Multi-Family Office Outsourcing- Challenges and Solutions
Introduction
Multi-Family Offices are specialist wealth managers who invest on behalf of their clients that are usually family offices. Due to multiple macro changes in the global economy, the pandemic, in particular, now MFOs are toying with the idea of outsourcing. Multi-Family Office Outsourcing for Operations in itself is an area that is still evolving. The scope of outsourcing is being broadened after the pandemic to save costs and improve the operational quality and reliability
In the article, we talk about the scope of outsourcing possible, without bringing down the quality of your engagement with your clients. We will also talk about the risks of the outsourcing process and how Magistral takes care of it.
Multi-Family Office Outsourcing- What could be outsourced?
There is nothing like “safe” or “unsafe” outsourcing. The scope of outsourcing depends on the capability of the vendor, repeatability, and replicability of the client processes, and the relationship and trust between the vendor and the client. Trust-building is a slow process with incremental value addition from vendors with reliable performance over a while.
Type of jobs that could be outsourced by MFOs
Still, the things that could be outsourced to different extents are following:
Investment Analysis
A major part of the Investment Analysis that is done by Multi-Family Offices could potentially be outsourced. Major ones being:
1. Fund Analysis: If you are investing in a hedge fund specifically long-short equity, that requires regular evaluation, then outsourcing may present a viable opportunity. The experienced vendor has set templates to benchmark a fund with global indices and coming up with all the performance indicators related to Risk, Volatility, Returns, Sharpe Ratio, Sortino Ratio, and a host of other commonly used indicators for the fund evaluation
2. Direct Investments: MFOs do invest directly in companies that they are convinced have a promising future. In this case, outsourcing could help you with Financial Modelling, Due Diligence, and preparation of Investment Memorandums and Pitch Deck
3. Financial Modelling: Financial Modelling, not only related to valuations of the companies that an MFO wants to invest in, but also Real Estate, Sum of Parts Analysis, M&A Analysis, Comps, and several other models are templatized with the vendor and since its being done for other clients too, it could be produced efficiently in terms of costs and time and with reliable quality
4. Private Equity and VC Funds’ Due Diligence: Magistral evaluates multiple PE and VC funds for investments by Single or Multi-Family Offices. We look for the track record of Founders and Partners, their portfolio, unicorns, exits, industry focus, geographic focus, and the reliability of expected returns that the funds promise
5. Fundamental Analysis of Stocks: Equity Analysis is a standard feature that many outsourcing vendors offer. It is analyzing the stocks’ capability to generate positive returns in the future
6. Crypto and Crypto-based Funds: Crypto has grown at an outstanding pace. FOMO is leading to all Family Offices adding this to their portfolio either as direct investments or in the form of a crypto-based fund. Magistral provides the financial model and due diligence for specialized investments like Cryptocurrencies and blockchain-based products and companies
7. Real Estate: Magistral also supports Family offices that specialize in Real Estate investments through services like valuations, comps, tracking and analyzing ETFs, preparing Pitch Decks and PPMs.
Investment Analysis for each client is unique and sometimes complicated. Magistral has helped 30+ family offices in outsourcing their investment analysis process and is well versed with all the operational areas that could be effectively outsourced.
Marketing and Investor Relations
The marketing and Investor Relations processes at multifamily offices are usually repeatable and templatized. These processes along with the research that goes into them, are obvious candidates for outsourcing. The following activities could potentially be outsourced without much loss in terms of quality or time and make for ideal candidates of Multi-Family Outsourcing candidates
1. Newsletters: Newsletters are a common occurrence in the Marketing functions of Multi-Family Offices. These are usually outsourced anyway if they are not too niche or specific
2. Reports: Industry Reports, Geography Reports, or other PoV materials that are prepared in marketing to further the investment thesis and differentiation is better done outsourced
3. MIS: MISs for internal stakeholders and investors are outsourced. These are usually delivered in Excel with or without Macros, PowerPoint, PDFs, and word. Sometimes data is pulled from specific databases like Pitchbook or tools like Addepar to prepare these reports
4. CRM: Management of the whole CRM systems for leads updation, investor reach out and content development is something that is better done outsourced
5. Research: Research is required to fine-tune the investments’ pitch and to prepare the reports. If reports need to carry a knack that’s very specific to a firm and can’t be outsourced, the research for the same is the next viable candidate
6. Portfolio Reporting: Portfolio and its valuations are reported sometimes as frequently as weekly and most of the time monthly. The whole process of preparing the valuation for different instruments in the portfolio like Hedge Funds, Direct Investments, PE and VC Funds, Real Estate, and other specialized investments is first understood by an experienced vendor and then gradually shifted offshore.
