The trend toward outsourcing fund administration to a third party is growing across all asset classes and fund strategies. Rising investor expectations and regulatory requirements are driving much of this although there are distinct advantage to a fund administration partner. The advantages are even more dramatic for debt funds.
More and more debt fund sponsors are discovering the efficiencies of outsourcing fund administration because of the complex back-office tasks that debt funds involve. A fund administration partner enables them to scale more quickly, seize opportunities more nimbly and benefit from valuable advice on operational best practices. Third-party fund administration removed the distraction of serving investors, advisors and industry partners at a net savings to the fund sponsor.
Private debt is a growing, crowded and competitive asset class. The advantages of a fund administration partner represent a significant competitive advantage as fund management is free to pursue any variety of investment and fundraising strategies without operational concerns.
The Demands of the Asset Class
Fund managers aware of the many opportunities for debt funds may not be aware that the operational demands of debt make professional fund administration critical in order to take advantage of them. It is not uncommon for fund managers, though they have the expertise to originate and distribute debt investments, to struggle to manage an intricate and labor-intensive debt fund with in-house operational staff lacking the necessary fund administration technology and expertise.
Fund administration pressures are a distraction from the core competency of fund management. The ability to focus on sourcing investors and managing a portfolio of loans while controlling expenses and ensuring professional investor services through outsourced fund administration is invaluable. This efficient division of labor concentrates effective effort that both drives investment returns and preserves essential sources of capital.
Automated workflows in specialized fund administration systems streamline processes saving time, reducing risk and ensure that committed capital is managed efficiently. The right fund administration tools in experienced hands eliminates significant stress on your in-house team at a time when employee retention is a major issue.
Your fund administration partner is able to process new investments and maintain your investor database in specialized systems designed to streamline investor relations functions – reason enough to partner with a fund administration partner. The capacity to manage complex assets is another.
Leveraging the capabilities of a fund administration partner, managers are able to expand their investment horizon into various and more complex loan types: convertible loans, syndicated loans, revolvers, delayed-draw instruments and emerging sophisticated debt structures without concern for the administrative demands of the portfolio. The capacity to diversify without operational concern is a valuable benefit of partnering with an experienced fund administration firm.
Investors are focused on investment returns, of course. But the fund administration team’s ability to execute on communication, payments, tax documents, information on fund performance and important notifications is critical to the investor experience and the reputation of the fund sponsor in the eyes of investors. This factors significantly in investor decisions on reinvestment. Investors notice and value the simplicity, accuracy and promptness of day-to-day contact from fund management: statements, distribution payments, reliable online access to investment information and documents. Outsourced fund administration offers clarity, consistency and professionalism to the back-office investor-facing processes that leave a reassuring impression in the minds of investors. Many institutional investors and sophisticated high-net-worth individual investors will not invest in a fund lacking professional fund administration considering it an unacceptable operational risk.
In too many cases, debt fund investors do not have the impression that their interests are aligned with those of fund management. Inadequate fund administration gives the dismissive impression to investors of being taken for granted. Investors site transparency at the fund level as an important area where alignment with fund management might be improved. An advanced fund administration partner with integrated systems and proven processes designed for debt funds preserves and enhances fund management’s reputation among investors and simplifies transparency. Issues with investor communication and consistency of service only compound as a fund succeeds, portfolios grow and investor count rises. Professional fund administration from the outset of the fund assures a smooth investor experience and the ability to scale on all fronts without operational issues.
The fund administration partner for the modern debt fund has a capacity for specialization, customization and reporting that streamlines process and controls costs while prioritizing investors and eliminating disruption to the core mission of fund management. Investor reporting is one of the key advantages private funds can derive from outsource fund administration. Advanced systems now available take fund administration to the next level in serving all the participants in the life of an alternative debt fund.
We will discuss the advances in fund administration systems in Part 2 of Fund Administration for Debt Funds.