While levels of service to the CFO and their back office are key, fund managers also rely on the fund administrator to meet the reporting needs of their investors. As investors’ levels of sophistication have increased, so have their reporting requirements, and some fund administrators have not been able to keep pace.
Investors expect detailed, customized, and more frequently, ILPA-compliant reporting for fees and expenses, capital statements and notices, and quarterly reports. And they expect the information to be delivered sooner and to be accessible 24/7.
According to Preqin, dissatisfaction with service quality is the top reason for switching to a different fund administrator, with 27% of fund managers citing this as the main reason behind the switch.
If your firm is dissatisfied with service levels and plans to find a more service-oriented fund administrator, make sure you ask the right questions the second time around.
HOW TO ADDRESS SERVICE QUALITY ISSUES
It’s important that your fund administrator be an effective partner with your internal team. Your day-to-day contacts should have experience working with firms similar to yours in structure, strategy, and reporting requirements.
Look for fund administrators that offer formal service-level agreements (SLAs) and are willing to customize your SLA to meet any specific requirements that you or your investors may have.
It’s a best practice to have your fund administrator schedule status calls weekly, or every two weeks at minimum, so look for an SLA that covers regular meetings.
If you need to improve levels of service to your investors, look for a fund administrator that, regardless of size, offers investor services and ancillary reporting for Limited Partners and one that manages and administers an investor portal on your behalf.
It’s also important to ensure that the fund administrator is SSAE 18 System and Organization Controls (SOC) 1 Type 2 certified on an annual basis. The SOC 1 Type 2 audit includes a rigorous analysis of the service organization’s processes, systems, and internal controls and an evaluation of those controls to ensure that they are designed to achieve the control objectives and that they operate effectively. The audit also examines the firm’s automated and manual processes, related accounting records, the financial reporting process used to prepare financial statements, and information technology systems.
If personalized service is a priority, consider a boutique service provider that is able to provide a deeper level of customization, more direct access to senior-level expertise, and a dedicated, single-point-of-access account manager supported by a wider team.
HOW TO ADDRESS COST ISSUES
Outsourcing has become part of the cost-management discussion for many private equity managers, with 37% reporting that they are increasing their reliance on outsourcing in order to protect the margins of the management company.1
While not every back-office function lends itself to the outsourcing model, fund administration has emerged as one of the most valuable areas to outsource. In fact, more than two-thirds of CFOs (67%) consider fund accounting to be an area where outsourcing will add value.2
However, not all General Partners are seeing that value materialize. According to Preqin, 23% of General Partners switched fund administrators because of concerns about cost.
As regulatory and reporting requirements have become more stringent, back-office costs have risen for General Partners whether they choose to administer funds in-house or outsource the function.
When cost is enough of a concern to trigger a switch to a new service provider, the issues are likely to be related to the value the General Partner receives rather than the hard costs alone. If you aren’t seeing value from your current fund administrator, take a look at these three areas.
Is pricing based on the total assets under management (AUM) to be administered? If so, this fee structure could result in costs that exceed the value of the services rendered, particularly when the AUM are primarily in an easy-to-administer fund strategy.
Instead, look for a fund administrator who calculates their fees based on the amount of work required. Basing costs on considerations such as the number of capital calls and distributions processed, the complexity of the portfolio and volume of transactions and the complexity of the required reporting ensures that your firm sees tangible value for the fees paid.
Was the service package “one-size-fits-all” or was it customized to your firm’s requirements? When a fund administrator is capable of customizing the service proposal, it enables you to eliminate unnecessary services (and the costs associated with them) or replace them with alternate services that align with your needs and deliver more value.
Service partners that offer services beyond basic fund administration can also deliver more value for the money. Examples of these value-added services include investor reporting, AML/KYC investor services, treasury services, wind-down or end-of-life fund services, guidance on navigating investor situations that happen over the life of the fund, and other areas requiring complex analysis.
Technology enables fund administrators to optimize value by streamlining operations, enhancing data accuracy, and minimizing the need for costly manual administration and remediation. No service team—no matter how efficient and experienced—can maintain the required speed and reliability without access to advanced database and automation technologies.
While shrinking margins have become a reality for a growing number of firms, cost management remains a top strategic priority for private equity firms. Service partners that offer services beyond basic fund administration can also deliver more value for the money.
These checklists for General Partners and their fund administrators are designed to smooth the transition and address some of the most common onboarding issues.
1 EY, 2019 Global Private Equity Survey.
2 EY, Operational Excellence: One Path or Many? 2018 Global Private Equity Survey.