Should a fund administrator be hired? Four important factors
As private equity firms expand, they might need to think about outsourcing to increase operational savings, acquire specialised skills they might not have in-house, and expand their capabilities. Firms may be able to realise all these advantages and dedicate more time to what they do best—finding and concluding agreements that give investors the maximum potential return—by outsourcing funds administration in particular.
But how can a company know when to bring on a fund administrator? Outsourcing doesn’t have a one-size-fits-all rule, and the time and strategy will be determined by a variety of elements, such as the firm’s resources, the fund’s jurisdiction, and associated compliance needs. However, businesses can evaluate a number of crucial factors to determine when it’s appropriate to hire a fund administrator. Here are four important factors that businesses should weigh.
Consideration 1: Demands for reporting and compliance
It might be appropriate to think about outsourcing if a fund is dealing with rising demands for transparency from limited partners or is switching from smaller and high-net-worth individual investors to larger institutional investors.
In general, institutional investors need fund administrators who are well-known and often used. They could also request certain IT and other controls certifications, such as Service Organization Controls (SOC) reports, Global Investment Performance Standards (GIPS) 2020, and ILPA Institutional Limited Partners Association (ILPA) 3.0. Limited partners might also need more frequent or extensive reporting to reduce their risks. Investors may also demand details on environmental, social, and governance (ESG) issues as well as confirmation that private equity firms are allocating their funds to socially conscious ventures (SRIs).
Consideration 2: Future expansion strategies
Private equity firms that operate well are masters at obtaining, allocating, and generating high profits. Going big and far is typically the objective. However, functioning in multiple markets comes with a number of legal and legislative requirements.
A fund may run into difficulties as it diversifies into different jurisdictions, such as heavy bureaucracy and ignorance of local laws and regulations. Because they’ve undoubtedly guided other businesses through the same procedure, fund administrators are usually familiar with a variety of international markets. However, when a business expands, it could run into knowledge and resource gaps and not be able to manage every aspect of its operations. Onboarding a fund administrator might be beneficial when entering new markets.
Consideration 3: Human resources
The majority of businesses go through growing pains when they add more employees, start engaging with institutional investors, and handle increasingly complex structural and legal requirements.
Doing everything in-house might not always be the most economical or successful course of action. Additionally, it can be dangerous if compliance requirements are neglected because of a lack of internal expertise or resources.
Consideration 4: Technology is a key factor
Data-driven automation and decision-making are essential in many fields, including private equity.
However, many funds continue to use antiquated manual procedures, general ledger software, and spreadsheets. By bringing on a fund administrator, businesses can gain access to technological platforms that automate operations, increase transparency, and let them grow data usage. In order to meet investors’ demands for more transparency, operational visibility, and robust risk mitigation, a fund administrator can offer comprehensive solutions and services that not only assist businesses in navigating changing operational challenges but also help them become better data stewards. Better technology frequently positions a company to better satisfy regulatory requirements.
Choosing to contract out
Even though outsourcing might not be the best course of action for all funds, many developing businesses can extend their capabilities while successfully controlling risks by looking externally rather than internally. Working with an experienced administrator and outsourcing fund administration can help businesses gain the knowledge they need more affordably, meet regulatory requirements more successfully, and maintain investor satisfaction. All of which will allow them to devote more time and effort to their primary company and change their attention from back-office operations to transactions that provide investors with a strong return on their invested capital. Fund managers can choose the optimum strategy for their fund by carefully assessing these four areas.
Comments (2)
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