Optimizing Operations: The Rise of Co-Sourcing and Lift-Outs for Established Fund Managers
Optimizing Operations: The Rise of Co-Sourcing and Lift-Outs for Established Fund Managers
By David Goldstein
In recent decades, emerging fund managers have increasingly turned to fund administrators to streamline operations, reduce costs, and mitigate risks. By outsourcing key functions, they’ve been able to focus more on investment strategies and growth. This trend is expected to continue into 2025 and beyond. However, what about established fund managers who began operations before this model became popular? How are they adapting to the new demands for operational efficiency, reduced risks, and investor satisfaction? The answer lies in evolving operational strategies such as co-sourcing and lift-outs.
These models provide established fund managers with a blend of efficiency, flexibility, and risk management while preserving some internal control. In this article, we explore how these strategies are transforming operational models for older asset management firms and enabling them to compete in a rapidly changing financial landscape.
Challenges for Established Fund Managers: A Changing Landscape
Many established fund managers have spent years building their operations without the benefit of outsourced administrative functions. While this structure may have worked in the past, today’s complex regulatory environment and increased investor demands are prompting many managers to reconsider their operational models.
Managers who started their operations in a more traditional, in-house setup face several challenges:
Complexity in Scaling: As funds grow, scaling internal operations while maintaining control over compliance, reporting, and investor relations becomes increasingly difficult.
Regulatory Pressures: Increased regulatory scrutiny requires more robust controls, documentation, and reporting, all of which can be difficult to manage internally.
Investor Expectations: Institutional investors are increasingly requiring that their managers use third-party administrators to ensure transparency and reduce operational risks.
In response to these challenges, established fund managers are turning to innovative models that combine the best of both worlds: retaining internal control where necessary while outsourcing administrative functions to reduce costs, improve efficiency, and mitigate risk.
Co-Sourcing: A Middle Ground Between Outsourcing and In-House Operations
One such model that has gained popularity among established managers is co-sourcing. Co-sourcing allows managers to maintain direct control over key operations such as books and records, reporting systems, and investor platforms while outsourcing more labor-intensive or specialized tasks to third-party providers. This model creates a balance between fully outsourcing fund administration and keeping everything in-house.
The co-sourcing model offers several benefits:
Operational Efficiency: By outsourcing administrative functions to specialized service providers, fund managers can focus more on core tasks, such as generating returns and managing investments. Time-consuming tasks like investor communication, compliance checks, and reporting can be handled by third-party experts, reducing the strain on internal resources.
Cost Reduction: One of the most attractive aspects of co-sourcing is the potential for cost savings. Fund managers can reduce headcount and overhead costs while maintaining a high level of operational effectiveness. Outsourcing non-core functions allows managers to redirect their internal resources to more strategic initiatives.
Error Reduction: Co-sourcing offers an opportunity to reduce errors in fund operations. When specific tasks are outsourced to experts, such as fund administrators or legal experts, the risk of human error is lower compared to tasks handled internally, where employees may be juggling multiple responsibilities.
Increased Control and Transparency: Unlike fully outsourcing operations, co-sourcing allows managers to retain ultimate control over their internal systems. They can still oversee processes directly and ensure that their systems align with their organizational goals while benefiting from the expertise of external providers.
Succession Planning and Backup: Co-sourcing also provides built-in support for employee absences, whether short-term or long-term. It creates a reliable safety net in case key personnel need to take leave, ensuring continuity in operations. Moreover, by collaborating with external partners, firms are better prepared for future leadership transitions or changes in staffing, reducing the pressure to hire internally for every role.
Lift-Outs: A Complete Solution for Operational Overhaul
In contrast to co-sourcing, lift-outs offer a more comprehensive solution for fund managers looking to fully outsource their operations. A lift-out involves a complete takeover of a firm’s processes by a third-party administrator, including its employees, internal systems, and sometimes even office space. This model has gained significant traction in recent years, particularly among larger hedge funds, private equity firms, and venture capital managers.
