Start-ups and emerging managers often see best results in their embryonic years when the internal team can focus their attention on their core business and carefully selected outsourced partners are used to fulfil essential support functions. Given the pivotal roles such external partners will play in supporting the business, firms should use a holistic approach when establishing their business operations with rigorous due diligence checks in place.
This will ensure engagement with reputable partners who have a proven track record within the industry, not only from a business perspective but with the regulators too. Pitfalls exist for start-up and emerging firms using a singular selection criterion (for example cost), including compromising on expertise, communication, ability to scale and the quality of output, any of which has a detrimental effect on a fledgling firm in a highly competitive environment, including financial and regulatory repercussions and possible damage to reputation with investors for hard-won mandates.
Firms will hope to scale over time and there are challenges to overcome. Recruitment and resourcing and regulatory complexities always feature. These challenges can be reduced by working with a reputable third party with extensive expertise in the industry and robust technologies.
Procuring support with governance, processes and meeting regulatory requirements
Operating in a highly regulated industry with varying legislative requirements across the globe can present its own challenges, meaning a reputable outsourced partner can be invaluable. The expertise third parties can support with, particularly for funds in their infancy, is excellent and whilst the accountability for all regulations sits with the firm and not the third party, it will limit its exposure to regulatory repercussions. Firms should look for reputable partners who are all-encompassing for their needs and can stay with the firm as it scales and evolves its business model. The FCA in particular places emphasis on firms having comprehensive understanding and mapping of people, processes, and technology amongst others, and this applies to their dealings with third parties as well.
Barriers to switching
According to Ian Bickerstaffe, Founding Partner and COO, Rye Bay Capital LLP, in the AIMA Hedge Fund Start-Up Guide: "From the investor's point of view, a switch in any area is a red flag." Decisions for changing third-party partnerships need to be explained in detail to investors as well as disclosing reasons for hiring them in the first instance. Ian explains that "if you replace your legal counsel, auditor, and fund administrator in the first year, that is evidence of poor due diligence." This will inevitably affect your reputation within the industry.
Across the board, outsourced support is operationally integral to any firm, and particularly for newer firms finding their way. Even outside the more critical outsourced functions listed above, switching any outsourced provider can present an operational challenge, such that many firms retain a sub-optimal relationship instead of triggering the upheaval to a more effective ongoing approach. So it is important to select the right provider from the outset, or, if change is unavoidably needed, firms should be sure to select a new outsourced provider that is experienced with effecting a seamless handover from an incumbent.
Finding an outsourced partner who supports scalability
Regulated firms need to show they have fulfilled due diligence requirements of their outsourced partners and Centralis Governance Risk and Compliance is an experienced and trusted partner within the alternative finance sector. We support firms from start-ups right through to mid-sized and larger firms. As start-ups and emerging managers witness exponential growth it is important that firms work with partners who can scale with them from the beginning, to avoid the difficulties associated with moving partners later. The FCA for example, states that "greater levels of risk management are needed when a firm increases its dependence on outsourced and third-party service providers." Data security is particularly important as data being held by third parties will inevitably increase as the fund grows therefore the requirement for the partner to use robust technologies is important. Our frameworks have been built with our clients in mind; they will stay with our clients throughout their partnership with us no matter how much they expand. Firms can rest assured that they can easily scale their business with us and ensure they are on the right side of the rules no matter where they operate across the globe.