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Challenges and benefits of putting an outsourcing agreement into practice: real estate and outsourcing, part II
Challenges and benefits of putting an outsourcing agreement into practice: real estate and outsourcing, part II
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Challenges and benefits of putting an outsourcing agreement into practice: real estate and outsourcing, part II

15/02/2016

Hervé Schunke speaks with the Preqin Global Real Estate Report on outsourcing agreements

A fund manager is interested in establishing an outsourcing agreement. What are the challenges faced in putting that into practice?

Firstly, the definition of the exact splitting of duties, what has to be retained and what has to be controlled; we have an advising role here to secure a successful move. Also, what should be made clear is that they are not going to make any savings before at least the second year, because they need to invest in the move, and in the set-up of an efficient control environment, and that is going to cost money with the risk of some duplication of effort at the beginning, until they set up the right level of oversight.

The second main challenge is ensuring a smooth transition between systems and staff. A massive dataset has to be taken over by the outsourcing party. We are not talking about fund investing in stocks and bonds, where once you take over, then it is mainly what happens after this point that is most important, as opposed to what has happened in the past. Here, if you want to produce a performance report on IRR, or multiples, you need historical data. If you take over the administration of a closed-end fund that has been live for say three years, and is going to be live for another seven or eight years, then you cannot do that without taking over the history of those first three years. It is taking over the information, the quality of the information and the quality of the transfer.

The outsourcing model is not a frozen model and is in fact becoming a mature model.

Another challenge is the communication and the accessibility of information to those that – if post-outsourcing the operational team sits outside their organisation – are in another country. A good example of this is during the structuring phase before a transaction where, for example, the impact of the tax setup of a new acquisition is tested. In the past, fund managers used to go to their team of accountants and tax specialists, and ask: “I am buying this new property in such country. If I set up this type of company, can you confirm how the VAT is going to work?  They may then request simulations of future returns. Our teams will not necessarily be available for that. They will certainly be available if part of the outsourcing is the budgeting exercise; it is just a request that results in another request, and  therefore will not necessarily be treated as a priority request. So this different mindset and different way of accessing property information is new to them.

Benefits

There are also a number of benefits. The first key element is that you are moving fixed costs to variable costs based on the assets under management, so you better amortise, and you are better able to absorb quick and drastic variations in your level of assets. There is no doubt that you can benefit from efficiency and productivity gains because our objective is to make the model scalable, so that any staff or process which is taken over is able to help for scalability and clients also gain productivity.

Clients also access a more sophisticated organisation. We spend millions on our systems and are used to doing so, and share these costs across multiple clients and multiple business lines within our organisation. Clients can then really focus on their core business of raising funds, managing a pipeline of investments and managing these investments – as opposed to focusing on the back office and paperwork. Of course they can retain elements if they wish to do so, if they want to retain investor relationships for example, or work with the property managers on a day-to-day basis. Our offer is a modular one, so we could incorporate these elements, or they can decide to keep some of these elements in-house.

A benefit that should not be underestimated is the ability to quickly enter a new market. This has been used by a number of different clients, particularly those that were originally a mainstream asset manager but have expanded into new asset classes, including real estate. They are looking for quicker and cheaper access to new markets, either without opening a new office, or simply having an office which is used for transactions, or investor relations, but with no back-office functionality. Questions we get a lot of the time are: “Where are you present? Where can you offer a service? And what would the setup cost be?” And the answer is that it is not the client’s cost, but our cost. It is just a matter of timing and identifying if there is a true opportunity. The scalability and the time to market is an important argument for them.

 

 

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