The alternative investment management business is highly competitive, as managers compete for institutional investors’ capital allocations. Managers not only compete on investment track records and strategies for driving alpha, they also compete on the strength and reliability of back- and middle-office operations.
In fact, 48% of private fund CFOs have reported increased interest from LPs in their back-office operations over the past three years, with 13% noting this increase was significant (Private Funds CFO Insights Survey). Additionally, 36% of private fund CFOs stated that LPs are now paying closer attention to a manager’s operational and infrastructure capabilities, up from just 22% a year earlier. This growing emphasis underscores a fundamental shift: operational efficiency is no longer just an internal concern—it’s a competitive advantage in attracting and retaining institutional capital.
Operational challenges are often a roadblock to achieving full potential for alternative investment managers. Before securing capital commitments, fund managers must satisfy investor operational due diligence and regulatory requirements. These pressures create an ongoing balancing act, particularly for small- to mid-sized funds that lack the operational scale of larger asset managers.
Enter the strategic lift-out: a transformative approach to fund administration that blends operational outsourcing with seamless integration. Through a lift-out, fund managers can delegate non-core activities to a specialized partner while preserving institutional knowledge, achieving operational efficiency, and maintaining control. Unlike traditional outsourcing, lift-outs are collaborative, flexible, and designed for long-term growth. Let’s explore the nuances of the strategic lift-out model, its role in scaling fund operations, and how co-sourcing enables investment funds to thrive in an increasingly complex environment.
The Lift-Out as a Growth Enabler
Operational excellence is no longer optional for fund managers—it is a key differentiator in the competitive alternative investment management industry. Yet many fund managers, especially those overseeing smaller funds, lack the resources to optimize their middle and back-office operations.
Why Traditional Outsourcing Falls Short
- Loss of Control: Outsourcing entire functions can create a disconnect between operations and strategy.
- Knowledge Gaps: External providers may lack context or deep familiarity with the fund’s processes.
- Inflexibility: Outsourcing agreements often lack the adaptability required in dynamic investment environments.
The lift-out model addresses these shortcomings by transferring operational functions and teams to a trusted co-sourcing partner while maintaining integration and continuity. This ensures fund managers retain control and institutional knowledge while benefiting from enhanced capabilities.
Benefits of a Strategic Lift-Out
At its core, a lift-out is the transition of non-core operations—such as accounting, reporting, compliance, and investor servicing—from an internal team to a specialized external provider. The distinguishing feature of the lift-out model is its collaborative nature: existing teams often move to the partner organization, ensuring a seamless transfer of knowledge, processes, and systems.
Unique Benefits of the Lift-Out Model
- Continuity: Unlike traditional outsourcing, lift-outs preserve legacy systems and processes while integrating with the partner’s expertise.
- Scalability: Lift-outs allow fund managers to access a broader pool of resources, ensuring operational capacity grows alongside the fund.
- Cost Efficiency: Economies of scale and streamlined processes deliver significant savings without compromising quality.
- Staff Empowerment: Employees benefit from career development opportunities within the partner organization, increasing morale and reducing turnover.
Lift-outs are particularly valuable for funds undergoing rapid growth or those seeking to focus internal resources on higher-value activities like deal origination or portfolio management.
How Co-Sourcing Enhances the Lift-Out
Co-sourcing is the backbone of a successful lift-out. Unlike pure outsourcing, co-sourcing fosters a collaborative relationship between the fund manager and the service provider, ensuring alignment of goals and priorities.
Key Elements of Co-Sourcing in a Lift-Out
- Integrated Teams: Co-sourcing maintains close collaboration between internal staff and the partner, ensuring continuity in day-to-day operations.
- Customized Solutions: Each lift-out is tailored to the fund’s unique needs, rather than offering a one-size-fits-all approach.
- Technology-Driven Efficiency: Co-sourcing partners bring advanced platforms to enhance reporting, data analytics, and compliance tracking.
- Strategic Alignment: By integrating operational expertise with the fund’s vision, co-sourcing supports long-term growth objectives.
E78’s co-sourcing approach ensures that lift-outs not only address immediate operational efficiency but can increase investor confidence.
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Strategic Lift-Out Enhancements
1. Operational Resilience
Fund managers face constant challenges, from unexpected regulatory changes to economic uncertainties. Lift-outs enhance resilience by ensuring back-office functions are supported by a team of experts with access to cutting-edge tools and scalable resources.
2. Talent Development and Retention
Back-office staff often feel undervalued in traditional fund structures. Lift-outs provide these employees with growth opportunities in a professional services environment, boosting engagement and reducing turnover.
3. Enhanced Reporting and Transparency
In an era of increased investor scrutiny, lift-outs enable funds to deliver higher-quality reporting, supported by data automation and compliance expertise. This builds investor trust and demonstrates a commitment to operational excellence.
4. Focus on Strategic Goals
Delegating operational tasks to a trusted partner allows fund managers to concentrate on investment strategies, portfolio growth, and fostering relationships with investors.
5. Cost-Effective Scalability
For funds anticipating growth, lift-outs provide a scalable solution without requiring significant upfront investments in staff or technology.
Building Investor Confidence Through Lift-Outs
Today’s investors expect more than strong returns—they demand operational rigor, transparency, and resilience. A strategic lift-out enables fund managers to meet these expectations by:
- Delivering Real-Time Insights: Advanced reporting tools ensure investors have access to timely and accurate data.
- Demonstrating Stability: The lift-out model mitigates risks associated with operational disruptions or staff turnover.
- Attracting and Retaining Top Talent: Transitioning back-office teams to a professional services environment allows employees to access greater career development opportunities, reducing turnover and ensuring continuity in fund administration.
Lift-outs not only enhance operational efficiency but also reinforce the trust that underpins successful investor relationships.
The Future of Fund Operations
As the alternative investment industry continues to evolve, fund managers must adapt their operational models to keep pace with growth and innovation. The lift-out model represents a forward-thinking solution that blends flexibility, scalability, and expertise. Research shows a growing preference among private equity firms for co-sourced solutions to improve efficiency and transparency. By adopting the lift-out model, funds can overcome operational constraints while positioning themselves for long-term success.
Taking the Next Step
The strategic lift-out is more than an operational adjustment—it’s a pathway to growth, resilience, and excellence. By choosing the right partner, fund managers can unlock value across their operations while maintaining control and focus on their strategic objectives.
We are committed to delivering tailored lift-out solutions that empower fund managers to achieve their goals. With a track record of helping funds manage $85 billion+ in assets and expertise across diverse asset classes, we are uniquely positioned to support your success.
To learn more about how a strategic lift-out can transform your fund operations, visit E78 Fund Solutions.
