The following document is an approximate, but not exact, transcript of the Operational Leaders podcast conversation between host Terrance J. O’Malley and guest Brian Shanly.

Please support the production of this podcast by downloading the Brian Shanly episode.

Narrator  0:00

Welcome to the Operational Leaders podcast featuring leaders and innovators in the investment management industry, where we discuss the business of running the business with host and top industry executive Terrance J. O’Malley.

Terrance O’Malley  0:30

This week’s guest is a founding partner of 2912 Advisors, a consulting firm offering investment managers a broad range of advisory services, including a suite of middle and back office functions.  He previously spent over a decade at Perry Capital where he served in a variety of roles, including co-CFO, CCO, and head of the management company accounting group.  Please welcome Brian Shanly.

Brian Shanly  0:47

Thank you, Tery.

Terrance O’Malley  0:48

Brian. It’s great to have you here today. You’ve focused over the past few years since your time with Perry on outsourcing solutions and you started your own firm 2912 Advisors. Can you introduce us to the firm and tell us a little bit about what you do?

Brian Shanly  1:00

Sure.  So we started 2912 Advisors in July of 2018.  The founding partners had all spun out of Perry Capital. So Perry Capital had announced its wind down in late 2016. Most recently I was the co-CFO there, and my other co-CFO and Lauren Levy, who was most recently the general counsel, we had stayed on for a period of time to help with the wind down. So as the wind down, it’s started progressing, our roles were sort of naturally atrophying. And as we kind of looked around at both the industry space and also just our own functions and how we would need to backfill ourselves and our departments if we lost certain people, we had started taking a look at the outsource industry.  Really, in that sort of confine of how would this help Perry Capital.

And then as we were realizing, looking at different positions in the industry, the industry has been going through, you know, serious changes over the past few years. And the trend was toward outsourcing. We could you know, we had seen this happen with technology, we’d seen it happen with compliance, and we realized this was really the next shoe to drop. So we decided at that point, hey, this could be a viable business for us. Let’s take it to Richard Perry and see if he would be interested in retaining us as a group and paying sort of at that fraction of the cost instead of full-time dedicated employees. But if he needs 50% of us, that’s great. So that was our deal. We took it to Richard. He was certainly in favor of it. And that was it. We were off to the races.

Terrance O’Malley  2:41

And what are your core services now?

Brian Shanly  2:43

So we offer one person called as a hedge fund in a box for a back office. So we are accounting, management company, compliance. We’re not technically legal services but we do have general counsel, so we will interface with lawyers, we interface with all the accountants, so it’s really how you would think of a back office of a hedge fund, we provide that same level of service.

Terrance O’Malley  3:07

Now, what is your model in terms of the level of service?

Brian Shanly  3:11

It’s a good question. That sort of depends on the investment manager and what they require. It’s a wide scope of what people will need. So, you know, we provide services from really everything.  If we have one stand-alone portfolio manager, we do everything besides the investment side. We also have clients that may have a CFO in-house and they may need support in some areas. They may need guidance in other areas if they don’t have that the aptitude or that’s not their background. Some people are finance focused, some are accounting, marketing, and we can kind of supplement, you know, wherever they need that additional help.  But our model is really, you know, we will try and from the outsource side to do as many repeatable tasks as possible to make that operation more efficient for the client.

And also on the consulting side or advisory side. When people need help, they’re launching during the pre-launch, we will get involved we will get them set up with all their infrastructure. If they need an admin, depending on their strategy, we can look at different admins that we have relationships with that we know that is going to be a good match for them. Legal firms, accounting firms, technology firms, trying to help them with a PDO, all the things that an investment manager will need, but may not realize that they need.

Terrance O’Malley  4:39

Where do you see this as part of the big trend? You mentioned you observed outsourcing becoming more prevalent in other areas?

Brian Shanly  4:46

Yeah, I mean, listen, I think [we’ve] probably caught the wave right at the right time. Of all the new launches that, I mean, obviously there’s an economic factor here, right? There’s compression on fees. It’s very difficult to raise capital in this environment. So If you look at all the new capital that is allocated to new managers in a given year, there’s generally, you know, a handful of launches, if that maybe one or two, that suck up a tremendous amount of the capital for new managers. Once you carve those out, the average launch size is somewhere in the $30 million range. At that size AUM, it’s very difficult to really build out the infrastructure you would need. So outsourcing makes a ton of sense for a manager who’s in that $20 to $75 million AUM range where they don’t, they can’t go out and they can’t build up an entire back office. But if they want that sort of institutional, best practice, policies, procedures, and that back office is very important to them. I think that’s where this industry can really have some impact.

