In response to increasing interest from institutional investors and retail investors, more private equity fund managers are opening their minds to the proposition of outsourcing fund administration. Doing so responds to calls from investors and pressures on internal operations.
- Both investors and the investment managers are seeking transparency, accountability, and investor-friendly technology:
- Behind institutional investors’ increased demands to involve third-party service providers is a desire for risk reduction and accurate, reliable financial reporting.
- Retail investors and their financial advisors, on the other hand, are focused more on specific technology and data requirements.
For investment managers’ own operations, the focus is streamlining—now with a focus on providers’ ability to deliver cutting-edge data management and artificial-intelligence-supported workflows.
Here’s how these distinct but related perspectives interrelate, in our experience.
What does outsourced fund administration do?
Third-party fund administration is the outsourcing of non-investment related operations such as accounting, reporting, investor servicing, regulatory compliance, capital call and distribution, and other back-office functions by the fund managers to a specialized external service provider.
By outsourcing these functions, private equity (PE) managers can focus on their core competency, investment management, and potentially improve operational efficiency, reduce costs, manage risks better, and meet the increasing demands of investors for transparency, accuracy, and professionalism.
Fund manager benefits from outsourced private equity fund administration
Meeting investor demand may be the reason investment managers begin to consider outsourcing. With a third-party private equity fund administrator, investors have the benefit of knowing there is oversight in the accounting and cash movement processes.
However, given the complex demands that investment managers face, outsourcing often allows them to focus more on the fund itself, as opposed to fund administration functions. Some benefits to consider include:
- Gaining efficiencies: Complex fund structures and growth of retail market channels in the PE market require specific expertise and capabilities. The volume and scale of investor activity can be expertly managed by teams that focus on that crucial function in the fund life cycle. Outsourcing allows investment managers to focus on their core strategies. Fund administrators do the heavy lifting when it comes to implementing best practices from an accounting and technology perspective to deliver accurate reporting.
- Reducing risk: Investment managers are turning to fund administrators to implement proven controls, processes and technologies that are costly and time-consuming to implement in-house. The risks continue to grow for fund managers including privacy concerns, errors and omissions. Administrators are not only documenting and auditing their policies and procedures, but they are making sure their organizations are adhering to those policies. Additionally, with AI resulting in even more reliance on technology, cybersecurity takes center stage. Administrators understand the risks involved and how to build and implement an effective cybersecurity program.
- Meeting regulatory requirements: Administrators can add value by staying ahead of the curve and responding quickly to evolving regulatory requirements across their broader client base. Managers can look to their administrator to point out potential blind spots or advise on best practices related to new and changing requirements both on and offshore. Between changing anti-money laundering (AML) rules, and the requirements for transparency relative to common reporting standard regulations, having an administrator actively working on solutions can alleviate the regulatory burdens.
- Upgrading technology: Maintaining technology solutions in a rapidly evolving industry can be challenging. Administrators are able to invest in technology and enhancements to support third-party data requirements and regulatory change faster and more efficiently than in-house money managers.
Overall, the greatest advantages for a manager outsourcing to a third-party administrator are increased efficiency and reduced operational burden.
Partnering for success: Finding the right fund administrator
Managers are typically wary of outsourced private equity fund administration for reasons such as the perceived loss of control or a potential lack of understanding about their product by the administrator. Managers may wonder if their external partner can be trusted to deliver in the same way their internal team would. However, those concerns can be addressed by partnering with an administrator who is willing to take the time to understand funds and embrace individual needs.
In making this important decision, managers should conduct extensive due diligence to ensure the administrator is reputable and has proven policies. Beyond that, ask for references from a variety of clients. Ask questions about service levels, timeliness, access to key personnel and how knowledgeable the service team is about private equity, real estate or venture capital fund administration. Tenure of the team, turnover and culture play an important role in the service level managers receive so inquire about those items and historical turnover trends. A quality team can feel like an extension of your own office.
Ultimately, the technology platform supporting each function is the most critical component to success and is a major differentiator in the administrator space. All private equity funds are unique, and the technology supporting these funds needs to reflect their specific needs. Quality administrators have customizable technology tailored to each manager’s needs. Technology should be continually developing to keep up with changing investor demands, regulation and product trends. In addition to sourcing off-the-shelf technology, leading administrators may also offer proprietary technology‡, which allows for even more customization and market responsiveness.
Administrators should provide robust reporting and online access to fund information, including portfolio company and deal information, investor information and comprehensive financial reporting. Fund managers need real-time access to their fund information, and an administrator partner should deliver reliable, timely and accessible data.
Retail channels often have additional data requirements that may mean daily data feeds are necessary to keep platforms current. An administrator should have capabilities to meet those demands, either through file transfer or APIs. At a minimum, administrators should be able to provide a detailed schedule of investments, committed capital summaries, performance information including MOIC, IRR, TVPI, DPI, and RVPI, and since-inception transactional information and reporting.
An experienced fund administrator can provide a breadth of services to private equity managers including administration, accounting, tax, custody and investor servicing. Managers can better meet the demands of today’s investors—which is critical to growth—with an administrator that takes the time to understand the unique components of each fund.
Learn more about UMB Fund Services and how we can support your firm’s registered and alternative investment fund servicing needs, or contact us to be connected with a fund services team member.
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