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Outsource fund administration to attract institutional investors

Private equity fund managers are increasingly looking for larger and more sophisticated investors, and institutional investors are committing larger and larger sums to private equity funds.

According to London-based research firm Preqin, U.S.-based public pension funds allocate 6.8% of their total assets, or an average of $758M, to commercial real estate; private pension funds tie up 5.2% of their assets, or an average of $434M, in real estate investments; and endowments have allocated 6.1% of their money, $143M on average, to commercial property.

All of these allocations are below target goals. Public pension funds aim to have up to 8.1% of their total assets allocated to commercial real estate, private pension funds aim for 6.7%, and endowments aim for 9.2%, and these targets continue to increase.

The majority of the $107B raised by funds closed in 2015 went to large established commercial real estate funds, supporting the expectation that AUM for real estate investment managers will continue to grow.

So how does an emerging manager attract these growing commitments from institutional investors? How do they differentiate themselves in an increasingly competitive environment?

Less than 20% of institutional investors will make commitments to start-up managers or managers with a track-record of less than two years. As a result, investment managers need to augment their offering to clear institutional due diligence and create the scalability that will enable institutions to make a commitment.

One solution is to outsource back-office operations to an independent fund administrator. This solution expands the functionality of a fund’s back office, enabling it to not only meet accounting demands but to also meet regulatory and investor reporting requirements. Outsourcing to an independent third-party fund administrator provides all the controls and security that institutional investors require in their operational due diligence reviews.

Underinvesting in back-office resources can stunt growth, while building an infrastructure that exceeds your needs can stretch manager’s budgets. An administrator provides a predictable cost structure while enabling scalability as the fund complexity grows and new funds are added. Additionally, fund administrators are viewed as independent third-party oversight for fund managers.

With an increasing appetite among institutional investors for investments in real estate, partnering with a service provider might be the best path to tapping this investment pool.

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