Fund Administration For Debt Funds

Innovative approach to fund administration and representing the priorities of fund administration in the major trade associations in the industry.


Fund Administration for Debt Funds

Across all fund strategies, the trend toward third-party fund administration is growing, spurred in part by rising investor expectations and fund administration requirements. The benefits of outsourcing fund administration are even more dramatic for debt funds. According to new research, outsourcing the management of the complex fund administration role helps fund management scale quickly, capitalize on opportunities, gain access to senior-level operational expertise and maintain a competitive advantage in an asset class that is more crowded than ever with investment sponsors pursuing a myriad of strategies. 

There are many opportunities in debt funds, but managers must be able to keep up with demands on the fund administration side in order to take advantage of them. Fund managers may have the expertise to originate and distribute deals, but they may struggle to service a labor-intensive debt fund if they lack the essential fund administration capacity.

Outsourced fund administration relieves managers of the pressures of the back office, allowing them to source more investors and manage more loans without increasing expenses or endangering investor faith or lending agreements with inadequate fund administration processes. The ability of outsourced fund administration to process new investments and manage the investor database alone is reason enough to outsource fund administration. The ability to manage asset complexity is another. Fund managers can leverage the capacity of outsourced fund administration to grow out into atypical loan types such as syndicated loans, convertible loans, revolvers/delayed draw instruments, and other sophisticated debt structures without concerns for how they will administer the portfolio. The capacity to administer these types of loans is a valuable benefit of outsourcing fund administration services.

Investor Confidence

Debt is a dynamic and fast-changing alternative investment asset class and fund managers must fight for investment opportunities and any competitive advantage possible. While most investors prioritize the manager’s ability to deliver returns, the ability of the manager’s fund administration team to convey account and performance information to them simply, promptly, and accurately is a critical component in the investor experience and a factors into any decision to reinvest. Statements, distribution checks, tax documents and notifications are the day-to-day face of fund management in the experience of the investor. The level of clarity, accuracy and consistency in these deliverables is the product of the fund administration team and is a major element of the manager’s reputation in the eyes of investors.

Unfortunately, many debt-fund investors believe that their interests are not aligned with those of their fund managers. This is often the fault of substandard fund administration. Transparency as a main problem. Many investors say that increased transparency at the fund level is a critical area where alignment might be improved. Experienced and integrated outsourced fund administration equipped with sophisticated fund administration technology achieves these reputational goals in investor perception while simplifying fund management and saving on operational costs. 

Partnering with a fund administration provider greatly improves reporting and reassures investors by putting fund administrative processes in the hands of a neutral, professional third party with specific skills and technology fitted to the task. Improved investor reporting is one of the principal changes that helps private equity firms gain a competitive advantage in the market.

Specialized Fund Administration Technology

When it comes to resource-intensive debt fund administration relying on old technologies or manual processes can lead to skyrocketing fund administrative expenditures and a greatly increased potential for errors.

The limitations of many fund administration technologies to track loans are cited as an important operational difficulty by many debt fund managers. One of the top three most common operational difficulties for debt funds is inadequate fund administration technology.

The cost of deploying and sustaining a top-tier fund administration system suite, however, can be prohibitive for a small or even mid-sized business. Partnering with a premium outsourced fund administration provider allows debt fund managers to take advantage of an integrated system for fund accounting, fund administration, financial reporting and debt management without having to bear the costs and upkeep of an in-house fund administration technology solution.

The alternative investment industry as a whole has begun to place a greater emphasis on technology in order to eliminate paper-based processes, automate transactional tasks, better utilize data, improve compliance and provide more extensive, tailored reporting. Because of their dynamic structure and added complexity, debt funds have an even greater requirement for investment in fund administration technology than funds of other asset classes.

A State-of-the-Art Fund Administration System

While there are off-the-shelf fund administration technologies debt funds can use, they are rarely adequate without substantial and costly customization. Then there is training in the functionalities of these systems required for an in-house fund administration team. This all comes at a cost along with all the headaches of acquiring and maintaining a sufficient employee headcount. 

First-rate third-party fund administration comes with an advanced and specialized fund administration system along with comprehensive knowledge of all its functionalities and direct real-world experience with fund administration for a wide variety of debt funds. Advanced fund administration systems have the capacity to maintain loan amortization schedules and account for complex conditions.

To support the fund administration needs of a debt fund a fund administration system must have specific capabilities.

The capacity to manage loan amortization schedules and account for complex terms.

  • All interest day count conventions
  • Paid-in-kind (PIK) interest
  • Original issue discount (OID)
  • Term changes (including interest rates and PIK components)
  • Amortization of fee income
  • Variable interest rate loans with floating base rates
  • Revolvers/delayed draw instruments
  • Unfunded commitments
  • Loan covenants and collateral requirements

The ability to generate comprehensive, and concise reporting customized for all audiences

A centralized interactive dashboard

Integration with an accounting system

Bulk-upload capability for transactions and other data

Automated feed for market data for variable base rate resets such as LIBOR rates

The capacity to generate recurring portfolio business invoices securely

Access to high-quality fund administration skills can be difficult for both experienced and novice debt managers. Setting up an in-house fund administration team with the proper experience to handle a debt fund’s complicated and ever-changing needs is a difficult process. Accounting for nonstandard debt instruments, working with fund administration technology built to fit the needs of debt funds, and knowing the particular reporting needs of debt funds and the ability to customize reports should all be part of that competence.

One of the most common issues for in-house fund administration is a lack of past experience. Many debt fund managers report that this is a serious problem. Fund managers can have access to the fund administration skills they need to service debt funds, even ones that are more complicated, by outsourcing fund administration. The major reason private credit managers outsource fund administration is access to experience-based operational knowledge. This is the main reason to work with a third-party administration provider.

 Back-office turnover can be another of the great challenges to productivity and reputation for debt fund managers. The weakness of an in-house fund administration team is a significant area of vulnerability for fund companies of all strategies. When an employee leaves the company, it can wreak havoc on fund administration processes, especially since the most experienced employees are the ones who are most likely to be lured away.

This problem is exacerbated for debt funds because loans must be managed and serviced on an ongoing basis.

Any interruption in the flow of events might have catastrophic ramifications. Loan conditions must be kept up to date in order for computations to be accurate, and covenants must be managed to verify that the portfolio firm is in compliance.

Internal turnover costs money and causes disruption that can be avoided by outsourcing fund administration. A seasoned fund administration firm preserves institutional knowledge and assures continuity over the fund’s lifetime by documenting essential processes, sharing information across an experienced team, and using a central repository for current and historical fund administration data.

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