The Fund Administration Partner and 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.
An emerging manager is an investment management firm that is raising retail and/or institutional capital for a first, second, or third fund in either the private equity, venture capital, real estate, growth equity, or debt strategies. The term ‘emerging manager’ can also refer to investment groups that have broken off from larger companies, fundless sponsors, and funds with a lower level of assets under management.
Fund administration is not often top of mind for the emerging manager. It is easy to dismiss fund administration as a set of perfunctory back-office tasks without serious implications for a fund. But outsourcing fund administration can benefit new fund managers in reducing costs, satisfying investors and enhancing new investment sales.
The drawbacks of in-house fund administration are reason enough to consider outsourcing. Not only the salaries and expenses of back-office staff, but the expense and complexity of putting in place, maintaining, and troubleshooting the necessary fund administration infrastructure are considerable. The training and oversight needed for a fund administration team to prevent costly errors, comply with regulations and meet the needs of investors, financial advisors and auditors only adds to the expense.
When fund administration is outsourced, technology costs are dispersed, economies of scale act in the manager’s favor and costs are contained by pricing that is pegged to the work that actually needs to be done. There are no issues of overstaffing, understaffing or key man risk with an outsourced fund administration provider.
Third-party fund administration has further benefits in addition to controlling back-office costs
Institutional Expertise and Scalability
Because an experienced fund administration firm has dealt with hundreds of client funds, efficiencies, workarounds and potentials for automation are well known to them. They also bring a broad scope of knowledge to the table from having managed funds across several strategies. An expert fund administration partner will conduct a thorough examination of the limited partnership agreement to construct a fund administration process that complies with not only industry regulations but all the stated commitments of the fund. A quality fund administration firm will have a deep knowledge of industry best practices and will work in concert with the skills of the client company.
When an emerging manager begins a new investment fund it is hard to imaging the operational complexities and risks that develop with the success and growth of the fund in terms of assets under management and investor count. A fund administration partner allows client funds to grow without breaking the bank. Outsourced fund administration in place also helps attract larger investors, including institutions, which require third-party fund administration for their prospect funds. Many institutions and ultra-high net worth individuals consider in-house fund administration an unacceptable operational risk for prospect funds.
An experienced fund administration partner can provide strategic and targeted assistance with vendor recommendations, fundraising guidance, new fund launches and assessments of LPAs and PPMs. While fund formation attorneys may be knowledgeable about the legalities of fund structures and waterfalls, fund administration professionals will be able to advise on whether a structure, though legal, is operationally practical or desirable given the goals of management. A fund administration partner will conduct operational due diligence in, advise on back-office best practices, simplified compliance options and ways to streamline new investment sales.
Attention to Detail
A fund administration is in the business of monitoring and managing the vast body of back-office detail for which the fund manager is responsible.
- Management ledger
- Cash transactions.
- Monetary activity
- Financial accounts
- Payables and receivables
- Portfolio company activity
- Accrued and prepaid revenue
- Financial statements
- Trial balance and equilibrium sheets
- Investor web portal
- Production and delivery of investor 1099/K-1 forms
Emerging managers should focus on their investors and assets. The last thing managers need is the frustration and distraction of tax reporting issues. Fund administration firms with integrated tax capabilities are in a position to simplify tax processing having all the necessary investor and accounting data at their fingertips.
- Preparation and processing federal, state, and municipal tax returns
- Produce and deliver investor 1099s/K-1s by mail or web portal
- Provide tax projections
- Audit support
- Preparation of paperwork for international reporting
The Right Fund Administration Partner
An emerging manager should not consider fund administration purely on the basis of cost. Not all fund administration firms are created equal. Errors and omissions on the fund administration side can be costly and embarrassing. Some important characteristics to consider:
- Reputation in the industry
- Years of experience
- Experience with fund administration for emerging managers
- Systems that promote efficiency and streamline processes
- Transparent value pricing
- Customized services and deliverables
- Personalized client and investor services
- Full suite of fund administration services
- SEC registration
- Service Organization Controls (SOC) audit
- Data security / disaster recovery / business resumption plan
Third-party fund administration is a good business decision for emerging fund managers but it must be approached intelligently. Working with a fund administration partner should be as much as possible like working with one’s own employees. So, choosing the fund administration firm should be as thorough and circumspect as hiring for an in-house staff.
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