted firms to re-evaluate their security postures across both infrastructure and policy levels.

The answer to most of these problems has brought about an increase in technology outsourcing across the PE industry. According to some industry watchers, the PE group’s adoption of managed cloud services has lagged behind their hedge fund counterparts, but today’s private equity firms are making significant investments in outsourced IT support and managed third-party infrastructure platforms to meet the changing demands of an ever-evolving landscape.[1]

Outsourcing vs. In-House IT

There are a number of factors that come into play for private equity firms debating the prospect of outsourcing: risk, control, cost, management, and compliance. Many of these considerations are impacted by a firm’s positioning and size.

For smaller, emerging funds, the choice is generally much simpler. Managing technology in-house for these firms is expensive and usually requires a seasoned and expensive IT professional staff and significant upfront investments in infrastructure and security. Cloud environments are natural choices for these small to mid-market investment firms, who can rely on an experienced managed services provider to handle all of the firm’s IT management, support and infrastructure without the burden of hiring or training IT staff. However, as with the hiring of all third-party vendors, it makes sense to have a third party, impartial expert consultant come in and appraise the needs and the most cost-effective solution. When it comes to expensive outsourcing for highly technical requirements, it takes a consultant with a deep understanding of the industry as well as the current and best technical solutions before signing on with a third-party vendor. Although there is an additional cost for an impartial consultant, it can pay for the effort by making sure there is a best long-term solution.

“For larger, more seasoned private equity firms, there’s a separate, but equal case to be made. Often, these firms have operational infrastructure in-house to run day-to-day operations. Typically, they are looking for an added level of expertise in a niche area or with a project. They want to feed off the talent and infrastructure they already have in place without the burden of hiring and training additional IT staff. Managed service providers can easily and effectively step in to augment a private equity firm’s existing IT operation and assist in solving challenges including workflow and business process issues as well as growing cybersecurity and data privacy concerns.[2]

Cybersecurity & third-party oversight

The SEC recognizes that firms are using third-party service providers to outsource operational functions, but they’ve been clear to recommend to investment firms, including private equity funds, that there must be strict oversight of those relationships.[3]

SEC Business Continuity Requirements

We saw it most recently in the SEC’s investment management guidance on business continuity, which they issued in mid-2016. It calls specific attention to the use of critical service providers and advises firms to conduct thorough due diligence to ensure they are not taking on unnecessary risks through outsourcing. Due diligence questionnaires continue to grow in length and increase in complexity, and it’s a testament to how far investors have come in educating themselves on technology and IT operations best practices.

. The burden of ensuring continuous, reliable and secure operations is difficult even for the largest enterprises that have vast time and budgets – and potentially insurmountable for small and middle market firms. Through outsourcing technology services and support, private equity firms are reaping the benefits of fully outfitted IT teams and virtual CTOs – and simultaneously maximizing efficiencies in-house to support investment growth and operations.

[1] https://www.hedgeweek.com/features/ezecastle/how-and-why-private-equity-firms-are-transforming-back-office

[2] https://www.hedgeweek.com/features/ezecastle/how-and-why-private-equity-firms-are-transforming-back-office

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