Fund Administration for the Emerging Fund 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.
Tomorrow’s high-flying fund managers are the emerging managers of today. To make the journey to successful fund sponsor, a fund administration partner is a valuable ally. The number of emerging managers has steadily increased over the last two decades. The reason is the investment opportunities that abound and the expansion of the availability of more fund types to more investors. Emerging managers take on the challenge of the sales and investment roles but often have little appreciation of the importance of fund administration. Emerging managers are intrepid and have a reputation for producing strong returns through unique opportunities for investors looking to invest in underrepresented and developing talent but unique and novel investment concepts can take on a back-office complexity few anticipate. Experienced outsourced fund administration plays a critical role.
Because emerging managers frequently outperform their peers, more and more investors are specifically looking into investing in new managers. Still, investors insist on transparency, compliance and the kind of customer service that comes from professional fund administration. While most emerging managers are talented at spotting investing opportunities and producing alpha, they are not as strong at keeping track of the back-office details with the diligence of a third-party fund administration partner.
Failures to meet investor service expectations, compliance requirements and audit demands can cost an emerging manager seriously both financially and in terms of reputation. If fund administration is not professionalized, the amount of cash accessible to a less mature fund offering could be severely reduced. Financial advisors particularly are sensitive to fund administration shortcomings amount the products they promote. Emerging managers have the potential to become hot managers tomorrow, but only if they establish not only a solid and appealing investment thesis but also the fund administration capacity to meet the needs of all the participants in the industry.
Emerging managers need not and should not feel the need to employ, train and maintain an in-house fund administration team. Allocating limited resources to construct the kind of fund administration infrastructure that can reassure wary investors is a distraction from the core competencies of a fund manager. Outsourcing fund administration frees the emerging manager to focus on sales and assets while receiving best-in-class fund accounting, investor services, compliance and reporting at substantial savings to maintaining an in-house fund administration team.
Choosing a Fund Administration Partner
The selection of a fund administration firm is critical. With the right fund administration partner the emerging manager will enhance the fund’s reputation, lower risks, and keep management’s focus on sourcing and managing assets. Inadequate fund administration can have a negative effect on investor relations, operations, compliance, and the emerging manager’s capacity to scale.
Fund managers, new or experienced, should carefully consider fund administration as a core business decision.
Emerging managers have special considerations in selecting a fund administration partner because to their lack of experience in setting up and maintaining the infrastructure required to administer a fund. The potential risks associated with fund administration are not top of mind for most emerging managers who have no experience with the potentially disastrous effects of fund administration failures. There are several important elements to consider in choosing a fund administration partner.
Emerging managers rarely have a trusted network of service providers in place because they are setting up fund infrastructure for the first time. An experienced fund administration partner can introduce the emerging manager to auditors, placement agents, valuations firms, compliance firms and tax reporting professionals whose services they can vouch for and with whom they already work. It is important that all the vendors supporting the fund work in concert effectively. The fund administration provider is in the best position to coordinate that ecosystem.
Experience with Emerging Managers and High Touch Client Service
A fund administration firm that has worked with emerging managers before understands the challenges and are prepared to provide the extra help and perspective the emerging manager requires in launching a first fund. An emerging manager should speak with at least one client of a fund administration firm that fits the emerging manager and get a firsthand account of the experience. Look for fund administration firms who have been retained by emerging managers for both the first and subsequent funds. This demonstrates that the fund administration partner is able to scale up as the client sponsor grows.
Many larger fund administration providers use a one-size-fits-all strategy, which may or may not be appropriate for a new fund. Emerging managers are more likely to require a service offering that is customized to the their preferred work-flow, one that accommodates existing fund administration preferences and customizes services and output to enhance the fund’s brand. When a generic approach is applied to a new fund, it requires effort for the manager to accommodate the preferences of the fund administration firm and causes friction. The investor experience should be the choice of the manager and fund administration should be able to deliver without diverting managmant from strategy and value generation.
Every manager benefits from a fund administration partner with industry-specific experience and knowledge of best practices. Emerging managers benefit even more from having a highly experienced fund administration partner as their own administration experience may be limited. Having direct access to a fund administration team with vast experience managing private capital fund structures can provide peace of mind in many situations.
Reputation Connectivity and Communication
Investors expect that a fund will not only deliver strong returns but will also be well administered, comply with regulatory requirements and apply industry best practices. Knowing that a new fund will have solid third-party fund administration gives investors confidence in their investment, particularly institutional investors. But not every fund administration firm is a respected name in the industry. A fund administration partner with a good reputation for emerging managers makes the fund more appealing to investors and show that the company is serious about compliance, transparency, and operational efficiency.
Fund administration that deploys industry-leading technology in support of its service offering makes an important difference to an emerging manager. Systems integrated with industry participants and platforms maximize efficiency and eliminate errors. An investor web portal that delivers clear and complete investment information and is easy to use is valued by investors. A shareholder registry that centralizes investment and activity history, that the manager can easily reference and run reports on is an important technology. The ability for the fund administration firm to integrate with electronic subscription systems and data rooms to streamline the new investment process in a valuable fund administration capability. The technology of a fund administration provider says a lot about the firm’s understanding of the fund manager experience and commitment to supporting client success.
Phoenix American has provided industry-leading fund administration to some of the most complex fund types and met demanding regulatory and investor expectations since 1972. We are the leading boutique fund administration firms in the alternative investment industry, serving managers, investors, their financial advisors and other participants with decades of experience, state-of-the-art technology and a commitment to high-touch customer service.
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