The issue of outsourcing fund administration ultimately rests with fund managers, but increased pressure from their sponsors (LPs) to reduce operating costs and increase transparency is catalyzing the shift to professional administrators , says Mary Bruen, Regional Head of Fund Services – Jersey, Guernsey & Isle of Man.
Regardless of the asset class, the key for Limited Partner (LP) investors is to have the ability to analyze their investments as accurately as possible. It’s not just about monitoring investment performance. Investors want transparency from their GPs about how much leverage is used in the fund and how fees and expenses are calculated.
The Global Financial Crisis (GFC) has been a major force of change for LP strategies. They found that they could not analyze their exposure across their entire portfolio. LPs learned the hard way that they were exposed to the same investments in different funds managed by multiple GPs. This led to magnified losses in their portfolios instead of providing greater diversification.
Since the GFC, there has been a marked push for greater transparency across the investment management industry. This was accelerated by several factors, including changes in the relationship between LPs and GPs; the maturation of the industry; the growing sophistication of asset aggregators; and the growing scrutiny of the private equity market by global regulators.
Meanwhile, high-profile incidents will continue to drive demands for increased transparency: In 2015, KKR committed nearly $30 million to settle accusations of not properly disclosing the fees charged to investors for failed takeover bids during a period of six years.
It seems that transparency has come to the fore and that LPs are now carrying out more detailed operational due diligence at the pre-investment stage. This is a key factor in how and where LPs allocate capital, especially as the search for yield, even within real estate markets, becomes more difficult.
What managers look for in a fund administrator
If you look at the market, the average size of funds raised is increasing. This means more investments are being made and more investors are signing up. All of this brings additional complexity that requires a sophisticated administrative response, including both human capital expertise and technology. Why outsource the administration of your fund?
Therefore, the starting point for fund managers when appointing an administrator should be analyzing the provider’s depth of understanding of the underlying asset. We employ numerous accountants and lawyers who serve as directors on our clients’ boards of directors, providing the substance, management and control that a jurisdiction may require. They also bring the ability to interpret offers presented to them for approval.
A good fund administrator will also have a background in managing a fund and understand how fund operations work. Of course, having a robust fund administration system is also vital.
Finally, there is the important compliance and regulatory component. Fund managers are extremely focused on making sure things are done the right way. For example, investors need to be effectively onboarded, but also respect any regulatory hurdles a given jurisdiction has around know-your-client checks.
Managing this process can be hard work and one mistake can have serious adverse consequences. It is essential to work with a fund administrator with a strong compliance function.
How New Fund Managers Can Leverage Fund Administrators
Not surprisingly, there is a clear trend for investors to commit capital to fund managers who have strong track records. These managers generally have an easier time raising their next fund. However, there are also new teams that may come out of reputable houses that don’t have that easily attributable track record or that mature operating model.
There are real benefits for these types of companies to partner with a fund administrator, so that they present potential investors with a robust operating model, rather than simply relying on their own expertise.
The future of fund administration
The investment management industry is constantly changing and service providers look set to play an even bigger role as managers focus on value creation and leave administrative tasks to experienced providers.
There is potential for outsourcing to third parties in multiple functions, including compliance, fundraising, investor services and corporate governance. These services may be provided by a single administrator in their entirety, or they may be divided into their composite parts.
I think we will see a bespoke approach develop, where the administrator sits down with the customer and determines exactly what is expected of them, which can then be delivered from an ever-expanding catalog of services.
Fund managers themselves are increasingly developing bespoke operating models and administrators need to recognize that this is not a unique case. We pride ourselves on being able to offer the flexibility of a boutique home while leveraging a platform that offers economies of scale.
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With specialist teams in major international jurisdictions, we provide a full range of fund administration and related fund services to give our clients clear visibility and confidence in the performance of their investments.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.