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 a fast-moving landscape, GPs shouldn’t put themselves at a disadvantage by not doing something their peers have already figured out.
The more you can show you’re relying on a credible, vetted third party for things like tax accounting and fund administration versus handling that in-house, the more it comforts investors. It is an important set of checks and balances.
But choosing the right third-party administrator to take on this responsibility is critical to your long-term success. Your administrator powers many of your firm's 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, but forward-thinking GPs know their administrators can be an ally—one who not only meets their needs today but enables them to survive and even thrive years into the future.
Here are six questions to ask yourself when evaluating potential fund administrators:
How well-matched are they 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.
How do they approach service provider coordination?
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.
To facilitate this multi-pronged process with numerous stakeholders, your fund accounting team must establish and maintain clear communication paths with all your other service providers, “quarterbacking” the process to ensure everyone has what they need, precisely when needed.
How ready is their technology to meet your current and future needs?
Part of the decision to outsource often rests on the desire to access more modern fund administration technology. But 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, combing your investor data, investment track record, and underlying portal data to uncover new insights and drive operational efficiency. Purpose-built solutions streamline fundraising, investment operations, and investor reporting while enhanced controls, automated workflows, and approval rights help minimize errors.
What are their protocols and track record for smooth 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. A well-structured database will be easier and quicker to transfer than an older, unstructured one. However, even if your firm has a clean data structure, older funds (and years of historical data) were likely run on Excel spreadsheets. How the administrator will handle the transference of data and institutional knowledge needs to be established upfront.
What is the administrator’s team ethos?
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. In its “quarterback” role, your administrator must have exceptional EQ skills. 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. An efficient, knowledgeable, and personable fund administration team—the sort of people you’re happy to talk with—can build a strong working relationship. 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.
Are they a modern administrator?
The upsurge in outsourcing points to the rapidly changing landscape of fund administration. Technology, asset types, and regulation have all shifted in the recent past and promise ongoing evolution at an increasing rate. 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.