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When Should PE Firms Outsource Research?

According to a 2017 study from Preqin, the growth of alternative assets is providing capital service providers with a staggering amount of new opportunities. As new markets appear, asset classes are evolving and fundraising activities and deal flow are increasing. This aggressive landscape is forcing fund managers to spend more time sourcing and procuring investments, tasks they used to handle in-house.

To keep pace, PE firms are having to alter some of the ways they operate. They’re realizing they don’t have the hours or expertise to keep everything in-house. They’ve already been outsourcing accounting and legal services, but today many are taking it a step further by outsourcing research.

Why outsource research? The short answer is that it can get done better, faster and for a lot less money.

Deal teams generally have a set of skills for which they are highly qualified and salaried. Making them juggle too many in-house tasks — the consequence of which is inefficient deal evaluation and slower, less informed decision-making — is far riskier than outsourcing to a third-party partner who has the right compliance measures in place. PE needs to be focused and deliberate in their actions, which means they need to determine where to delegate parts of their operations to specialists. To determine where to outsource, firms should measure waste in their operations process.  

Given the fast pace of the competitive M&A landscape, deal teams are already under pressure to complete deals faster. Over the past few years, deal activity has continued to fall while dry powder has accumulated, which has further exacerbated the situation. On top of that, limited partners want their external managers to use capital quickly, so deals are being made that wouldn’t otherwise happen.  

To ensure they’re not left behind, PE firms are realizing the benefit of outsourcing. They’re learning that keeping everything in-house can exhaust resources and waste critical hours and budgets. In many instances, firms are outsourcing more and more research. Whatever stage of research the deal team is in, they should tightly integrate qualitative research into their process. The PE firm should develop a point of view and then outsource to specialists who can validate and help steer their investment approach.

When selecting a research partner, the first question a PE firm should ask is whether or not the firm can deliver on their promise.

  • Is the research partner capable of acquiring expert insights to help you make confident business decisions?
  • Do they hold itself accountable to the same standards the PE shop holds its deal team?
  • Are they willing to to work with the same persistence and dedication as the actual investment team?
  • Are their partnerships characterized by open communication and proactive interactions?

Firms want to find a partner that can deliver consistently and that they’ll be able to stick with long term.

The same Preqin study found that in 2016, a fifth of private capital fund managers changed at least one of their service providers. The main reason they switched was the quality of service offered. Here are the percentages of fund managers who changed providers and the primary reasons they switched:

  •      33% - Dissatisfaction with the quality of service
  •      31% - Cost
  •      31% - Increased portfolio complexity
  •      25% - To cope with regulation
  •      19% - Change in fund strategy

Knowing the pitfalls, firms should determine how transparent the research partner is in metrics and reporting. Sharing performance metrics provides PE firms with the transparency that helps them judge performance. It gives the PE client the ability to communicate openly if quality ever slips.

At Apex leaders, we believe research partners should have a clearly defined, scalable process for mapping advisors that fit each angle of PE’s diligence — as well as a designated process for measuring client satisfaction. As such, we provide a dashboard that shows how clients and advisors rate our services. By selecting a firm with similar processes and commitment to service, your chances for a superb experience is higher.

Learn more about Apex Leaders' service offerings here or give us a call. We'd love to help your firm make the most of limited resources. Our specialty is building custom advisory teams of former CEOs and industry leaders matched to the specific angles of your diligence.

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Apex Leaders saved us from making a poor investment. We now use them on almost every transaction we get under LOI.
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Ancor Capital
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VP Global Marketing, Flow International