Fund administration has become an increasingly popular way for fund managers to outsource their accounting, financial, and reporting duties. What exactly is it, and how does it compare to onboarding an in-house administration team? In this interview with Finally Fund Admin, we’ll go over some of the basics of fund administration.
What is Fund Administration?
Fund administration is a third-party service that assists funds on their administrative functions. The services provided include, but are not limited to:
- Tax filings
- Capital calls and distributions
- Asset valuations
- Investor communications
- Limited partner reporting
- Accounting and audits
Outsourcing administrative functions frees up time for fund managers to focus on analyzing investment opportunities and marketing and fundraising for the fund. With the growth of the venture capital and private equity industries, fund administration has also cemented itself as a key service for funds.
The Logistics
Fund administrators may get involved as early as the fund formation stage to assist clients with entity structuring. They provide templates for legal documents and connect fund managers with legal counsel for additional customization. As funds launch and wind up, fund administrators may work with accountants to provide specific tax expertise to clients.
Funds are provided with client portals for their limited partners and assigned account managers with signatory authority for administrative documents. Capital calls and distributions are made through client portals, which are linked to the funds’ bank accounts. Fund managers may authorize account managers to handle communications with limited partners, legal counsel, and accountants directly.
Fund Administration vs. In-House Administration
While larger funds may prefer to onboard in-house administration teams under their management companies, smaller funds may find this too costly to do so. Fund administration is a fraction of the cost of hiring employees to manage administrative functions. Additionally, fund administrators are typically well-connected to external legal counsel and accountants (who may offer discounts on services), meaning that fund managers can save time and money on finding other professionals for their funds.
What is the downside of fund administration? Some funds may be so specialized and structured in such unique ways that conventional methods of administration might not work. Since fund administration is designed on economies of scale, if your fund requires special ways of administration, then you may want to consult with your fund administrator to see if they are capable of handling your business needs. They may refer you to legal counsel to see if there is a solution that works for everyone.
Is Fund Administration For You?
If you are still in the early stages of planning your fund, you may want to build out your fund thesis before consulting with a fund administrator on the points mentioned above. While fund administrators may assist you on many aspects of planning, such as entity structuring with legal counsel, it is up to you to design the operational model for your fund. This includes your plans for:
- Marketing your fund
- Fundraising from limited partners
- Investing in portfolio companies
- Constructing a distribution scheme for capital contributions
- Onboarding employees
Fund administrators will ask you about these plans so that they can set up an administration model for you. This includes the way your account manager will handle your investor communications, the way legal counsel will structure your documents, and the way accountants will structure your tax strategy.
Which Fund Administrator Should You Choose?
If you have been following fund administration news, you may have heard of the collapse of Assure, which was caused by both internal mismanagement and the inconsistent provision of fund administration services. Other competitors are currently facing down rounds in valuation and are operating at a loss.
Funds can have a lifespan of more than ten years, so it is important to make sure that your fund administrator will still be in business when you wind up. In choosing a fund administrator, make sure that it offers high quality services at a price that makes sense for its business model. Feel free to ask your fund administrator about its pricing model and profit margin.
Final Words
If you are looking for an efficient, cost-effective way to manage your fund’s administrative functions, then fund administration may be for you. Fund administrators can provide you with a network of legal professionals and accountants to assist you at various stages, from structuring your fund at the very beginning to providing complex tax advisory services upon distribution and at later stages. Once you develop your fund thesis, you can start looking into whether fund administration works with your operational model.