Terrance O’Malley  5:51

And we’re talking about this industry. Are you seeing this as a phenomenon that is related to liquid hedge funds, or is this broader across asset classes?

Brian Shanly  6:01

I think it’s cross asset classes. I think certainly, the liquid long/short or long bias strategies lends itself to outsourcing entirely. But we see it across all the different strategies from real estate, private equity, credit funds, structured credit funds. So everyone is now at least evaluating it to determine whether this could make sense and maybe components of it do and components of it don’t. But I think it’s a wide, it’s a wide area.

Terrance O’Malley  6:32

So who’s left in-house if everything’s outsourced?

Brian Shanly  6:36

Honestly, I think our preferred model that we’ve seen is you maybe have – and it depends on scale and AUM – but if you have a sort of dedicated COO or CFO.  Maybe you know someone used the term a navy seal in-house and they’re the quarterback, and they’re not an investment professional, but they’re managing the accountants, they’re managing the outsourced accountants. They can manage the outsource compliance. And maybe they’re the CCO. So they’re kind of the shepherd minding all the various components.

Terrance O’Malley  7:10

What’s been the LP reaction to this outsourced model?

Brian Shanly  7:13

I think it is, again, it’s, it’s in a continuum, right? So from a year ago to two years ago to now It keeps migrating a certain way where I think people are becoming more and more comfortable with it. As it progresses, and as it, you know, becomes more of a everyday occurrence. I think allocators, [prime brokers], everyone is getting a little bit more comfortable with the concept. And I think, you know, that’s hopefully, part of what we’re trying to do too, is kind of change that conversation that this isn’t a normal outsource function where I don’t see these people. I don’t talk to these people.

You know, we’ve had clients who have said it felt like you were in the room with us when you launched our funds. So I think our background as being internal at a very large hedge fund, it’s very hard to sort of turn that off for us. So that’s just our “M.O.”, how we will operate with clients. So I think that changes the dynamic of outsourcing. We even talked about what what’s a better term for outsourcing. Because it’s really not what we are. It’s really just an external back office.

Terrance O’Malley  8:19

Do you think there is a limit to the number of clients that a firm can take on?

Brian Shanly  8:25

Yeah, I think it depends again, on their size and what they are. So

Terrance O’Malley  8:30

When you say “they,” you mean?

Brian Shanly  8:31

Yeah, the client. So the clients, our clients, you know, they may require either bespoke services or a full suite of services. So if you’re offering a full suite, you’re going to at some point have capacity issues. We have grown, you know, we have tried to have measured growth. But because of the interest in it, its actually really interesting to see how many managers are interested in this. We’ve done no external marketing. We get a lot of inbound inquiries just by word of mouth, just by relationships with PBs. But everyone is sort of interested in this space. They want to evaluate it and then at some point, you will have capacity issues of “Okay, how many depending on if it’s just your normal outsourced accounting, fund accounting, shadow, NAV reconciliation,” how many clients can each accountant or controller that we have handle. And trying to figure out what’s that right mix and staffing it accordingly.

Terrance O’Malley  9:35

And talk a little bit about the role of technology and how that fits in with outsourcing.

Brian Shanly  9:40

From the sort of fundamental concept of outsourcing you are trying to take a repeatable task or process and have someone just repeat that, right. So whether you’re creating widgets, or creating a monthly NAV, you know, you want to make that as efficient and uniform as possible, each time. So that will help, certainly the client in terms of what the product they’re getting, and it helps an outsourcing firm be more efficient, profitable and easier to review and mitigate the risk of errors. Technology is driving that. I mean, I don’t think if technology hadn’t been where it is today, this industry probably doesn’t even exist. So you know, it’s much different from 13 years ago when I was in the back office, and everything we did was in Excel. And it was a different iteration of everything we did. And, you know, that’s still, you still have portfolio managers who will operate in that manner. And that personality may not lend itself to having an outsource back office, they just need someone who’s at arm’s length, because every time you hand them something, there’s going to be four different versions of it that are produced next. But I think it’s probably the younger generation looking at different technology to just say:  “Listen, I know what I need, just give it to me. Every morning. That’s it.” So technology really lends itself to that. And it’s driving the whole bus.

