Benefits of Outsourcing Fund Administration

Written by Justin Krieger, CommonWealth Fund Services Ltd.

In the years since the financial market correction, the fund administration industry has experienced great change. From technology to valuation methodologies to reporting standards and even how administrators hold assets in custody for clients, the industry as a whole is perpetually shifting, morphing, and in many cases amalgamating to offer the best types of services for fund managers of all shapes, sizes and strategies.

Now commonplace, hedge funds in Canada look to third-parties to handle the administration of their funds. As evident by the relatively new services targeted at private equity firms by existing fund administrators, the private equity space is beginning to shift in the same direction, with more firms enlisting the help of administrators to assist them in taking over some of their operations, leading to stronger efficiencies.

For many private equity firms, the idea of handing off a chunk of their back-office is a very foreign concept. Indeed, the majority of Canadian private equity firms are not even familiar with what a fund administrator is, let alone what one can do for them. To provide some perspective on how large the market is, total PE investment in Canada in 2016 was $13.7 billion, inclusive of $4.1 billion in Q4 — up from $3 billion in Q3, according to CVCA InfoBase.

What Services do Fund Administrators Perform?

Fund administrators provide a variety of services to individually suit their respective clients. The primary objective of a fund when they enlist the help of a third-party administrator is to obtain an independently calculated net asset value — essentially, to ensure that all transactions processed actually took place, and are appropriately accounted for.

Another equally important task funds outsource are unitholder record-keeping responsibilities. The administrator typically manages capital calls, processes any allocation and redemption activities, and provides general investor level support.

In addition to these central services, an administrator can also perform financial statement preparations and financial reporting duties.

Why Private Equity Firms Should Consider Administration?

Technology

Most private equity firms understand the value of technology. In the fund administration business, technology options are endless; some administrators use advanced and specific technology programs, while others use Excel.

When considering technology solutions a few things should be considered: firstly, it’s flexibility. With regulation in particular, rules and standards are changing all the time, making technology an extremely important consideration on how effective it can be transitioned into incorporating new regulations. Secondly, efficiency and accuracy. Technology platforms that incorporate a straight-through system are able to pull data, computer calculations and export reports electronically – without the need for re-keying – which reduces human error and increases speed. Excel-based administrators, meanwhile, can build up human error by the transfer of information. Thirdly, security. Today, data security is on everyone’s mind; having an administrator that leverages multiple security methods like secure FTPs, data encryption and firm privacy policies. These measures help to maintain manager confidence in their most important information which is necessary to help protect and preserve business continuity.

Strong administrators will also generally have portals which can provide clear access for investors to gain detailed information about their investments and the fund and managers they are invested in.

Transparency, Independence and Standardization

An added benefit that fund administration can also provide is transparency in reporting. Allowing transparency between the manager and investors builds confidence in the products they are selling. Showing their statements and assets are being frequently reviewed and kept in line with investment objectives, being able to value risk, performance and valuation into an investment decision can help to further develop confidence.

Moreover, independence is of supreme importance particularly with increasing desire for transparency. Independence avoids conflict of interest by providing a separation of duties.

The industry as a whole has a lack of standardization and the biggest challenge for managers to adopt the use of a fund administrator is the flexibility of reporting (capital calls, NAV Statements, etc.), given each manager has a customized template for investor communication. To address this, managers should realize the value of standardization and transparency when considering whether or not to look at a fund administration, as the industry is continuously evolving, and standardization is almost inevitable.

What About Cost?

Of course there are costs associated with fund administration. After all the benefits are taken into consideration the fee may not be such a leap. Hiring an outsourced third-party fund administrator can help reduce head count directly at the manager level and this trickles into more than just an employee’s salary. What’s more, costs in office space for extra staff, benefits, and operating expenses could be eliminated with the duties and responsibilities the administrator would perform. In addition, time spent on training and quality review would all be managed at the administrator level so the data being provided can be more confidently relied on.

Think of the old adage; work smarter, not harder.

Law by trade, finance by practice, at CommonWealth Fund Services, Justin contributes to prospect onboarding, research, and strategy, as well as to general development and growth initiatives for CommonWealth as a whole.