Real estate firms are used to outsourcing many parts of their business. From construction to property management, third-party providers have helped streamline their operations so the managers have more time to focus on what they do best. But this mentality doesn’t always apply to the fund administrator, one of the most critical back-office components of an organization. Neglecting to outsource their fund administration services means losing out on the efficiency and scalability that it can provide.
Outsourcing to a third-party administrator has been the norm in hedge funds for a long time. It’s nearly universal in private equity and venture capital and is increasingly common in real estate. In the current challenging environment, don’t put yourself at a disadvantage by not doing something your peers have already figured out. As Tana Gardner, CFO of Affinius Capital said at the IMN COO/CFO Forum, “We’re focusing on what we can be really good at, and we don’t want to be really good at fund administration. We want to be really good at investing and serving our investors.”
But choosing the right third-party administrator to take on this responsibility isn’t always easy. Your administrator will be responsible for many of your firm’s most important interactions with the outside world—from investors to auditors—and their knowledge and efficiency reflect directly on your firm. Any fund administrator should be able to deliver accurate financials and investor statements—that’s table stakes. The best administrators can and should also be more of a strategic partner, one who can help your firm survive and even thrive years into the future. Your fund administrator is akin to the hub of a wheel, connecting the work of the rest of your service provider stack—lawyers, CPAs, banks, and auditors. Their activities drive the flow of work over the year, and they ensure that each party receives the necessary material in an easy-to-use format with ample time to meet deadlines. For instance, the fund administrator can streamline tax and audit season by delivering structured records from the investor ledger to your advisors. They can also ease audit preparation by preparing initial drafts of annual audited financial statements.
The right fund administrator can help make your firm more efficient and resilient during the busy season; the wrong one can cause administrative headaches or even negatively affect your reputation with investors. So before making the critical decision of who to choose as your third-party administrator, you need to ensure they are a good fit for your fund today as well as tomorrow.
Considerations for choosing an administrator
First is how well-matched they are to your firm’s specific needs. An administrator who is committed to understanding the nuances of your fund is critical for a successful working relationship. Your administrator should be able to walk you through any potential accounting implications of decisions made regarding the fund’s structure, including financial reporting models, fee arrangements, and distribution modules. Ideally, your fund administrator should also be able to provide expert advice, insights, and examples of what other successful GPs in your space are doing (or what less successful GPs have done and you need to be wary of) so your firm can outperform. This type of consultative relationship isn’t a given, as many traditional administrators see themselves as only responsible for the necessary reporting.
After learning about how the administrator works with their clients, it’s important to dive into their tech platform, particularly how their technology will be able to meet your current and future needs. Technology must genuinely serve a purpose, increasing speed, flexibility, and transparency, rather than just being new, fast, or shiny. A tech-forward fund administrator can maintain all your fund information in a centralized system, enabling internal teams, other third-party providers, and LPs to access any data they need. A modern administrator can power everything from fund accounting and investor services to your investor portal and CRM. If an administrator doesn’t have purpose-built solutions to streamline and automate fundraising, investment operations, and investor reporting, consider finding one that does.
The next thing to consider is what the administrator’s protocols are for data transfers. Continuity of financial records is always top of mind, as your fund documents require you to deliver financial reports to investors on a schedule. The administrator’s onboarding team should provide detailed checklists, handoff dates, and a check-in cadence to ensure the handoff from your internal team goes as smoothly as possible. Some administrators recommend transferring data at a point in time, but it’s also possible to transition the entire general ledger history if that’s what you prefer. For older funds with years of historical data, there will certainly be Excel spreadsheets to input, which requires oversight to make sure to eliminate errors and ongoing work to make sure spreadsheets stay up to date.
The soft skills of a fund administrator are also as critical as their technological prowess. Just because the administrator is external to your in-house teams, that does not mean they operate entirely independently—the accounting team should feel like an extension of your own. That means that the admin should share the company’s ethos. Along with knowing the industry, these experts must also learn how to work with your in-house team, people whose priorities and preferred ways of working may differ. A constructive, shared problem-solving ethos will make it much easier for your administrator and accounting team to meet those pressure-filled deadlines for quarterly reports or urgent due diligence questionnaires with good humor and precision.
All in all, look for a modern administrator—one that has kept up to date with the technology and regulations that are constantly shifting as time passes. As you consider which administrator to partner with, remember that some of these firms have patched together old technologies to meet today’s needs. In contrast, others have designed theirs from the ground up to meet the challenges of tomorrow, providing thoroughly modern fund administration. When you’re ready to outsource your fund administration, a modern, tech-forward approach will best position you for the exciting, always-uncertain future.