Fund Accounting and Capital Activities
Your investment fund's capital is its lifeblood. The expertise you bring to investment management is your ability to raise and deploy cash. The key role of a fund accounting provider is to account for your capital flow, manage its movements, and report on it with accuracy, clarity, and compliance.
Your investment fund’s capital is its lifeblood. The expertise you bring to investment management is your ability to raise and deploy cash. The key role of a fund accounting provider is to account for your capital flow, manage its movements, and report on it with accuracy, clarity, and compliance. At the commencement of working with your fund accounting provider, explain how your fund will operate in terms of capital flow in-depth with fund accounting. Errors, misunderstandings, and audit queries can waste time and money if you don’t set up a consistent process with fund accounting that matches how you do business. It will also streamline and automate a number of critical activities that would otherwise be time and money-consuming.
Contributions of Capital
The first consideration for fund accounting is the capital contributions to the fund. For distributions, capital calls, and audit purposes, how capital enters the fund and how it is tracked will be critical. If the fund has several share classes, general and limited partners, multiple dividend rates, or heritage investors, all of this must be coded and tracked by fund accounting from the beginning in order to ensure appropriate payments and financial reporting. Fund accounting will have to understand every moving part of the fund’s structure. Is it necessary to keep track of previous activities in order to account for break points and thresholds? Will investors be issued warrants, and if so, how will they be tracked? Is it possible to make in-kind contributions? If that’s the case, how will fund accounting distribute any excess value? Is the investment going to be treated any differently? Will the general partner invest the fund’s carried interest? Could the manager be compensated with stock instead of cash for advising, management, or other services? Is there a different set of distribution terms fund accounting should be aware of for different types of investors, or for all investors with a particular custodian? Are there any side letters? What contingencies are in place in the event of future deaths, divorces, or other upheavals among investors? All of these issues, of course, must be permitted by the operating agreement or LPA, which should specify how each should be handled by fund accounting. Only if they are considered and adequately encoded by the fund accounting team during setup will they be operationally successful.
A number of critical decisions about capital calls must also be made at the outset so that fund accounting can execute effectively. First, there’s the capital call’s content. To avoid misunderstanding and unneeded queries, think about how much and what sort of information to have fund accounting include in your capital calls ahead of time.
Capital Requirements
A number of critical decisions about capital calls must also be made at the outset so that fund accounting can execute effectively. First, there’s the capital call’s content. To avoid misunderstanding and unneeded queries, think about how much and what sort of information to have fund accounting include in your capital calls ahead of time. What level of information do you want your capital calls to have? How much information is too much information? Should banking and contact information be required? Will the pro-rata share of the fund owned by the investor be mentioned? Will your capital call specify which investment the called capital will be used for? You can be as specific or unspecific as you want with a capital call. There is such a thing as too much information. These are decisions to be made by management and fund accounting in advance of set up. There is no standard that fund accounting will apply automatically.
When it comes to capital calls, the tracking you and fund accounting put in place when you set up the fund will be crucial. Is there a set of rules for investors who have made a specific amount of money? Are there any monetary restrictions? Percentage limits, opt-outs, and prohibitions on derivatives, credit default swaps, and commingled funds may apply to ERISA investors. They will be unable to engage in some investments and will be automatically deleted from the capital call if fund accounting performs sufficient tracking Institutional funds may be barred from participating in a capital call due to percentage limits and exclusions. The more these specific provisions are understood by fund accounting and encoded during setup, the easier it will be to make capital calls.
In terms of how much information to present, capital statements involve the same concerns as capital calls for fund accounting. How much information does the investor require? Too much information will simply lead to further confusion and time-consuming questions? If you have institutional investors, this becomes even more of a problem for some fund accounting firms. – The Institutional Limited Partner Association (ILPA) is a trade group that includes pension funds, endowments, and most significant foundations.
Statements
In terms of how much information to present, capital statements involve the same concerns as capital calls for fund accounting. How much information does the investor require? Too much information will simply lead to further confusion and time-consuming questions? If you have institutional investors, this becomes even more of a problem for some fund accounting firms. – The Institutional Limited Partner Association (ILPA) is a trade group that includes pension funds, endowments, and most significant foundations. Because institutions demand the utmost in transparency and due diligence for their stakeholders, ILPA advises its members to demand financial reporting from the fund accounting of their portfolio funds that adheres to the ILPA Reporting Template. This is a large, comprehensive reporting package, beyond the capabilities of many fund accounting providers, that includes granular information on portfolio performance, compensation rates, expenses, depreciation, and every other line item and metric of the fund, as well as detailed reporting on the fund’s adherence to any and all portfolio investment limitations to which the institutional is subject.
Even for fund accounting providers who are capable of producing it, creating ILPA template reporting is system-intensive and time-consuming. Many fund accounting providers’ computing capabilities (and server capacity) are insufficient for the task. The ILPA template, of course, contains far more information than you would want to convey to a non-institutional investor. For fund accounting to produce the ILPA template for every investor would be incredibly expensive, and it would simply serve to confuse and overwhelm ordinary investors who are focused solely on the bottom line. If you want to attract institutional investors, you’ll need a fund accounting provider that is familiar with and capable of producing the ILPA template for institutional investors, as well as a separate statement format for the rest of your investors at an affordable price.
The physical layout of your investor statements is another important factor to discuss with fund accounting. Your financial statements serve as a constant reminder to your investors of your brand’s strength and durability. You should know ahead of time that statements produced by fund accounting will be printed on high-quality paper, in an intuitive format that is easy to read and understand, and custom branded for your fund, so investors can see and feel that you have taken the same care in preparing your statements as you have with every other aspect of fund management. The overall image and impression of your investment product in the eyes of your investors is part of the fund accounting roll and should be an essential element in the process of setting up your fund with your fund accounting provider.
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