Fund Administration – A Valuable Ally For The Emerging Manager

Fund Administration now requires multiple competencies and the need to assume a much broader role in supporting multiple functions within risk and portfolio management.


Fund Administration — A Valuable Ally for the Emerging Manager

Emerging managers have a bright future ahead of them. Private equity and venture capital have matured, and the alternative investment universe as a whole is gaining the attention of more investors than ever. There is a greater availability of offerings, a proven track record of superior performance, tighter regulatory constraints and a growing commitment to transparency as provided by the top fund administration providers.

The majority of investors now consider emerging managers, spin-outs and first-time funds to be acceptable options for their portfolios. These were earlier regarded as too risky for conservative investors. However, to seize this pivotal opportunity, emerging managers must demonstrate that they not only have a compelling investment thesis but also the fund administration infrastructure to back it up.

Investors Due Dilligence

Investors do rigorous due diligence on every element of the firm’s operations. Fund administration has moved to the forefront of their minds. For today’s investors, how the fund is managed, how its success is communicated to investors and how compliance is achieved are critical factors. Failure to deploy effective professional fund administration can make the difference between frequent investor referrals and not being able to raise sufficient funds.

Spinning out, creating a business, raising capital and launching a new fund all take enormous work. Fund administration need not be a part of this lift. Emerging managers must be sensitive to expectations, realistic about requirements and savvy about what functions to delegate to service partners. Many emerging managers choose to outsource fund administration so they can concentrate on their core competencies, investing and capital raising, to produce solid returns for their investors. After all, fund administration is an intricate, demanding set of tasks, strictly regulated and with many specific requirements.

  • Data security and availability
  • Processing integrity
  • Confidentiality
  • Privacy processes
  • Annual Service Organization Controls (SOC 1, Type II) audit
  • Documented and tested disaster recovery plan
  • Business resumption protocols
  • Data redundancy / Offsite backup

Fund administration providers come with all these compliance features and service capabilities in place and at a cost far below employing and training an in-house staff.

Fund administration can provide an investor web portal for access to reporting, documents, statements, tax forms and to submit questions and requests to management. CFO portals and file transfer protocol (FTP) connections can be provided by fund administration providers to streamline functions within the operational team. A fund administration partner will have its own IT team that manages, maintains and enhances the fund administration technology that supports client funds.

Specialized Fund Administration Systems and Client Services

Fund administration firms utilize technology platforms created especially for accounting for private equity funds capable of processing portfolio data and partnership transactions, keeping track of investor data, and maintaining general ledger and investor capital accounts.

High-touch customer service is the hallmark of advanced and successful fund administration providers. Client satisfaction shows in the tenure of a firm’s typical fund administration client. A wide range of experience with asset classes, client managers of varying experience and fund strategies of varying complexity are also indicators of a superior fund administration firm. Fund administration challenges include:

  • Debt funds
  • Real estate funds
  • Small business investment company (SBIC) funds
  • Oil and gas partnerships
  • Buyout funds and funds of funds.

Fund administration experience across these fund types gives fund administration firms insights into operational efficiencies, reporting solutions and compliance strategies that can be passed on to the benefit of other fund administration clients. Day-to-day client interaction with the fund administration firm should be with a familiar account service team knowledgeable about the client’s funds and able to anticipate client needs. Working with high quality, service-oriented fund administration provider is like working with a hand-picked in-house staff.

Current fund administration clients willing to provide references in detailed terms point to the competence and reliability of a fund administration provider in the eyes of clients. A fund administration firm’s internal rate of service employee turnover indicates the level of morale and cohesion within the fund administration firm. The industry reputation of a fund administration company among financial advisors, custodian, wire houses and other industry participants is also significant.

Customization and Industry Expertise

A fund administration provider should have an evaluation process in place to determine a new client’s fund specific administration needs based on the provisions of their limited parternship agreement (LPA) or private placement memorandum (PPM).

Fund administration services should be adaptable to those needs along with workflow that compliments that of the client. Fund administration firms can also customize reporting, investor web portal branding and other industry-facing deliverables. For reporting to institutional investors, a fund administration firm should be familiar with and capable of producing reporting that adheres to the Institutional Limited Partner Association (ILPA) reporting template. Compliance with anti-money laundering (AML), know-your-customer (KYC), Office of Foreign Assets Control (OFAC), Financial Crimes Enforcement Network (FinCen) and other government screening requirements should be standard for any fund administration firm. Management company bookkeeping, fund accounting and tax services should also be available.

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