Fund administration is an important aspect of the alternative investment industry, as it involves the ongoing management and support of investment funds. This can include a wide range of activities such as accounting, reporting, compliance and risk management. Efficient fund administration is essential for ensuring the smooth operation of investment funds and for maintaining the trust of investors.
One way that fund administration improves efficiency and effectiveness for fund sponsors is through the use of straight-through processing (STP). By digitizing the new investment and transfer lifecycle and reducing the reliance on manual processes, STP helps fund administration streamline client fund operations and accelerate new capital into the fund. This is particularly valuable in the competitive and highly regulated world of alternative investments, where timely and accurate processing is at a premium. Additionally, the use of STP helps fund administration to improve compliance with regulatory requirements and industry standards on behalf of clients, as it provides a more transparent and controlled environment for the processing of transactions. Overall, the use of STP is an important part of a fund administration firm’s toolkit for improving operational efficiency and minimizing risk for clients.
What is Straight-Through Processing?
Simply put, straight-through processing (STP) refers to the digitizing of the new investment lifecycle, from subscription to execution to settlement. The goal of STP is to streamline the transmission of new investment data from the financial advisor to the fund administration system of the fund, minimizing manual intervention and errors, reducing operational costs, simplifying compliance and increasing efficiency in the processing for private equity, venture capital and private real estate funds.
The Paper Subscription Document
The traditional process of investing in alternatives centered on physical subscription documents that were mailed to the fund administration team. Extensive paper documents were filled out by the investor with their financial advisor. Subscription documents tended to be long and detailed with many specific required fields, a frustrating process for the investor. The subscription package would be mailed, messengered or FedExed to the fund sponsor’s back-office or fund administration provider. There the data would have to be transcribed into an electronic fund administration system for ongoing back-office processes to be possible. Only at this point would errors in the completion of the documents be evident. A subscription document with errors was declared ‘not in good order’ (NIGO).
The Challenge for Fund Administration
The fund administration team would have to pursue corrections to the errors with the financial advisor, the custodian (if applicable), the investor or whoever was the source of the mistaken or missing information. Then, these errors having been corrected, the potential existed for additional errors occurring in the process of transcribing the data into the fund administration system. These errors may not have become apparent until noticed by an investor in a statement or on a web portal or until errors had an effect on a fund administration process: distributions, transfers or tax documents. Reference to the original documents would always need to be possible. Subscription documents were scanned and preserved for audit and reference purposes by the fund administration team and even the original physical documents had to be archived.
The Straight-Through Processing Revolution
STP involves the subscription data being entered digitally from the outset and all subsequent transmission of investment-related information among all relevant parties, the financial advisor, the fund sponsor, the custodian bank and the fund administration provider, being electronic. This allows for the rapid and accurate processing of trades, accelerated admission into the fund and expedited commission payments. The investor enters the necessary subscription data digitally via an online portal (provided by an STP provider). Controls prevent entry errors and omissions. The investor signs via electronic signature. The all-digital subscription is then transmitted electronically as needed to the custodian, the financial advisor back office, the fund sponsor or the fund administration firm and is entered automatically into the target fund’s investor registry through pre-mapped fields. This requires a pre-existing integration between the STP technology and the fund administration system of record. The speed of processing admittance into the fund is dramatically increased and the potential for error is all but eliminated. Fundraising and fund administration are greatly streamlined.
Straight-Through Processing streamlines data flow among all the participants
in private fund transactions and simplifies fund administration.
The Benefits to Sponsors and Their Fund Administration Firms
By digitizing and automating the new investment lifecycle, STP reduces the risk of errors and discrepancies in data entry by both the investor and the fund administration team, improves the accuracy and timeliness of reporting and provides greater transparency and control over the investment process. It is an important tool for fund administration firms to streamline the operation of alternative investment funds, improving their fundraising efficiency and enhancing their overall effectiveness.
Fund administration providers that offer system integrations with STP providers help alternative investment funds to comply with regulatory requirements and industry standards. Many regulatory bodies require firms to have robust risk management and compliance systems in place, including the ability to track and report on trades in a timely and accurate manner. By digitizing the trade lifecycle through STP, fund sponsors and fund administration firms more easily meet these requirements and demonstrate their compliance with regulatory standards.
STP is a valuable tool for alternative investment firms and fund administration providers looking to improve their operational efficiency, reduce risk, meet regulatory requirements and provide a more modern investor experience. Fund administration providers committed to the success and efficiency of their clients should have system integrations with STP systems.