The trend toward outsourcing fund administration to a third party is growing across all asset classes and fund strategies. Rising investor expectations and regulatory requirements are driving much of this although there are distinct advantages to a fund administration partner. The advantages are even more dramatic for debt funds.
More and more debt fund sponsors are discovering the efficiencies of outsourcing fund administration because of the complex back-office tasks that debt funds involve. They find that they are able to scale more quickly, seize opportunities more nimbly and access valuable advice on operational best practices – to most effectively serve investors, advisors and industry partners. Third-party fund administration accomplishes all this at a net savings to the fund sponsor.
In a crowded and competitive asset class, the advantages of a fund administration partner amount to a significant competitive advantage as fund management is freed to pursue any variety of strategies without operational concerns.
The Demands of the Asset Class
Fund managers aware of the many opportunities for debt funds may not be aware that the operational demands of debt make professional fund administration necessary in order to take advantage of them. It is not uncommon for fund managers, though they have the expertise to originate and distribute debt investments, to struggle to manage an intricate and labor-intensive debt fund with in-house operational staff lacking the necessary fund administration technology and expertise.
Fund administration pressures are a distraction from the core competency of fund management. The ability to focus on sourcing investors and managing a portfolio of loans while controlling expenses and ensuring professional investor services through outsourced fund administration is invaluable. This efficient division of labor concentrates effective effort that both drives investment returns and preserves essential sources of capital.
Outsourced fund administration is able to process new investment documents and maintain the investor database in specialized systems, a complex set of tasks that are reason enough to partner with a fund administration partner. The capacity to manage complex assets is another.
Leveraging the capabilities of a fund administration partner, managers are able to grow their investments out into various and more complicated loan types including convertible loans, syndicated loans, revolvers and delayed-draw instruments and emerging sophisticated debt structures without concern for the administrative demands of the portfolio. The capacity to diversify without operational concern is a valuable benefit of partnering with an experienced fund administration firm.
Investors are focused on investment returns, of course. But the fund administration team’s ability to execute communication, payments, tax documents, information on fund performance and important notifications is critical to the investor experience and the reputation of the fund sponsor in the eyes of investors. This factors significantly in investor decisions on reinvestment. Investors notice and value the simplicity, accuracy and promptness of day-to-day contact from fund management: statements, distribution payments, reliable online access to investment information and documents. Outsourced fund administration offers clarity, consistency and professionalism to the back-office investor-facing processes that leave a reassuring impression in the minds of investors. Many institutional investors and sophisticated high-net-worth individual investors will not invest in a fund lacking professional fund administration considering it an unacceptable operational risk.
In too many cases, debt fund investors do not have the impression that their interests are aligned with those of fund management. Inadequate fund administration gives the dismissive impression to investors of being taken for granted. Transparency is a typical issue. Investors site transparency at the fund level as an important area where alignment with fund management might be improved. An advanced fund administration partner with integrated systems and proven processes specifically for debt funds preserves and enhances fund management’s reputation among investors and simplifies the need for transparency. Issues with investor communication and consistency of service only compound as a fund succeeds and portfolios and investor counts grow. Professional fund administration from the outset of the fund assures a smooth investor experience and the ability to scale on all fronts without operational issues.
The fund administration partner for the modern debt fund has a capacity for specialization, customization and reporting that streamlines processes and controls costs while prioritizing investors and eliminating disruption to the core mission of fund management. Investor reporting is one of the key advantages private funds can derive from outsourcing fund administration. This is owing to advanced systems now available that take fund administration to the next level in serving all the participants in the life of an alternative debt fund.
We will discuss the advances in fund administration systems in Part 2 of Fund Administration for Debt Funds.