This article was originally featured in Private Funds CFO.

Dan McNamara, chief strategy officer and chief financial officer at MUFG Investor Services, describes the evolving role of CFOs and what it means for outsourcing in the private markets.

As new investors, fresh capital and technology innovation reshape the private markets, chief financial officers are seeing their remit grow as firms prepare for a new paradigm. Dan McNamara, chief strategy officer and chief financial officer at MUFG Investor Services, explained how asset managers are preparing for a new future, the role of trusted partners and outsourcing and the growing importance of automation and data management.

How is the range of CFO responsibilities expanding?
Dan McNamara (DM): Since the global financial crisis, effective CFOs have been serving as strong strategic partners. CFOs touch every aspect of an organization, with responsibilities ranging from financial planning and analysis and resource allocation to product profitability, data analytics, staffing, travel and entertainment expenses, and macro drivers for forecasting models. This is in addition to core financial controller functions, such as statutory accounts, regulatory reporting and cost management, which are demanding but incredibly valuable for a business.

Technology will play a big role in what comes next. CFOs have always used financial systems and leveraged each new wave of technology. However, the volume of data that businesses and financial teams need to manage is increasing exponentially, so managing data is becoming a significant part of the CFO role.

CFOs must have a clear view about data strategy, and that includes gathering, cleansing and ensuring the accuracy of data. Financial and non-financial data must be accessible to internal teams and clients for a range of functions, including increased regulatory reporting, investment analytics, measurement and management of key performance indicators, and investor reports.

How do you help fund managers prepare for the future?
DM: Asset managers are faced with a confluence of factors, including macroeconomics, rapid growth, increased volatility, shifts in investor interests regarding asset types, increased investor demands, increased and sustained competition and growing regulatory demands. But many managers have outdated operating models, or perhaps more accurately, operating models that have grown organically and must be reengineered to properly manage all these competing factors.

Asset managers, hedge funds and other alternatives businesses are human enterprises that tend to grow organically and often reactively. After enough time, that work can result in many disparate platforms and systems that may not interact effectively with each other. As the industry grows and demands change, and as asset managers grow, the systems and processes that once worked well become outdated and need to be reengineered holistically.

Our view is that asset managers should use their limited time and resources to focus on value-added tasks that help grow their businesses. We work closely with asset managers to identify critical core functions, such as NAV production, middle-office functions, treasury support, banking activities like payments, and a range of processes that can be outsourced to improve efficiency and reduce costs.

These tend to be processes that are vitally important and must be without error but are not value-additive for the asset manager. The goal of every firm we work with is to generate alpha for investors and to attract investor inflow.
Anything that sits outside those two categories should be part of discussions about outsourcing.

A significant development in private markets is increased presence of retail investors and the “democratization” of the asset class. What does that mean for back office and fund administration teams?
DM: Private market performance is the main driver of increased demand. For retail investors, the listed liquid markets are increasingly indexed and correlated, so they can access beta fairly easily. What they can’t access as easily is alpha. A lot of alpha, and uncorrelated returns, have recently been realized in the private markets. Retail investors therefore are looking to follow these historic returns into private markets.

For asset managers, that interest provides opportunities – a significant influx of new capital – but also creates challenges. The volume of new investors and capital can overwhelm managers’ existing systems. There are investor protection concerns regarding suitability, as well as regulatory and compliance considerations about providing access to retail investors. Retail investors also have different expectations, including higher levels of liquidity and faster, higher quality reporting.

Finally, with regards to retail, there are considerations around product distribution and ease of execution to ensure investors’ ability to access, subscribe and redeem into and out of funds. Managers may need connectivity with private banks, for example, or other ways to reach those clients, and the technology or “pipes” to enable those processes to take place. We provide the “pipes.”

Are managers changing their approach to seeking third-party support?
DM: Absolutely. Firms are looking much more holistically at their approach to outsourcing. Traditionally, asset managers have identified specific back-office or middle-office functions they wished to outsource, opened a request for proposals process for services – such as accounting, fund administration or custodian services – and selected an outsourcing firm.

Increasingly, fund managers are open to outsourcing a much wider range of functions, such as complex fee calculations, FX processing, banking and payments, anti-money laundering/know your customer tools for investor onboarding, as well as treasury and liquidity-related functions, and management of correspondent banks. We are also seeing requests for front-office support, including outsourced execution, profit and loss attribution, measurement and benchmarking.

Managers do not want someone to come to them and just sell a service. They want a trusted partner who understands their unique needs, will provide multiple solutions and will be there for the long term.

How are firms adopting co-sourcing?
DM: Co-sourcing is part of a broader trend, especially for managers that have an influx of new investors or capital, or are launching new products, including “evergreen” or semi-liquid funds. Instead of managers coming to us with specific requests and a set idea around an operating model, they’re saying, “We have a problem, how can we fix it?” They might need more staff but do not want to hire. Co-sourcing can be our firm providing operational staff in a client’s environment with their technology, or offering technology and services or just technology alone.

Those initial meetings often lead to discussions about how data is being managed, financing, or how they ensure that excess capital is being deployed optimally. It becomes much more of an ongoing dialogue, which clients appreciate.

Managers are grappling with LP requests for greater transparency. How are strategies around data management evolving?
DM: Data management is a real challenge for asset managers as LP demands evolve as well. Many managers use disparate systems with a variety of data points that do not interact automatically with internal or external platforms. It’s an issue of volume and having many types of data, but we have an answer: be disciplined about inputting data into a system and consolidate data into one core data repository.

Our data solutions enable managers to streamline systems, ensure data is harmonized and stored securely in a single data layer or data lake and interact with external systems. We accept data from managers and replace manual steps with automated processes and controls around data input. After data is aggregated and centralized, managers have access to apply analytics for investment strategies, and to create investor and regulatory reporting.

From a technology perspective, how important is automation for CFOs, and how do you, as a fund administrator, use it?
DM: Automation is key. As the alternatives markets grow and evolve, anyone doing business in this space – asset managers, trusted partners, etc – need to automate as many manual tasks as possible. For example, by automating preparing and cleansing data, the teams that used to handle that work can focus on value-added tasks, such as analyzing data, drawing conclusions, and using it to make better investment decisions. Automating the processes that bring data into the system – either by an application programming interface or a portal of some type – help to make sure it’s clean, standardized and accessible.

We embed our “hyper automation” team with operational teams deep within the organization to drive automation “at a cellular level.” It builds from that initial point to automate and create the most efficient deployment of resources. That way, it’s organic and grows from the organization.

As consolidation continues in the fund administration space, what impact is that having on competition for talent with private market expertise?
DM: The competition for top talent is fierce, and it’s an ongoing battle. With the outsized growth of the private markets, there’s been a corresponding challenge in hiring people with experience in the asset class. About three years ago, we took a step back and saw that we had colleagues who had peripheral experience in public markets, finance, or fund administration – and transferable skills. We developed in-house academies to help train people in private markets – for example, transitioning a public markets accountant to a private markets accountant. It’s been a huge differentiator for our firm. Our colleagues are highly motivated to participate; they see it as an investment in their careers and future.

Our firm spends a great deal of time focused on training and development, and we believe that’s one of the reasons our employee attrition rate is significantly lower than our peers in the industry. Our employees are deeply engaged, which is important for our clients because they want proper long-term relationships. No client wants to see a “revolving door,” where they are dealing with different team members every six or nine months. In fact, many of our asset manager clients have sent their own teams to our academies for training.