Outsourcing fund administration – eight factors for success
For investment firms, outsourcing fund administration offers significant benefits in the form of operational efficiency, cost savings, and access to specialised technology and expertise. However, for those outsourcing for the first time or considering a move to a new provider, the process can seem daunting. Here we outline eight criteria for outsourcing success.
For many venture capital (VC) and private equity (PE) firms, outsourcing fund administration for the first time is not only a practical challenge, it’s also something of an emotional one. ‘Letting go’ and entrusting core operations to a third-party service provider requires a shift in mindset. Equally, taking the decision to move to a new provider can also seem like too much of a headache to be worthwhile.
However, the transition to a (new) third-party fund administration provider need not be a painful one. Here are eight factors that can help ensure the process is a success.
Selecting a service provider with the right credentials and expertise is crucial. The service provider should be able to demonstrate an established track record in the industry, have in-depth knowledge of regulatory requirements, conform to industry best practice, and offer access to the latest technology.
It should be straightforward to determine whether a potential provider is present in the right jurisdictions (for both the firm and its investors), whether it has the appropriate resource allocation to the PE/VC industry, and whether it has sufficient knowledge of the appropriate structures for each jurisdiction.
The best outsourcing providers have well-established and robust processes in place for onboarding new clients or funds. They will offer a rigorous project management approach to onboarding new entities into their platforms. They should be able to provide a clear idea of the expected implementation period per entity (whether new funds, existing funds, co-investment vehicles, General Partner (GP) entities, or management companies), along with a timeline and approach to implementation. A decision point around moving over all historical information to calculate metrics, like internal rate of return (IRR), or transferring from a cut-off date are some of the considerations that should be thought through.
Successful fund administration outsourcing is built on clear expectations, performance metrics, and reporting mechanisms that provide visibility and accountability. There should be open lines of communication, with regular updates, comprehensive reporting, and periodic meetings to help establish trust and build confidence. It should be possible for fund managers to access the reports they need, when they need them, through advanced client portals, for example.
Open and transparent dialogue fosters a collaborative partnership approach, and helps identify areas for improvement and address any concerns promptly.
Ideally, an outsourced provider should provide a single point of contact that understands and can manage a global service team and an array of entities and resources. It should be possible for GPs and senior fund managers to maintain peer-to-peer relationships with those in the outsourcing provider’s team, whenever needed.
It’s also important to establish what level of involvement is required from the client team. In an ideal world, the investment firm should be able to transition to a more oversight-focused role, with partners and employees empowered to focus on strategic decision-making, risk management, and compliance oversight.
One of the main reasons to outsource fund administration is to achieve predictability and efficiency of costs. Transparency in pricing, including a breakdown of fees and charges for different activities, is essential. Before choosing an outsourcing provider, investment firms should assess and compare the pricing structure and associated costs – like for like – across the potential candidates. Some providers offer a template to make this easier. It is crucial to strike a balance between cost and value, taking the potential providers’ expertise and technological capabilities into account.
As investment firms grow or launch new funds, the outsourced provider should have the ability to scale and flex to accommodate the expanding or changing workload. Flexibility in service offerings enables firms to tailor their outsourced fund administration to align with specific requirements, such as fund structures, geographic reach, and reporting formats. It might make sense to outsource the administration of a specific fund launch to test the waters and check if there’s a good fit with the provider.
It is vital for outsourced fund administrators to have appropriate data security and privacy measures in place, and to be compliant with relevant data protection regulations. Robust technology, protocols and policies – including encryption, secure data transmission, and regular audits – should be in place to mitigate the risk of data breaches or unauthorised access. Engaging a provider with a proven track record in data security and privacy helps protect against potential reputational damage and regulatory violations.
Outsourcing fund administration does not absolve investment firms from their risk management and compliance responsibilities. While a competent service provider can alleviate certain operational risks, accountability ultimately lies with the investment firm. This makes it vital to assess the service provider’s risk management framework, internal controls, and compliance procedures. Clear expectations and responsibilities should be defined through robust contractual agreements and service level agreements. Regular monitoring and audits should be conducted to ensure adherence to regulatory requirements and mitigate potential risks associated with outsourced activities.
By overcoming the mental challenge of ‘letting go’, PE and VC firms can successfully embrace outsourcing to a trusted third-party fund administrator as an opportunity for growth and efficiency – and focus on their core business of investment.
How can TMF Group help?
To learn more about how TMF Group can provide tailored fund administration solutions, please contact us today.