A Reputation for Fund Administration

The dreary but necessary set of back-office processes that make up fund administration are not usually thought of in terms of your reputation as a fund sponsor.


A Reputation for Fund Administration

Normally, the words associated with a sponsor’s fund administration core are hardworking, diligent, timely and compliant. 

But the world of private funds has changed over the last twenty years and so has fund administration. Institutional investors, high-net-worth individuals and regulators have become more alert and aware of the operational risks than ever before. Fund administration is more and more considered a prerequisite for private funds. Even retail investors, with more options than ever in the alternative investment space, are sensitive to failures and missteps on the fund administration side and take them as a sign of a fund sponsor’s general competence.

The accounting, reporting, investor relations and processing duties of fund administration teams are increasingly in the spotlight. Inadequate fund administration, whether performed by an in-house team or by a third-party fund administration provider, carries serious financial, regulatory and reputational risks to fund sponsors. They must protect themselves from operational risk with a deliberate fund administration due diligence process.

Fund administration that can deliver high levels of efficiency, transparency and responsiveness provide a major competitive advantage in terms of risk. At a time when investor capital is difficult to come by fund administration that can effectively carry out its obligations and exceeds investor expectations allows the sponsor to attract more capital.

The most precious assets of an investment firm are its people and its reputation. Fund administration that complements the acumen of the investment and management teams with back-office precision, reliability and responsiveness enhances the reputation of the fund sponsor and contributes substantially to the success of its funds over time.

The Growing Imperative of Third-Party Fund Administration

The need to raise capital is the single most important element in the new focus on fund administration excellence. Fund sponsors are beginning to realize that demonstrating a track record of creating value is no longer enough.

Investors may be attracted by a fund’s investment performance, but if the fund administration infrastructure is inadequate and back-office execution is poor it can be enough to make investors explore other investment options. This is especially true of institutional investors. Pension funds, endowments and family offices frequently consider third-party fund administration required infrastructure for portfolio funds, considering in-house fund administration an unacceptable operational risk. Institutions will perform comprehensive due diligence on the fund administration provider of a prospect fund to ensure the data security, reporting and audit standards they require are in place.  

And due diligence is not a one-time event. Many institutional investors have been burned in the past by faulty fund administration. Having done their due diligence on a fund administration firm and checking all the boxes, they discovered in the day-to-day activity that compliance or service issues were ongoing. Today, an outsourced fund administration provider can expect an annual review by institutional investors in addition to a required SOC 1 process audit.

The fund administration provider is at the center of this architecture. The ability and willingness of the fund administration firm to transmit data, meet reporting requirements and communicate effectively with these entities is important to establish from the beginning. The proper alignment of vendors puts the fund administration provider at the center of a well-oiled machine able to support investors, management, financial advisors and all parties in a way that communicates the over-all professionalism of the fund sponsor.

A Fund Administration Strategy

A thoroughly considered fund administration strategy will include not only the capabilities and performance levels of the fund administration provider but also how the various vendors involved in the back-office will interact with fund administration. There are several essential entities in the architecture of a fund’s back office that must be able to communicate effectively and meet each other’s needs.

  • Banking
  • Valuations
  • Fund Accounting
  • Investor Services
  • Audit
  • Tax

When these entities work effectively together fund administration strengthens the brand of the fund sponsor while satisfying all parties and containing costs associated with delays, revisions, audits and enforcement actions.

A well thought out fund administration strategy will have as its organizing principle the experience of the end user, the investor. Serving investor needs and maintaining investor confidence in the sponsor should be paramount for fund administration. The investor-facing communications and deliverables should be in alignment. The partner’s capital statement, the information on the investor web portal and the tax document (whether 1099 or K-1) should express the necessary investment information in a way that does not cause confusion for investors. This is often a problem. Investors cross referencing multiple fund administration deliverables can be uncertain just what it is that they own. Fund administration should be aware of the potential for this issue and address it from the outset.

Custodians, too, often inquire about the disparity in the information in the feed from the fund administration provider and the information in the investor statement. Fund administration must understand that reporting for different purposes in the eyes of the layman can appear to be contradictory and incorrect. As a matter of sponsor reputation, the fund administration provider should eliminate the potential for this confusion.

Other recipients of fund administration deliverables must be considered as well. Reporting that is customized to the concerns of the recipient increase efficiency and show operational appreciation for each party.

  • The fund manager is focused on the performance of the assets
  • The portfolio managers care about assets and liabilities
  • Accounting managers care about the entire trial balance.
  • Deal teams are concerned with what new assets can be acquired.

o   How much capital they have left the call so I can spend it on assets?

o   How much is available from the credit facility?

  • The investor relations team is concerned with individual partner activity rather than the portfolio.

o   When did we send investors a distribution?

o   When did they first make a contribution?

o   What’s their current and ending NAV

  • Investors are mainly only concerned with the portfolio return and their share of it.

Customized reporting for each of these audiences simplifies everyone’s tasks, equips all parties to focus on their specific roles and enhances the internal reputation of the firm. Fund administration output represents the sponsor firm in many ways to participants throughout the industry. Fund sponsors should understand the effects that their fund administration strategy will have on the reputation of their firm.

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