Three Things to Consider When Choosing a Fund Administrator
February 07, 2023
By Dan Kaplan
Finding the right partners to support a fund platform is crucial for fund managers, and they are increasingly turning to third-party fund administrators to support them. Here are a few key considerations for fund managers when hiring an administrator.
What is the difference between a fund manager and a fund administrator?
Think of a fund manager as the front of the house in a restaurant, the person who is client-facing and responsible for operating the business. A fund administrator, conversely, is the kitchen. A fund manager is responsible for actively raising capital, deploying it and managing the investments to meet the fund's investment goals. A fund administrator is a third party who should have strong expertise in the segment you operate. The administrator maintains all the books and records for the fund, handles its investor relations and treasury functions and ultimately takes the place of some, if not all, of an internal accounting group within a fund depending on the needs of the manager.
Why should a fund manager use a fund administrator?
Increasingly, it is considered a best practice to outsource a fund’s administrative work. There are a variety of reasons for this shift. A fund manager needs to be completely focused on deploying and managing investor capital and generating the best returns for their investors. Having a third party perform the back-office work frees up the fund manager from these duties and gives the institution’s managers confidence that there is an industry-focused, independent set of eyes preparing the books and records of the fund according to best practices. Additionally, the outsourcing of these critical functions provides the manager with a breadth of subject matter expertise it would be difficult to replicate internally while providing a depth to its human capital as a hedge against the volatility of the marketplace.
At what point in the fund launch process should a manager bring on an administrator?
It's best to bring in a fund administrator as early in the fund's life as possible if you plan on scaling in the future. The ideal administrator can bring a lot to the table by sharing how best to structure the fund from a tax efficiency point of view, the best operating and reporting practices and feedback on the manager’s operating documents based on their own experience. While it may appear easier (and cheaper) to handle these tasks internally early in a fund's life, as the fund platform grows, it will need institutional-grade reporting and verification of its accuracy, which is difficult and costly to recreate.
Considerations when hiring a fund administrator
Ensure the administrator has experience in your industry. It's critical to hire a fund administrator with expertise in your industry. For example, you don't want someone who works mainly on hedge funds trying to figure out how to act as an administrator for a real estate private equity fund. You want people aligned with what you do from a skills point of view.
Analyze what you really need. Depending on the size of your fund, you may not need a whole accounting staff or a full-time CFO and deploying and customizing an accounting solution is costly. If you're a small fund, hiring a fund administrator who can do this for you and scale it as your business scales makes sense. You'll also want to consider your in-house resources when choosing a fund administrator. A larger fund with substantial in-house infrastructure may need fewer services from a fund administrator than a smaller fund. But even large funds require the services of an administrator to ensure they're in compliance with increasingly specific and sophisticated reporting requirements.
Watch out for red flags. Prioritize getting referrals for any prospective fund administrator. These referrals should reflect proficiency in your business's industry. Also, check the firm's employee turnover rate. A high turnover rate can be hugely disruptive to your workflow, especially if you must educate a new administrator on aspects of your industry.
One size doesn’t fit all
The ideal fund administrator should act as an advisor, providing feedback and guidance on the best practices particular to your industry. By hiring the right administrator early on in your fund’s lifespan, you can rest assured that you’re in compliance with your fund’s reporting requirements, potentially saving you time and money in the future.