Terrance O’Malley  11:08

So the outsourcing trend, is it a stop on the way to something else? Is it here to stay? Or we might look back and say, “you know, that was an interim step to something else?”

Brian Shanly  11:20

I think it’s here to stay. I mean, I think if you look at every industry, regardless of you know, whether it’s alternatives, financial services. I remember they used to do like the average revenue per headcount. And that metric has become not even relevant anymore in certain industries because everything has been outsourced. So I definitely think it’s here to stay. I think it’s going to change a lot, just like everything continues to change. There will be transformations. You know, one of the things that I think is always a concern is who makes a big mistake, right? And does something either untoward or whatever that will have ramifications throughout the entire industry. You’ll also have episodes like that that will probably create change within the industry. But I definitely think it’s here to stay. I think we’re in early stages of it of what it actually looks like, and how it gets adopted and what the best practices are. But certainly here to stay.

Terrance O’Malley  12:22

So Brian, let’s talk about talent a little bit. Where are the future roles for people coming up in this business? What should they be thinking about in terms of their own long-term careers?

Brian Shanly  12:32

That’s an interesting question. So I think, you know, the, the model that we’ve tried to adapt is really creating the next generation of CFOs. So, you know, I was at a firm where I watched it change over time, and I was part of that, but where, early on in my career, the, you know, you touched every different component. So you were much more of a generalist. You weren’t siloed or segmented. So I had exposure to fund accounting, to management company accounting, to compliance. As we grew, as assets grew, we became much more of an institution. So I think today for a lot of big funds, if you’re a young accountant, you may have a set of responsibilities, that is repeatable, you’re doing the exact same thing every single day, you might not be getting that cross training with other segments of the business. I think that’s the most important thing for being a CFO and being able to cut through and understand what the issues are, how to attack the issues and who needs to be involved in the issues. So if you haven’t had exposure to either the management company side of the business and how does this whole business look from 30,000 feet, or if you know, you’re only reviewing trade breaks, there’s a lot there that you really need to understand. And I think that’s difficult in larger firms that have much more process-oriented institutional back office to really move up and progress in those ranks.

Terrance O’Malley  14:07

How do you stay current? And what advice would you give to people to sort of maintain what’s going on in this business at a very fast pace in some segments of it?

Brian Shanly  14:17

Staying current is honestly some advice that I remember you giving, which was going out and meeting people and expanding your network. 15 years ago, I think the industry was very insulated and didn’t want to talk to other people. It was secretive. No one wanted to really go out there and network. And I think that has changed a lot. So going out creating that network speaking to other people speaking to your peers, developing a network that’s really outside of what you do as well. So compliance, that’s obviously a very hot topic, technology. These are things that probably 10 years ago, I didn’t really have even a small grasp on. And now it is prevalent in everything that’s going on in the industry. So I think expanding that network, expanding your comfort area, and understanding how those things are really going to impact what you do. I think that’s how you stay current. And that’s how you kind of build your, your brand and your reputation.

Terrance O’Malley  15:21

Any last thoughts about the industry you see going forward?

Brian Shanly  15:24

You know, I think you’re still going to have a lot of the fee compression. The institutional investors that are out there today are much, much smarter than you know, they were 20 years ago. So they really drive change. They drive transparency. And I think they’ve made the investment managers, probably better investment managers as well, because you’re now thinking about all these things of technology, compliance, all the things that are important to your investors need to be important to your business. I think it’s still going to be difficult to raise capital. I think it is difficult to probably attract talent within the firm’s, especially the smaller level. So I think you’ve seen we’ve seen a number of these old lion sort of firms start to hang up their shingle is because it’s just difficult in this investment environment as well. So I think you’re going to see prolonged transformational change, and it’ll be interesting to see where it shakes out.

Terrance O’Malley  16:26

Alright. Well, thanks for joining us. If people want to know more about 2912 Advisors, where can they find you?

Brian Shanly  16:31

Go to our website, and we have an info button and send us an email and someone will get back to you.

Terrance O’Malley  16:38

Thanks for joining us today.

Brian Shanly  16:39

Thank you, Tery. Appreciate it.