How to Select a Fund Administrator

Selecting the right fund administrator is critical for an alternative investment firm to achieve business operational excellence and satisfy investor demands.  There are a handful of due diligence considerations for funds when selecting the best partner, including the organization’s technical capabilities, reputation, service capabilities, operational controls, and more. In addition, they need to be aware of red flags, including unwillingness to provide a SOC 1 Type II report, high client turnover, and high staff turnover on fund accounting teams.

Key takeaways:

• Funds should partner with an administrator that has a solid reputation in the marketplace and also has experience working with funds of similar investment strategies and assets under management (AUM).
• Funds should understand the administrator’s core service capabilities and scope, including performing NAV calculations, processing subscription and redemption requests, reconciliations, fee computations, knowledge of GAAP requirements, and the technology platform being utilized.
• Funds should understand the administrator’s operational and risk management controls, including processes pertaining to treasury management, data security protocols, business continuity, and disaster recovery plans.

What Should Fund Managers Evaluate During Due Diligence?

How to Assess an Administrator's Stability and Reputation

• Track record. Funds should consider how long the firm has been in business and if they have experience working with funds of similar investment strategies and AUM.
• Funds should consider whether the team consists of Certified Public Accountants / Chartered Accountants having deep investment accounting knowledge.
• Reporting Package. Funds should ask to see the administrators reporting package and evaluate for suitability.
• Client references. Funds should ask the administrator for client references, specifically those that run a similar investment strategy and have comparable AUM.

What Core Services Should a Fund Administrator Provide?

• Core Services. Funds should obtain an understanding of the administrator’s core service capabilities, including performing NAV calculations, processing subscription and redemption requests, cash and position reconciliations, fee computations, and knowledge of accounting/financial reporting requirements. Emphasis should be placed on the administrator’s technology platform, including its investor allocation and reporting package. Funds should also inquire as to the administrator’s ability to facilitate ongoing investor capital account maintenance, perform treasury management functions, and prepare audit-ready financial statements.
• Investor Services. Funds should consider whether the administrator can complete subscription/redemption processing (including leveraging technology in this process), issue capital call and distribution notices, perform AML procedures, provide a secure investor portal, and offer K-1/tax support.
• Tax Compliance Services. Many fund administrators are now bundling accounting and tax compliance services, making for an efficient cost-effective solution and timelier completion of K-1's for investors.
• Technology platform. Funds should be educated on which systems the administrator will use and whether they are integrated with automated pricing services and with their prime broker or custodian.

How to Evaluate Operational Controls and Risk Management

• SOC 1 Type II report. Funds should review findings and management responses carefully.
• Data security & cybersecurity. Funds should ask about encryption standards, access controls, penetration testing cadence, and incident response protocols to ensure they don’t fall victim to cybersecurity
• Business continuity & disaster recovery. Funds should ensure the administrator has robust recovery time objective (RTO) and recovery point objective (RPO) targets.
• Error history & resolution. Funds should ask administrators what, if any, material errors have occurred recently and how they were resolved.

How Should You Evaluate the Administrator's Team and Staffing?

• Dedicated team versus shared pool. Funds should ask the administrator if they will be assigned a designated relationship manager and accountant(s), or if a general queue will handle their inquiries.
• Staff turnover. High staff turnover is a red flag, and fund managers should ask about retention rates among fund accounting staff.
• Key person risk. Funds should understand what happens to their account if their primary point of contact leaves and who will resume responsibilities.

Can the Administrator Scale with Your Growth?

• AUM and investor growth. Funds should make sure the administrator can scale as your fund(s) grow.
• Multi-fund/multi-strategy support. Funds should make sure the administrator can handle parallel vehicles, master and mini-master structures, co-invest vehicles, SPVs, and separately managed accounts on the same platform.
• Jurisdictional reach. Funds should inquire if the administrator can provide support to offshore structures (Cayman, Luxembourg, Ireland) if needed.

How to Identify Conflicts of Interest in Fund Administration

• Affiliated relationships. Funds should evaluate any potential conflicts of interest. For example, is the administrator affiliated with a placement agent or broker-dealer?
• Auditor independence. Funds should make sure their administrator and auditor are unaffiliated due to independence rules and limited partner (LP) preference for independence.

What Reporting and Transparency Should LPs Expect?

• Investor portal quality. Funds should inquire if LPs can self-serve documents, capital account statements, performance data, audit reports, and tax forms.
• Reporting customization. Funds should understand if the administrator can produce bespoke LP reports, waterfall calculations, and side pocket accounting.
• Communication standards. Funds should understand an administrator’s service level agreements (SLAs) for responding to investor queries.

Does the Administrator Support Your Regulatory Filing Requirements?

• AML/KYC capabilities. Funds should inquire if the administrator will provide investor onboarding compliance, know your client/anti-money laundering procedures.
• Regulatory change readiness. Funds should ask the administrator how they monitor and adapt to evolving regulatory and accounting requirements.

What Fee Structures and Contract Terms Should You Negotiate?

• Fee structure. Funds should have a clear understanding of their fee structure, whether AUM-based, per-investor, per-transaction, or flat. Also, they should understand what's included versus what is billed as extras.
• Termination provisions. Funds should understand their contract obligations, including notice periods, since switching administrators is operationally painful.
• Scope of Services. Funds should thoroughly understand the services to be performed, and those services should be clearly delineated in the agreement. Understanding what is not included is also important.

Why LP Perception of Your Administrator Matters

• Institutional LP requirements. Partnering with the right administrator lends credibility to fund operations.
• Third-party validation. Funds should understand that being administered by a recognized firm can reduce friction during LP due diligence and fundraising.

What Are the Red Flags When Evaluating a Fund Administrator?

• Unwillingness to provide a SOC 1 Type II If an administrator can’t provide the fund with a SOC 1 Type II report, then there is no independent verification of their controls.
• High staff turnover on fund accounting teams. Fund accounting is highly detailed work, and when the person leaves, the replacement has to learn the fund’s intricacies, such as waterfall mechanics, side pocket history, and side letter provisions. In the interim, the risk of errors potentially increases on NAV calculations, capital account statements, and distributions.

How EisnerAmper Can Support Your Fund Administration Needs

The right administrator is a long-term operational partner, and the due diligence process should reflect that commitment.

EisnerAmper's Fund Administration team works with hedge funds, private equity funds, venture capital funds, and real estate funds at every stage of growth. To learn more about how our team can support your fund administration requirements and strengthen investor confidence, contact us below.