Lift-outs provide several key advantages:
Operational Efficiency and Scalability: Lift-outs allow fund managers to achieve operational efficiency by transferring all operational responsibilities to a third-party provider, often with the promise of improved processes and technology. This enables managers to scale more effectively, without the need to invest heavily in expanding their internal teams or systems.
Risk Reduction: One of the most significant advantages of a lift-out is the reduction in operational risks. With a specialized administrator managing key functions, fund managers can rely on a provider with experience in compliance, reporting, and regulatory requirements. This significantly lowers the risk of errors and ensures adherence to industry best practices.
Investor Confidence: In today’s competitive market, many institutional investors require that fund managers use third-party administrators as part of their due diligence process. A lift-out satisfies this requirement by ensuring an independent third party manages fund administration, offering investors additional assurance about the integrity and transparency of operations.
Due Diligence and Operational Improvement: During the lift-out process, a comprehensive due diligence review is typically conducted. The new administrator will thoroughly assess all books, records, and operational processes, which can expose gaps or inefficiencies that may not have been apparent to the manager. This process often results in operational improvements and optimizations that can benefit the firm in the long run.
Focus on Core Competencies: With the operational burden lifted, fund managers are free to focus on their core business—investment management. By shifting day-to-day operational responsibilities to a trusted third-party provider, managers can devote more time to strategy, investor relations, and growing assets under management.
The Human Element: Empowering Teams with Co-Sourcing and Lift-Outs
While both co-sourcing and lift-outs focus heavily on improving operational efficiency, they also offer benefits to the human side of fund management. By removing administrative burdens, employees can focus on more strategic, value-added tasks. This can help improve employee morale, reduce burnout, and foster a more innovative and agile working environment.
Additionally, outsourcing administrative functions can help improve staff retention by allowing employees to work on high-impact, rewarding projects. Instead of spending time on routine administrative tasks, employees can engage in activities that align with the firm’s core mission and growth objectives. Moreover, these models allow firms to reallocate resources, training, and leadership development in areas that will have the most significant impact on performance.
Looking Ahead: The Future of Co-Sourcing and Lift-Outs in Fund Management
The shift towards co-sourcing and lift-outs represents a significant transformation in the asset management industry. As more firms embrace these models, we can expect several trends to shape the future of fund management:
Increased Adoption Among Established Firms: As the benefits of co-sourcing and lift-outs become more apparent, even established managers who have operated traditionally for years will continue to embrace these models.
Greater Focus on Technology: The rise of sophisticated technology and data analytics platforms is likely to play a critical role in the co-sourcing and lift-out models. Fund managers will look to administrators who can provide cutting-edge technology for reporting, compliance, and performance tracking.
Stronger Regulation and Investor Due Diligence: As regulatory requirements increase, both co-sourcing and lift-outs will be crucial for ensuring compliance and meeting investor demands for transparency and accountability.
A Holistic Approach to Operational Efficiency: The future of fund management may see a greater integration of back-office, compliance, risk management, and investment functions. Managers will seek holistic solutions that allow them to streamline all aspects of their operations while ensuring the highest standards of service.
The landscape of fund management is evolving rapidly, and established managers are increasingly turning to co-sourcing and lift-outs as strategic tools to remain competitive and efficient. By adopting these models, managers can reduce costs, improve operational efficiency, and better manage risk—freeing up resources to focus on growing assets and driving investment returns. As the industry continues to evolve, co-sourcing and lift-outs will likely become standard practices for firms seeking to adapt to the new realities of the investment world.
By integrating these models, established fund managers can position themselves for long-term success, ensuring they remain agile and capable of navigating the increasingly complex financial environment while continuing to attract new capital and drive investor confidence.
David Goldstein
Director, Product - Fund Services
STP Investment Services
STP helps financial firms navigate complex investment and regulatory landscapes with integrated services in operations, fund administration, and compliance. Powered by expert professionals, contextual service, and the BluePrint platform, STP combines strategic, middle-to-back office services with compliance consulting, enabling firms to focus on growth and client service through innovative technology and skilled experts.
