by Mark Heil, PEF Services

1.  “They are an expert on accounting and investor reporting for funds like ours.”  Small and emerging funds need to be handled differently than large funds.  Large funds have more resources and can spend time customizing.  Small and emerging managers are usually under the gun in terms of time.  They need solutions that “cut-to-the-chase” and work without draining their internal resources.

Fund managers should be weary of the “jack of all trades, master of none” groups.  Some accounting firms and administrators try to do it all:  family offices, hedge funds, private and public companies, mutual funds, etc.  Each of these verticals requires different domain knowledge, controls and procedures.  When doing diligence on fund administrators, fund managers should ask if the administrator focuses on funds similar to theirs.  Make sure you get references from funds similar to yours and probe them about their experience.

2.  “Our fund administrator is SSAE 16, SOC1 certified.”   To obtain the Statement on Standards for Attestation Engagements on Service Organization Controls designation (SSAE 16, SOC1 – formerly known as SAS 70), fund administrators need to be audited by a third party.  The audit rigorously examines systems and processing controls used in their operations, as well as their technology controls to insure they meet the standards set by the American Institute of Certified Public Accountants.   Funds that are in the process of capital raising should be careful they do not get knocked out of the box because their back office is not SSAE, SOC1 certified.

3.  “Their portal is more than a portal – it is a workflow management tool.”  Not all portals are created equal.  Some portals merely provide secure access to information.  Others track investor activity for compliance and assist in fund management.  Some offer workflow features which create efficiencies and quality controls.  When selecting a portal with workflow features, be sure the portal is intuitive and manageable for the fund managers and your investors.  Some are so complex to navigate and hard to administer that they require a full time administrative person dedicated to the “solution.”

4.  “We can focus our time and energy on investments, because they have got the back office covered.”  Fund administrators should provide their clients with experience, depth and stability.  They should provide a team with various levels of accounting expertise, including CPAs.  They should have an expertise in working with funds like yours and continually train your staff on industry best practices.  Your fund administrator should routinely track announcements from the IRS, SEC, SBA, FASB and other similar organizations.  If you hire the right group, you can focus more on dealmaking than accounting.

And the one thing you shouldn’t tell them …

1.  “They were the cheapest.”  On occasion it works out that the best solution is also the least expensive.  But price can also come at the cost of quality and that could hurt your credibility with your investors, companies, auditors and/or government examiners.  Investors may question how you think about them and whether interests are aligned and lead them to conclude that you are more interested in management fees than running a quality fund.

A low price may be an indication that the fund administrator did not understand the structure of your fund or possibly the administrator is lowballing the price to buy market share.   This is fine until higher margin business walks in the door and your fund’s work falls to the bottom of the stack or you are assigned to a lower level person on the team.

PEF Services is an SSAE16, SOC1 certified fund administrator to over 100 small and emerging private capital fund managers, including early and later stage venture capital, debt (structured, distressed, mezzanine), real estate, special purpose vehicles, growth capital, buyouts, multistage and fund of funds, among other strategies.  Our services include everything from bookkeeping to preparing quarterly and year end financials, and we work closely with your auditors and tax preparers.  In between, we make and monitor capital calls and answer questions from investors.   We are adept at communicating with and reporting to high net-worth individuals, family offices, institutional investors and governmental agencies.  We have a national reputation for our work with SBIC funds.  Our proprietary software offers workflow features to improve the management of the fund and our client’s relationships with their investors.