By Hank Boggio, Senior Managing Director & Chief Revenue Officer of PEF Services LLC
The number of emerging managers has grown steadily over the past 20 years, and looking at their performance, it’s easy to see why.
Even in a high-performing asset class, emerging managers have earned a reputation for offering above average returns, and many provide unique opportunities to those investors with a mandate to invest in underrepresented and emerging talent.
Yet as motivated as they are to invest, LPs are unwilling to compromise on matters of transparency and compliance. And while most emerging managers excel at identifying investment opportunities and generating alpha, many are far less skilled at managing the back-office minutiae.
WHY OUTSOURCE THE BACK-OFFICE FUNCTION?
For an emerging manager focused on staying lean, outsourcing fund administration may seem like an extravagance. Why go to the expense of hiring a back-office specialist when you can do the work yourself?
An outsourced solution can actually help new fund managers lower their operational costs. Consider that taking fund administration in house includes not only the salaries of back-office staff and the associated overhead, but also the cost of implementing, maintaining, and troubleshooting the supporting technologies, including fund accounting software and an investor portal. When fund administration is outsourced, however, those technology costs are spread across multiple clients to deliver significant savings over self-managed platforms.
In addition to managing back-office costs, outsourcing offers other benefits:
ACCESS TO EXPERTISE
Because experienced fund administrators have worked with hundreds of funds across multiple strategies, they bring a higher level of expertise to the administration of your fund. For example, an experienced fund administrator will conduct a full review of the LPA to ensure that it conforms to LP expectations, industry best practices, and your firm’s capabilities.
ABILITY TO SCALE
While emerging managers have more experience by the time they launch their second and third funds, there are no economies of scale when it comes to the administrative burden. A fund administrator enables your firm to expand without having to worry about back-office staffing, training, or turnover. In addition, as emerging managers begin to move upstream, having a third-party fund administrator in place can help them attract larger investors for whom outsourced fund administration is a non-negotiable requirement.
ACCESS TO CAPITAL
Investors are bringing a new level of due diligence to the evaluation process, and emerging managers must work harder than more mature funds to prove that they have the operational infrastructure in place to ensure compliance, manage the fund efficiently, and report to LPs in a timely and transparent way. Appointing a trusted, third-party fund administrator demonstrates that the firm is serious about meeting its regulatory and reporting obligations, and that can be the deciding factor.
To learn more about the benefits of fund administration for Emerging Managers, read this white paper, Emerging Managers: Staying Lean and Nimble.