The Economics of Fund Administration

The overall value of third-party fund administration can be measured in a number of different ways:

• Savings – reduced expenses for fund management
• Efficiency – management’s ability to focus on sales and assets
• Fundraising – the degree to which fund administration streamlines and enhances new investments
• Compliance – the relief fund administration provides from operational risk and regulatory scrutiny

Any one of these may be reason enough to outsource fund administration. Together, they make a compelling case for employing a third-party for back-office functions.

1. Payroll Savings

From the launch of your first fund, in-house fund administration is never easy, inexpensive or free of operational risk. As your fund prospers and expands, the expenses and challenges of keeping an internal team for fund administration only get worse. For a successful and growing organization, hiring new employees, training them, equipping them, paying for sick leave, vacations and other benefits entails significant costs and unnecessary hassles. Consistency in in-house fund administration teams is hampered by continuing, costly difficulties with hiring and firing, overstaffing and understaffing and key person risk.

With fund administration tasks in the hands of a third-party, internal staff can work on projects that improve returns. The value of reassigning an in-house fund administration team to revenue generating tasks in incalculable. It is increased by working with a fund administration partner who can offer a full suite of services:

• Fund accounting
• Financial reporting
• Investor Relations
• New investment onboarding
• Capital calls
• Check & statement production
• Tax documents
• Audit support

2. Greater Back-Office Efficiency

It is impossible to calculate the overall value of freeing management from the distractions of fund administration duties. An efficient division of labor has management focused on asset acquisition and increasing shareholder value while experienced and well-equipped professionals support those efforts with fund administration services.

Fund administration for private equity and venture capital is a set of intricate and highly regulated tasks. A specialized team can not only ensure compliance and investor satisfaction but leverage technology, relationships and experience to enhance fundraising and fund reputation. Advanced fund administration technology, in the hands of skilled and knowledgeable operators, speed up and simplify every fund administrator function. By leveraging well-equipped fund administration services, the following typical back-office headaches are eliminated:

• Time devoted to a new investment onboarding
• Correction of subscriptions ‘not in good order’ (NIGOs)
• Investor database maintenance
• Sales and marketing reporting
• Transfers
• Distributions
• Calculation and payment of commissions
• Statement production
• Tax document production

The effectiveness and efficiency of advanced fund administration systems is achieved by controls that enforce data uniformity, reduce errors, monitor activity and provide audit trails

3. Fundraising

A fund administration firm is in the business of processing new investments for client funds. The strategies, technologies and participants of fundraising are well-known to your fund administration partner. The wealth of that experience is an important benefit for client funds. A fund administrator is in a position to support fundraising in a number of ways:

• Technology connections with fundraising platforms, straight-through processing and the AIP platform
• Direct API connections with your online subscription form
• A reputation among financial advisors that encourages investment in client funds
• Relationships with consultants, managing broker-dealers and placement agents that assist fundraising
• Reporting capability to arms sales teams in fundraising efforts

Excellence in fund administration leaves an impression. Investors, financial advisers, auditors and institutions take notice when routine tasks are completed promptly and accurately – inquiries and requests are addressed quickly and competently – and deliverables are of a high quality and professional appearance. Fund management develops a reputation for professionalism and stability. Investors feel secure in their investment choice when both investment return and operational responsiveness from the fund administration team shine. Reinvestments and referrals are very much encouraged by such a reputation.

4. Compliance

The cost of an audit is determined by the client’s history with the organization and timely readiness for the audit. A fund administrator partner makes the audit process more effective, less disruptive and less expensive for fund management. A fund administration team can make quick scheduled delivery of correct and flexibly available data. The process is a simple matter of routine because a fund administration firm has experience meeting the audit needs of multiple client funds.

A fund administration firm acting as an operational partner for fund management comes with many benefits. Your fund administration partner is in a position to:

• Keep up with market trends and compliance requirements
• Enhance their technology to increase efficiency
• Develop best practices based on their experience across clients
• Offer referrals and recommendations based on relationships throughout the industry

A skilled and dedicated provider of fund administration services can alert fund management to potential red flags, helping to prevent costly errors and infractions. Fund administration will set up processes and guidelines that protect client funds from errors, saving time, money and disruption from regulatory inquiries.

Partnering with a fund administration provider should be considered in terms of the costs, complexities and potential risks of doing the job yourself. The intricate nature of the alternative investment ecosystem makes a fund administration partner an important backstop, a source of operational advice and a valuable resource. There are many options in approaching the alternative investment market. You will want that partner at your side when contemplating a new fund structure, asset class or fundraising strategy. Their experience is invaluable.