To improve operating efficiency, enhance investor confidence and reduce costs, a growing number of private equity and real estate fund managers are shifting from a model in which they perform all administrative functions in-house to outsourcing them to third-party specialists.
Devoting internal staff to perform middle- and back-office functions and routine filings can be a distraction from core activities that can hinder returns, fundraising and their own ability to grow. Enlisting specialized outside support for routine functions is typically less expensive than hiring dedicated staff for those tasks. In addition, a specialized third-party administrator will make investments in sophisticated tools that enhances customer service, reporting and security.
While outsourcing engagements can be customized to meet the needs and risk management preferences of the fund manager, typical functions that can be outsourced to gain time back include general ledger maintenance and accounting, monthly reporting, reconciliations, financial and statutory reports, investor management, distribution and waterfall calculations and corporate secretarial functions.
Using third-party administrator support the operational, risk management and financial goals of fund managers can reap great benefits in a variety of ways:
Streamlining operations – By taking over middle- and back-office functions, third-party administrators allow fund managers to support their investors with reports, statements and other documents more efficiently than most general partners could provide on their own.
Enhancing risk management and regulatory compliance – Outsourcing to a fund administrator with industry, technical and regulatory expertise helps a fund enhance its processes and compliance efforts to reduce overall risk. Many funds have a variety of sector-specific regulatory and reporting requirements, especially if they are pursuing international transactions. In these situations, an administrator with regulatory experience can be a valuable partner.
Reducing costs – An outsourced provider allows a fund manager to rely on specialized professionals and sophisticated technology to provide services efficiently and cost-effectively, without expensive investments in staff or systems.
Increasing efficiency – Third-party administrators invest in sophisticated tools that automate many routine tasks, such as digitizing paper-based processes. Often this technology would be too expensive for a fund to purchase on its own, but the ability of the administrator to allocate the cost across its clients can offer savings and productivity improvements for all.
Standardizing reporting – Third-party administrators can prepare investor reports in easy-to-digest formats that investors expect. Depending on the fund and its needs, this can include insight-rich performance dashboards, real-time and historical data access, and other reporting tools.
Improving collaboration – Depending on a general partner’s needs, an outsourced provider can interact closely with the fund’s staff to fill knowledge gaps and address emerging customer service issues or other problems.
Streamlining staffing – Outsourcing frees fund managers from hiring full-time staff members for these services. Instead, they can focus their recruiting efforts on investment and fundraising professionals. An outsourced administrator can also provide specialized technical accounting, tax, and regulatory advice that a fund may find challenging and expensive to obtain on its own.
Institutional investors are increasingly advocating for outsourced fund administration for a number of reasons. For example, investors are comforted by the idea that a service provider can offer specialized expertise in the various administrative aspects of running a fund, allowing the general partners to focus on core investment and fundraising activities.
Another advantage is that the outsourced provider can provide detailed financial performance reports, distributions, tax forms and other documents in a standardized format that allows investors to receive and analyze data quickly and efficiently. When this information is not easily available, investors can potentially lose confidence in their investment.
Investors are also comforted by the fact that an outsourced provider adds an additional layer of review and potential oversight because the administrator will have a robust controls framework of its own, backed by cybersecurity controls and audit reports.
It’s important to spell out the fund’s requirements and expectations to create an effective working relationship. For example, some third-party administrators provide standardized, off-the-shelf administrative functions to their clients. This could be effective for basic accounting needs but may not be sufficient for a general partner that’s also looking for more sophisticated reporting and data analysis resources.
An important step in the evaluation process is detailing which functions each party is expected to preform and how often they’re expected to interact, so everyone’s understandings and performance metrics are aligned. These careful discussions at the beginning of a relationship can help you reap the efficiency, risk management, compliance and cost benefits of effective third-party administration.
For questions or to learn more about our fund administration services, contact our experts.
