The ever-changing regulatory landscape, increasing investor demands and rapidly evolving use of technology are driving a trend towards outsourcing in the fund administration industry.
Traditionally, many fund managers performed the administration of private equity and real estate funds in-house. However, as the reporting demands of both investors and regulators grow, so too does the need for specialist knowledge, processes and technology, which independent third party administrators are well placed to provide.
By outsourcing, fund managers are able to concentrate on their core competencies of investment analysis and selection, and generating returns for their investors. In addition, they can take advantage of the third party administrator’s expertise and economies of scale (the administrator will service multiple clients and fund structures), thereby gaining access to the latest fund analysis and reporting technology at a lower cost than if they were to implement it themselves.
In this article, I take a closer look at the key drivers behind the outsourcing trend as well as the different operational models available to ensure that, once a decision to outsource has been made, fund managers are able to retain the level of control they desire over the flow of information to their investors.
Why outsource fund administration?
- Investor demands
One key factor propelling alternative fund managers towards outsourcing is investor demand. Institutional investors are undertaking more detailed due diligence on a fund’s operating practices before committing capital. This due diligence goes beyond the traditional analysis of a fund manager’s track record and investment team and now incorporates analysis of all parties connected with the fund. Investors increasingly expect to see that an independent third party fund administrator has been appointed with the experience and technology in place to provide detailed reporting on their investment as well as process transparency.
Due to the introduction of reporting requirements such as the Basel III framework, many institutional investors increasingly want further information on their investment portfolio, such as a breakdown of exposure by geography, sector and fund types. This is particularly relevant for investors with a large and diversified portfolio, typically including fund of funds investments, where the number of underlying investee companies is multiplied.
They are also increasingly considering the environmental and social impact of their investments, as well as the corporate governance of the investment structure. They therefore wish to see reporting on environmental, social and governance (ESG) factors.
The best fund administrators are able to track and store all of this information and have a team of technology savvy professionals on hand to build bespoke dashboards and deliver portfolio analysis reporting.
- Regulatory requirements
Over the past few years regulatory reporting requirements have become more and more complex with the introduction of global initiatives such as FATCA and CRS. These regimes, combined with rising AML standards and the introduction of GDPR last year, are greatly escalating the reporting obligations on fund managers. In turn, fund managers are realising the significant resources required to keep on top of this evolution and recognising that independent third party fund administrators with specialist staff are best placed to meet the mounting requirements.
- Access to technology
In line with the rising expectations of clients and investors alike, fund administrators are increasingly embracing technology in order to deliver the high level of service required.
Specialist fund administration platforms, such as eFront, FIS Investran and PFS Paxus, allow data to be tracked at each level of a fund structure, from the investor’s commitments and fund level data through to the underlying portfolio companies.
Consolidation of this data into one system allows processes around data input and output to be tightly controlled, enhancing the integrity of the data and minimising the risk of error associated with manual Excel spreadsheets. This data is then used to produce the fund’s financial statements, investor notices and portfolio analysis reporting mentioned elsewhere in this article.
Outsourcing provides fund managers with the opportunity to reap the benefits of these systems, while avoiding the costly and time-consuming process of implementing and maintaining the technology in-house. These cost savings can ultimately be passed on to the fund manager’s investors through reduced overall fees.
Retaining investor relationships
Although there are clear benefits to outsourcing, lack of flexibility, loss of control, staff turnover and the ability to trust an external provider are genuine concerns for some fund managers. The third party administrator therefore has to demonstrate that they can be trusted and deliver client-focused solutions in order to allay these fears.
Central to outsourcing concerns is the fact that most fund managers will want to retain the primary relationship with their investors. The flow of information between fund manager, administrator and investor therefore needs to be carefully considered.
Below are three possible investor interface models for outsourced fund administration:
Traditionally, all administration tasks throughout the lifecycle of the fund are completed by the third party administrator and are circulated via email to the fund’s investors. While the fund manager may choose to review a calculation or call notice produced by the administrator prior to it being shared externally, the administrator is the interface for the investors.
Given its efficiency in terms of saving the fund manager’s time, this model is still commonly used. However, there are other options for fund managers wishing to retain a greater level of control.
An evolution of the traditional model, all investor communications are delivered via a secure, web-based portal. Each time the fund administrator produces a new document, it is loaded to the portal and a communication is generated to let the investor know that a new document is available to view. Investors can access all historical communications related to their fund investment at any time. The interface itself can be branded with the fund manager’s logo and the link to the portal can be via their own website.
3. No Contact
With this model, the fund administrator performs a 100% back office function, with little or no contact with the investor. Administrative tasks are completed by the third party administrator and the output of these tasks is sent to the fund manager for review. The fund manager then in turn issues the communication to their investors. While more time consuming, this allows the fund manager to retain control over the flow of information to their investors and ensures they retain the primary relationship.
The path to success
Quicker, more frequent, customised, sophisticated, dynamic, real-time accessible, transparent: these are just some of the key words when defining the reporting needs of GPs and LPs today. As such, the outsourcing of fund administration has evolved into a more complex and tailored delegation of operational expertise. With the industry trend towards outsourcing back-office functions set to continue, the fund administrators that will thrive are those able to meet rising demands through the application of innovative technologies and a flexible client-centric approach.
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