Too often, we see private equity funds and VC funds endure strained relationships with their fund administrators. For various reasons, whether it’s a lack of support or the administrators’ inability to handle complex funds, it’s no longer a good fit. Yet the idea of transitioning to a new fund administrator feels daunting.
Given that it’s such a long-term relationship, transitioning to a new fund administrator might be in your fund’s — and your LPs’ — best interests. With proper due diligence and preparation, you can ease the process and build a good foundation for your relationship with a new fund administrator.
What You Should Look For in a Fund Administrator
Whatever prompted your search for a new fund administrator, you don’t want to end up in a similar situation. While every fund has its own checklist of specific needs, there are a few things that apply across the board. Inquire deeply as you talk to fund administrators, and ensure they can meet these requirements.
Reporting Accuracy
A fund administrator has to have excellent reporting accuracy. The fund administrator is an extension of your team. Not only must reporting be accurate and rigorous, but the fund should be able to provide reporting customization, if requested.
Responsiveness
In addition to quarterly tasks, fund administrators should be able to answer questions or issues that come up promptly. Ask if the fund administrator has a policy around response time, both to you and your LPs.
Reputation
When you do your due diligence, talk to others in the industry. The fund administrator’s reputation for managing back-office activities will help your LPs trust the numbers and the process. A good fund administrator can also help you elevate your own reputation as a firm.
Strategic Partnership
As your fund grows and becomes more sophisticated, your relationship with your fund administrator should reflect a strategic partnership. Additional services may include fund operation consulting, platform advising, or collecting KPIs from the portfolio companies.
How to Prepare for a Fund Administration Transition
Once you’ve chosen a new fund administrator, the first thing you’ll want to consider in a transition is the timing. Ideally, you don’t want to make the change in the middle of your fiscal year. We recommend that funds finish the current fiscal year with their existing provider. The legacy provider will complete the audit and any other year-end activities, and you can start fresh on January 1.
Next, data migration needs to occur, and that process can take several months. You’ll need to ask your current provider to create extracts of your existing data. Clean data is imperative, so if there are any issues, those will need to be handled during the migration process. Your new provider will need to recreate the historical accounting and financial records using extracts and official documentation.
Someone on your team will need to be available to work with your new fund administrator, especially if you’re trying to fix issues with the data from your current fund administrator. The migration process is not an autonomous project; the new team will have validation points or questions that you’ll need to answer. If transactions weren’t entered properly or you want to make changes, now’s the time to address those issues. You’ll also want to communicate with your new fund administrator if you want to change any internal processes at your firm to gain efficiency.
Some funds run old and new providers in parallel for one or two quarters. By running them in parallel, you can compare the reporting from both. But this also means that you’re paying two teams. However, if you can afford to do this, it de-risks the fund transition process.
Consider the People Involved
While your team needs to prepare for the transition to a new fund administrator, there are a few relationships you’ll need to manage throughout the process.
You must inform your current fund administrator of your decision to leave. In some cases, you may have a required notice period that you’ll need to align with your expected cutover date to the new fund administrator.
If you leave on good terms, the transition will happen more smoothly. Your previous administrator may even be able to work with your new administrator to answer questions during the migration process. However, if the relationship is more strained, you’ll need to prepare for less cooperation, and your new fund administrator will need to rely more heavily on your internal team.
You’ll also want to prepare your investors for the changes. They will have communications from a new party and may need to re-enroll on a new platform. The more you communicate the changes and the timing, the more your investors will know what to expect. You can let your investors know what level of service they can expect to receive from your new fund administrator and how the changes will benefit them.
Once the migration is complete, you can begin to work with your new administrator to better manage your funds, such as additional operations support or other added value in other areas of your business. You left for a reason; now’s the opportunity to make the most out of the new relationship.
Claude Olivier Girard is the Chief Executive and Co-Founder of Losange Finance, a fund services firm providing tailored back-end solutions to private equity firms and VC funds. Losange Finance is located in Quebec.
