GPs are directly impacted by market-moving events, and LPs, often one step removed, expect timely insight into how those events impact their investments. The days of just sending a monthly or quarterly reporting package are gone—investors are hungry for easy-to-use, on-demand information. This is especially true in times of uncertainty. During the early months of COVID, for instance, many CRE GPs opened up the lines of communication to keep LPs aware of what was happening on the ground at their properties—from on-site safety protocols to changing renewal rates. And after major shakeups like the collapse of Silicon Valley Bank or FTX, VC GPs quickly let their investors know how little—or how much—the headlines affected them.
Having a dynamic investor portal facilitates the flow of information between you and your LPs, but the easier it is to share detailed fund information, including performance metrics, fees, and other key data points, the more important it is to ensure that data is timely and accurate.
A fund administrator is responsible for assisting in the day-to-day management of a fund. While you still have to provide the overall guidance for how the fund operates, best-in-class fund administrators should have the knowledge, expertise, and technology to handle these tasks efficiently and accurately. As the fund administration industry becomes more data-intensive, reputable third-party fund administrators should also have the tools and processes to collect, analyze, and manage your data effectively, no matter how much or fast your firm grows. This gives your team more time to focus on high-touch investor interactions.
With the support of third-party fund administrators, you might wonder whether it's necessary to maintain internal shadow books that run parallel with what your fund administrator is doing.
The short answer—no, you shouldn’t have to.
Some fund managers may choose to keep internal shadow books for additional oversight or supplement the information their fund administrator provided, but it shouldn’t be necessary. If you find yourself maintaining shadow books because you don’t trust the work being done by your administrator, perhaps it’s time to find a new partner.
For instance, Shawn Hawthorne, a partner at Foxfield LLC, admitted his team never used their first administrator’s waterfall or distribution calculation tools because the numbers didn’t align with his internal team’s accounting. Shawn and his team ran shadow books on every deal because they weren’t confident in the administrator’s work. While these shadow books minimized the number of potential errors, it also meant Foxfield was still stuck doing redundant, in-the-weeds work.
A technology-centric administrator can automate routine tasks—investor equity calculations, waterfall calculations and allocations to LPs, and payments for each investor. But you should be able to trust that their own processes have layers of control and review to help minimize errors. Most fund administrators are SOC-1 Type 1 certified, meaning they have had their internal processes and controls evaluated at a point in time. But to be SOC-1 Type 2 certified, an administrator has to have those controls acknowledged and tested by an outside auditor over a period of time. Mistakes can happen, but your administrator should be able to quickly identify what caused the issue and resolve it without having to unwind the entire system.
At the end of the day, you deserve easy access to fund performance data so you can quickly respond to investor requests. While you may choose to keep shadow books–especially if that makes your day-to-day easier in some way—if you’re running parallel books to check the work of your administrator every step of the way, it’s time to find a new fund administrator.