It’s no secret that the challenge of fund administration grows more complex with every passing year as alternative funds become more prevalent, sophisticated and subject to more regulatory scrutiny. Often, in-house fund operations staffs find themselves overwhelmed by the demands of database management, compliance, reporting and requests from investors and financial advisors.
What’s the best way to handle these challenges and develop a fund operations infrastructure that works like a well-oiled machine? Increasingly, managers are realizing the answer is full service third-party fund administration.
Leverage economies of scale for your operation
In the past, it was supposed that only as fund size increased was it possible to develop economies of scale around fund administration. Largely, this is due to the fixed nature of many expenses involved in black office operations. As the total value of assets in a fund grows, the ratio of expenses to assets under management tends to decrease. As a result, for a certain set of very large fund operators, internal administration could make some sense. However, not every fund will inevitably grow to this size. And not every ambitious fund sponsor is interested in cultivating a back office sophistication over the long term that will be a hefty expense in the short term. So, how can smaller funds keep down operational costs?
Some cost conscious fund managers consider utilizing in-house of fund administration software only to find it extremely costly to purchase and inefficient to use on an individual basis. Many managers have in-house administrative work done using Excel spreadsheets. While the software is not a significant cost, manual data entry and fund operations processing using Excel usually proves surprisingly costly in terms of errors, time consumption and reporting limitations. More expensive off-the-shelf software solutions require both a large capital outlay and extensive employee training.
For smaller funds, it is possible to derive similar benefits to those of the large operations by employing a third party fund operations provider. A seasoned fund administrator has already invested in the best available solutions and highest levels of expertise and has optimized its processes to eliminate common errors and inefficiencies. A specialized third party administrator with specialized and integrated systems eliminates these issues for managers and maximizes the efficiency of a leaner in-house staff.
An experienced and well equipped fund administration service provider can function a lot like having your own back office employees with none of the issues of payroll, benefits, sick leave and vacation time. A dedicated account manager, a single familiar point of contact, who can manage investor services, broker relations, distributions, fund accounting, tax reporting, printing and mailing can take a lot of distractions off the manager’s plate.
An outsourced administration firm, servicing many clients for many years, has already achieved internal economies of scale and streamlined processes through long experience. They can pass these benefits on to you, freeing up your staff to focus on your core competencies.
Keep pace with the competition
Looking at the current state of the market, it’s clear that outsourcing fund administration is the wave of the future for alternative investments, including private equity. In 2016, a record number of firms sought outsourced services, according to Global Custodian – and 2017 is set to surpass even that mark.
While roughly 90 percent of hedge funds outsource their administrative needs to third parties, only an estimated 20 to 30 percent of private equity administration is externalized.
According to figures from BaseVentures reported by Global Custodian, it’s estimated that utilization of fund administrators by private equity and real estate funds will rise to 45 percent of assets under management by 2018.
If managers don’t want to be left behind by this move to increased operational efficiency, it’s important to start thinking seriously about full-time, third-party fund administration. With industry trends going as they are, it’s an essential way to ensure you keep a competitive and financial edge on the competition.
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