Operations
What comprises operations is different for different firms. Mostly lots of data-heavy lifting related to portfolio forms the bulk of operations. Depending on how it is defined, there are multiple activities that could be outsourced. In the Multi-Family office outsourcing scheme of things, these activities take the most time to outsource effectively
These are:
1. Data Collection and Automation: In a heavily invested Multi-Family Office, data is flowing related to multiple direct and fund-based investments. This data needs to be captured and analyzed. Sometimes there are specific strategic initiatives that are proprietary and need data analytics and research like coming up with future successful investments by analyzing the past ones. These initiatives have a good potential for outsourcing. In the past, Magistral has helped its clients automate the data collection process, preparation of reports, and data visualization on tools like Power BI and Tableau
2. Data Updation: Depending on the platform that a firm uses for capturing the data, the data needs to be collected and recorded for analysis and reporting. Sometimes it’s automated tools like Addepar and sometimes it’s just a host of excel sheets talking or not talking to each other. Irrespective of the platform, data needs updation regularly and that is something better outsourced for cost and time efficiencies
3. Data Analysis: Putting all the data collected or recorded through formulas and making sense out of it is the analysis part. Analysis shows whether an investment is right and whether the portfolio is on the expected track to make returns. Data analysis depending on whether there are set templates and their repeatability could be easily outsourced.
Risks associated with outsourcing
Everything is not hunky-dory when it comes to outsourcing MFO operations. There are multiple risks that clients face while outsourcing. These are:
1. Not enough savings: Global firms that offer outsourcing at scale are more reliable than small or medium-sized outsourcing players, but their price quotations come very close to the onsite hiring and there are not enough savings to warrant the risk.
2. Attrition in the FTE model: Most outsourcing companies operate on an FTE-based model, where you hire offshore a virtual employee to save costs. The client puts in time and efforts to train a particular resource, just to realize that the employee decides to leave to pursue a career elsewhere, taking with him months of efforts
3. Lack of skills: There are many outsourcing vendors out there in the market but there are very few who understand the multifamily office business and its challenges. It will be difficult to scale your outsourcing with such vendors
4. Operations disruption: While outsourcing, if the whole step backfires, there may be irreparable damage to the operational continuity and the firm’s reputation.
Magistral counters all these risks with its well-laid out Multi-family office outsourcing process with proper checks and balances. This process has been tested out with more than 30 Single and Multi-Family Offices across the globe.
Magistral’s Proprietary Process of Multi-Family Office Outsourcing
Multi-Family Office Outsourcing at Magistral is a 4 step process that minimizes the vendor performance risk for the clients. Here are the details
Magistral’s Outsourcing Process counters all the traditional drawbacks of outsourcing
Pilot process
Before deciding on whether the whole process needs to move offshore, the client starts with a small pilot project. We are also not in a hurry to push the big-ticket purchase, it’s because we are confident that clients will eventually find value in our performance and stick with us. So a Pilot project starts, quotes of which are very competitive as it’s quoted on “No profit-No loss” basis by us. The client gives us a small project and tests the various aspects of offshoring firsthand. These aspects are quality, communication, engagement, connection, technical expertise, billing, and other softer aspects of the engagement.
Proposal and Engagement Model
Once the pilot is successful, the client journey moves to decide on the overall broad contours of the engagement. Magistral submits a proposal with commercials, project plans, CVs of resources, the scope of work, methodology, etc. Once that gets signed the wheels finally start to roll. The engagement models offered by Magistral suit multi-billion dollar asset managers as much as it does to a one partner company.
Standard Operating Procedure
Magistral after the signing of Proposal or Letter of Intent gets down to the knowledge transfer process. It comprises detailed interviews with client stakeholders. All the information received from clients’ stakeholders is put in a standard document called SOP. SOP is helpful while training a new team. It’s equally helpful while a team member leaves and a new one joins for a quick knowledge transfer. It is updated regularly and is the bible of all the operational details and know-how.
Knowledge Transfer, Project Stabilization and SLA Reporting
Once the project goes live, it doesn’t do so in a big bang, all once at a time way. Workstreams are offshored gradually. Easier, repeatable processes are offshored first, before the complicated ones requiring complicated decision making. Once the team is stable, we start reporting MIS that carries our Service Level Agreements compliance. A few examples of our SLAs, 100% adherence to the promised timelines, more than 95% availability of the analysts, and several others depending on the scope of the project.
Magistral is a specialist when it comes to Multi-Family Office outsourcing, across the globe in outsourcing various aspects of their operations. Its costs are competitive as it’s small enough not to have overheads that don’t add any value to clients and still big enough to have the capability of servicing a global MFO well. To schedule a conversation with a Magistral representative drop in a line here
About Magistral
Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research
For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact
About the Author
The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.