The Importance of Experience in Fund Accounting


Because no two private equity funds are exactly alike, private equity funds face special fund accounting issues. It is wise for fund managers to work with a third-party fund accounting provider but the firm they choose is crucial. Your fund accounting partner should have experience adjusting to the unique ways that each client manager may desire to do business in addition to having knowledge of all the structures and operational variations of private equity funds in general.

A Partner That Can Advise You

To consider one example, distribution waterfalls can pose unique difficulties for fund accounting. The distribution of fund proceeds as specified by the waterfall structure is the primary expression of how the GP and LP’s interests are aligned. Waterfalls, though, can be intricate. No matter how complicated your distribution waterfall may be, your fund accounting provider should be able to compute and distribute in accordance with it. Your fund accounting firm should also be able (and willing) to advise you if your waterfall structure is too complicated for investors to understand or for fund accounting to compute, regardless of their processing capacity. When a waterfall structure is too complex, an experienced fund accounting team is aware that it will cost them more billable time to compute and process it than you probably want to spend on each distribution. They will also know from experience that some waterfall structures that appear to confusing, misleading (or self-serving for the manager), irritate and confound investors. Upon setup of your fund, your fund accounting team should be able to give you some insight into potential issues in various crucial operational factors.

Private Equity Funds Diversity

Another challenge for fund accounting firms is the diversity of the funds currently in the market. You should take into account the firm’s history and any potential restrictions on the area of their knowledge when assessing potential fund accounting partners. A fund accounting business frequently develops from a specific fund company or specialized accounting organization. However, there may be little understanding of the nuances of a debt fund, energy fund or infrastructure fund despite substantial familiarity with fund accounting for multifamily real estate. The company might not be accustomed to handling the allocations and fee calculations that your fund will require. Additionally, there may not be much knowledge of different investor classes or regulatory reporting obligations. It is also important to understand the systems a fund accounting company uses and whether they are appropriate for your structure, strategy and asset class. For funds of various configurations, there are specialized and adaptable fund accounting systems. A fund accounting firm might be able to service your fund using Excel spreadsheets but only with significant hourly fees to you because they are not utilizing a system designed specifically for fund accounting.

Expectations of Investors

Ultra-high-net-worth and institutional investors, who are your most significant investors, have stricter reporting requirements than ever before. These investors require thorough quarterly or even monthly reports with etensive capital account statements, and they want them as soon as possible after the end of the reporting period. These investors want customization. They are not happy with the product of ordinary reporting. Institutional investors could demand reporting that follows the template of the Institutional Limited Partner Association (ILPA). Many fund accounting teams are unable to handle the detailed and comprehensive reporting package that is the ILPA reporting template. Depending on the fund accounting systems they are implementing, those who are able to provide it may find the time required to do so to be unacceptably long.

The Role of Technology

Your back-office architecture must be built using specialized and cutting-edge technology platforms that cooperate to make operational tasks simpler and more efficient. The institutional grade back-office that institutions and sophisticated investors need as part of their due diligence requirements is constructed of interconnected fund accounting, transfer agent, web portal, tax reporting and printing systems that are completely integrated and run by professional staff, subject to a SOC 1, Type II process audit and SEC registration as a transfer agent. To make fund management easier, fund accounting and transfer agent solutions should also provide you with a high level of visibility into the state and activity of your fund. The reporting output of advanced systems is designed to meet the requirements of many audiences relevant to your firm, including deal teams, distribution partners, GAAP accounting, auditors, and fund management. Your fund will have a competitive advantage over internally administered funds if you partner with a fund accounting firm that has these system capabilities and the expertise to use them, but your fund accounting partner must have a client-focused orientation to comprehend your needs and create solutions just for you.

Fund Accounting Services are an Important Choice

With the expanding range of fund structures, distribution approaches and industry technology, fund accounting for private equity changes constantly. Outsourced fund accounting and administration is a wise division of labor as an alternative to hiring in-house administrative staff with all the annoyances and hazards that come with hiring, training and managing personnel. Professionalizing the back office reduces key-person risk as well as issues with vacations, sick leave and operational backup while also assuring and better serving investors. Any alternative investment fund would be wise to engage a seasoned, capable and client-focused fund accounting partner.

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