In an industry based on trust and compliance, your immediate focus must be on creating a solid platform from which you can raise more capital — so you can keep doing what you do best. Will Lopez, NES Financial’s Vice President and Engagement Manager, details the top qualities for a fund administrator and explains why the smart money is on outsourcing your back- and middle-office operations.
You’ve proven your mettle as a savvy private equity fund strategist with a track record of success. You likely already have solid relationships under your belt — committed investors that are ready to take the next step with you. And you’ve decided to leverage that success and create your own fund.
It’s a bold move, a truly exciting time. But along with the exhilaration of striking out on your own come a host of sudden complexities and requirements that could quickly overwhelm even the most talented new general partner or fund manager. From the first blush of fund formation, to the long game of administering a profitable business, your success rests on simultaneously attracting and retaining limited partners, maintaining a robust and secure infrastructure, and complying with an increasingly complex regulatory regime.
It’s a whole new operating universe — and it comes with a whole new set of risks.
Whether you’re lifting out from a larger firm or entering these waters for the first time, your track record as an emerging fund manager will have everything to do with how well you master both forms of risk: the investment risk you are already comfortable with, and operational risk — the complex thicket of legal requirements, infrastructure needs and limited partner/investor demands you now will have to manage in real time.
Emerging fund managers can use all the help they can get. Fortunately, that help is readily available, in the form of outsourced expertise. Here are the 5 must-have qualities to look for in an outside fund administrator.
1. Credibility, marketability and fiduciary oversight.
Your reputation is that of a discerning, smart investor. That’s why you set out to start your own fund. You will want every aspect of your fund to exhibit that same degree of quality and sophistication. Aligning with the right fund administrator can not only bestow instant credibility in terms of your infrastructure, it can also help you “punch above your weight” — compete for limited partners with the kinds of capabilities and advanced services, such as personalized reporting and portfolio analytics, that institutional investors expect from larger funds. And the assurance that you have expert third-party fiduciary oversight can help investors feel secure in the services and reporting they will receive from you — especially important when marketing in the alternative asset class.
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2. Cost and process efficiencies.
As more and more fund managers have discovered, outsourcing your non-core operational functions is both cost-effective and process-effective. Not only does it make sense to benefit from the deep specialization and scale of an experienced fund administrator — rather than trying to build your own infrastructure from scratch — doing so can also help protect your margins. That’s because the fund administrator’s costs are often passed through to the fund, rather than absorbed directly by the manager, enabling you to keep a lid on your overhead and internal headcount: especially helpful in the early stages of a fund. The key here, as with any expense allocation, is to provide transparency regarding fee disclosures in your PPM and LPA. The costs for fund expenses here align well with the fiduciary oversight a third-party administrator provides to the investors.
3. Compliance best practices.
When it comes to compliance, the margin for error is zero. Yet the web of legal complexity around fund formation facing this asset class — including setting up entities, mechanics and fees —continues to grow. Given continued interest by the SEC in the Private Equity asset class you’ll want to make sure you incorporate best practices that satisfy regulations and have internal controls in place tied to conflicts of interest, fee and expense allocation and related disclosures. There is also the web of anti-money-laundering (AML) and Know Your Investor (KYI) regulations, as well as conventions regarding internal controls and financial statements — obligations which multiply exponentially should you decide to market across borders. Working with an outside fund administrator such as NES Financial (which has just successfully completed the 12th successive voluntary independent audit of our technology, processes, and financial controls, and which offers in-house AML/KYI services as part of our solution set) can give you both the clarity and peace of mind you need.
4. Quality, scalability and security.
Our platform is based on a commitment to quality and continual improvement — and, consistent with our Silicon Valley tech heritage, a desire to build our service offering on a proprietary, fully integrated technology stack. Trying to cobble together spreadsheets and disparate solutions — such as CRM, portfolio management, accounting, and document management systems — and interfacing them with a client portal, can create “data noise” in the form of errors and inefficiencies, since they require more human intervention. The gaps between these systems can also make your fund vulnerable to cyber-breaches. By contrast, our data warehouse approach has the top qualities in a fund administrator that is most needed by managers: efficiency, consistency, compliance and security.
5. Orchestrating the right combination of people, processes and technology.
The ideal fund administration solution is a highly intelligent hybrid — one that combines the right technology and domain expertise, and guides you carefully through the process, adjusting to your evolving needs . That means not only fitting you with appropriate tech solutions, but also connecting you with the channel partners — such as counsel, auditors, tax accountants and placement agents — you will require at various stages of your lifecycle. This bridge to domain talent is especially useful for emerging fund managers, who may not yet have established their reputation, but who need bot