What General Partners Need to Know 

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By Beth Manzi, Chief Operating Officer, PEF Services LLC

Private equity is having another good year, but is too much of a good thing stressing your back-office?  Are your investor demands exceeding your firm’s back-office capabilities?  Are you struggling to keep up to date on regulatory requirements?  If so, you’re not alone.

Who’s Got Your Back?

There’s a growing trend toward outsourcing private equity fund administration for good reason. Fund administration encompasses the back-office and some middle-office functions necessary to successfully support  the operations of a fund, including fund accounting services, recordkeeping, financial reporting, audit and tax return support, capital call and distribution processing, compliance and risk management functions, investor AML/KYC reviews, and coordinated fulfillment of all investor deliverables.

As fund administration has become more resource intensive and specialized, outsourced fund administration has evolved from a small, niche industry to a business with $6.7 trillion in assets under administration in less than two decades.1  Regardless of the firm or fund size, outsourced fund administration has become a mainstream service category, not just for hedge funds, but for funds of every size and type, including venture, buyout, debt, real estate, SPVs, fund of funds, and more.

If your firm is considering outsourcing fund administration, you should realize that the services offered by all fund administrators are not the same. There are important differences.  Keep in mind that the biggest firms may not be the best to address your needs.  Personalized services offered by ‘boutique, high touch’ fund administration providers may offer you measurable advantages over larger firms.

Reputable fund administrators should also have a SOC 1 Type 2 Audit Report (System and Organization Control Report).  A SOC 1 report is a report on the controls at a Service Organization which are relevant to user entities’ internal control over financial reporting.  It ensures that your fund administrator has the proper procedures and controls in place to ensure that you are receiving the highest quality of service.

Most notably, the ‘best fund administrators’ should align their services and guidance with your business needs and investor expectations. They provide value by encouraging you to grow your portfolio, and they help you reach your goals by giving you back time to focus on investment strategies.

If you think hiring more people to address back-office demands is your best option, you may find that it’s not the most effective alternative when you factor in costs related to staff, systems, infrastructure, training, and ramp up time.

The strength of your back-office systems and processes is a key factor in recruiting investors – and one you want in place during a fundraise. The best fund administrators apply best practices to meet these expectations so you can deliver timely, detailed, and accurate financials to investors.

They offer you their expertise and valuable services to:

  • Streamline your back-office
  • Follow the proper accounting standards
  • Implement reporting best practices
  • Keep up to date with the ever-changing accounting pronouncements and regulatory landscape

Making a Difference

Let’s take a closer look at the top 3 benefits that set the best fund administrators apart from the rest.

1. Expertise

People are the game changers, separating the best from the rest. This is, after all, the core focus of a fund administrator’s business. The best administrators combine exceptional teams, proven processes, and industry-leading technology to align their services with your requirements so you can demonstrate the highest levels of transparency and service quality to your investors.

Consider the fund administrator’s team as an extension of your own team, one that complements your team with knowledgeable resources and expertise that extend beyond the basics of fund accounting.  They should be capable of offering you the best guidance on your unique situations while addressing compliance issues should they arise.

You need to be comfortable with the fund administrator’s team in terms of their level of expertise, industry tenure, and their ability to work collaboratively with your firm.  The best fund administrators have teams of dedicated professionals with senior level expertise and solutions supporting a range of fund strategies and structures, from startups and small funds to those with billion-dollar commitments.

You should expect the best fund administrators to have teams with an average of 10-20 years of experience including public accounting, fund administration and fund operations and management.  Their people extend your firm’s skill set and experience levels with staff credentials such as CFAs, CPAs, former CFOs, financial executives, audit managers, senior-level analysts, and compliance officers.

2. Technology

Accuracy through reporting tools, financial systems and top tier technology is essential to maintain the highest level of fund administration services.  The top fund administrators provide their clients with a technology platform that includes a robust portfolio accounting system, an investor portal and a client self-service reporting portal.

They leverage a core fund accounting platform to process portfolio and partnership transactions, maintain the general ledger, and track investor and investment data in an efficient and timely manner. The accounting reports are robust and detailed and include all necessary data points in an organized manner.

They should offer you a reporting portal with interactive dashboards, providing flexibility and accuracy in streamlining and organizing information for both internal and investor reporting. Online dashboards and financial statement reports allow you to review, drill down to more detailed information, and export information for additional analysis and reporting.

You should be given access to a secure online document management and investor portal platform that enable funds to communicate with investors and organize their documents such as capital statements, capital calls and distributions, financial statements, K-1s, and other general correspondence.

In addition, they should have a documented Disaster Recovery and Business Continuity plan to ensure that they can provide for continuous service and access to client data.

3. Leverage

Your bottom line is reinforced by leverage – enabling your firm to grow and to provide the best returns for your investors.  Outsourcing supports your team’s ability to focus on core investment strategies that keep your investment momentum going. For most General Partners (GPs), the challenge is to focus 100 percent on their portfolios and investments, which includes recruiting, planning, acquisition sourcing, referrals, and other strategic tasks.  Outsourced fund administration allows your team to do what they do best.

General Partners can provide better service to investors if they are focused on sourcing investments and adding value to them. Outsourcing the vital, day-to-day fund administration tasks helps your firm remain focused on strategy, driving investment decisions and other high-value activities. The best fund administrators provide operational strength, consistency and support so the GP can focus on increasing the value of their investments.

Today’s investment firms are experiencing unprecedented growth, and growth may be the single biggest factor in the decision to outsource.  Yet many firms fail to recognize the point at which their growth trajectory exceeds the ability of their back-office to keep pace.

Fund administrators provide GPs with continuous support and seamless coverage so that they do not need to be concerned with time off coverage and/or time spent hiring and training new personnel when turnover occurs. When part of your fund administrator’s team takes time off, they have adequate coverage to ensure that there is no interruption in the services that you receive.

The best fund administrators enable growth by supporting your efforts to increase investment initiatives by providing the proper resources to leverage your team’s capacity and supporting sustainable growth. Your fund administrator’s team should grow with your team.  They should provide scalability so that, as you add new funds, you don’t need to worry about who will be doing the work.

As growth in alternative investments continues to increase, this trend drives the need to outsource essential fund administration functions.

Finding the Best Fit

Ultimately, your decision to outsource fund administration services is personal.  Outsourcing isn’t a panacea for all operational concerns; rather it’s a strategic decision.  Consider your growth plans, anticipated gains in operational efficiencies, benefits inherent in getting time back to focus on core activities, and the benefits of working with an experienced team and cutting edge technology.

Finding the best fund administrator for your firm isn’t about finding the biggest one or the cheapest one.  Again, it’s personal, so a detailed selection process will guide you to find the best fund administrator for you – one that combines the elements discussed above with a collaborative and trusted business relationship.

To learn how PEF Services can help provide you with expertise, leverage and technology to meet your fund administration needs, please contact us at info@pefservices.com

1 eVESTMENT, Alternative Fund Administrator Survey, 2016.