This article was originally posted in Preqin.

Mac Kirschner, Chief Operating Officer

With significant industry changes underway, fund managers and their trusted service partners are reengineering operating models at break-neck speed to accommodate a new paradigm.

What were the significant operating model changes we saw in 2024?

Throughout 2024, fund managers have continued to work with trusted service partners up and down the value chain regarding operating models and outsourcing decisions. We’re focused on delivering new products and solutions to help managers generate returns. As a result, we’ve coordinated on outsourcing a range of functions, including fund accounting, NAV or shadow NAV production, reconciliations, collateral management, Know Your Customer/Anti-Money Laundering for investor onboarding, corporate services, regulatory filings, foreign exchange hedging, and trade and portfolio administration.

In one of 2024’s more interesting trends, fund managers introduced new custom funds and products at a fast pace. We saw a corresponding increase in requests for tailored solutions and workflows to help them resolve new operational demands.

For example, hedge funds accelerated the use of separately managed accounts (SMAs) for clients seeking access to specific portions of portfolios. We’re working with fund managers to create unique tools and processes to manage SMA portfolios, and to address operational complexities involving workflows, increased staffing, and enhanced compliance requirements.

In 2025, what will fund managers be focusing on when creating their next- generation operating models?

Fund managers will continue to move away from back-, middle-, and front-office functions, and focus limited resources on growing and protecting assets, and driving enterprise expansion. We’ll see more managers outsource commoditized functions whenever possible, relying on outsourcing partners to provide efficient processes, automated platforms, and experienced teams to help them reduce costs and improve efficiency.

Regarding those customs solutions for SMAs and other products, we’ll be working together with our buy-side partners to improve their performance and efficiency. Often, those solutions are developed on tight deadlines, and as we continue to refine them, they can be used for other new products. These types of tools and systems frequently can be commoditized and used for other clients, which standardizes processes, reduces the need for continuous development, and ensures they are priced competitively.

When your teams meet with fund managers to discuss new models, do you typically concentrate on wholesale change or more discrete initiatives?

It depends on the fund manager. Our client-centric model emphasizes personal service, listening to clients, and exploring their needs. Our goal is to establish long-term, trusted relationships and we’re fond of saying to clients: ‘What do you need? If we don’t have it, we’ll build it for you.’ We take a holistic approach to reengineering. With long-term clients, we already know their business and can offer thoughts on reengineering models.

When we meet with newer clients to discuss their needs, they might suggest a discrete project to start, such as automating a fee calculation or a custom client report. Then we might follow with another slightly larger engagement involving both our teams – for example, building application programming interfaces (APIs) to allow for real-time data exchange. Generally, after we have completed some smaller projects, we can begin exploring more extensive changes to an operating model.

How do outsourcing partners convince managers that they have the right skills to handle new funds or more esoteric investment strategies?

We’re very focused on being proactive. We hire top talent in all 17 of our global locations, and we’re committed to ensuring that we have the correct team for each client. Learning and development is critical. A few years ago, we struggled to find people with back- and middle-office experience from private markets. So, we took a different approach: We hired smart people with traditional finance experience, created private market academies in private equity and real assets, and trained those colleagues for the private markets discipline. That has been, and continues to be, a very positive outcome with measurable results. We even have clients who put forth their people to participate in our academies. Our digital academy, which focuses on artificial intelligence (AI) principles, is our newest employee offering.

Co-sourcing and lifts-outs are becoming more common. What are the benefits and how do you ensure that they address current needs and will support future growth and scalability?

For some in our industry, outsourcing (our people, our technology) is barely distinguishable from co-sourcing (our people, your technology). One of the benefits of co-sourcing is it provides a comfort level for fund managers who may be reluctant to give up control of processes or data, but recognize the need for specialized expertise or tools to help their businesses grow.

There are meaningful possibilities for lift-outs (your teams become our teams) because when fund managers decide they want to remove functions entirely, those teams move to a partner that shares the same skills. The fund managers achieve their objective of reducing costs and streamlining operations, and the partner inherits a team that can be used with other clients, too.

How important are technology and data/ risk-management in discussions about new operating models?

Updating technology and improving the ability to capture, harmonize and distribute data are among the most important elements of reengineering operating models. Managers need to eliminate outdated, legacy technology to handle the influx of new investors and capital, and to process volumes of data. To address disaggregated data in varied formats—from their own systems and external parties—fund managers are moving to secure, automated common data platforms to collect and process information about clients, investors, legal entities, funds, portfolios and transactions.

After data is cleaned to eliminate duplication and inconsistencies, and is translated into a standard syntax to create a single ‘golden source,’ it will flow into a secure data lake or aggregators where access is tightly controlled. With a clear audit trail, the data can be used for management and investor reporting, analytics for investment strategies and internal governance, as well as multi-jurisdictional regulatory and compliance reporting.

Global regulators are increasingly demanding more disclosure and transparency from fund managers, often with a wide range of reporting requirements. How important will automated systems be in meeting regulatory requirements?

Managing change is complicated and automated systems are critically important for meeting new compliance and regulatory standards. Funds with many strategies will have a difficult time manually coordinating regulatory and compliance requirements, which are often not harmonized across jurisdictions. Automated systems also rapidly streamline the reporting process.

For example, a fund manager marketing in 11 European Union jurisdictions with distinct disclosure and formatting requirements used our platform to submit AIFMD Annex IV reports. The automated platform filed the reports instantly to all the jurisdictions with verified data in the correct fields and format.

Where do you see AI fitting into new operating models? Validated data is critical for using generative AI, and fund managers that effectively manage and analyze that data are likely to be the most successful.

The long-term potential for AI is enormous, but there are also risks. At this point, AI is still making mistakes and hallucinating in certain situations, and even as that number drops, it will be hard to have complete confidence until AI results significantly improve. The industry needs to move slowly and establish guardrails for how, when, and where AI can be used.