Fund Administration: DIY or Delegate to a Specialist?27 Jun 2017
Reliable fund administration is key to a successful investment platform. The growth in private equity, real estate and infrastructure investment managers opting to outsource their back-office fund administration continues to gather pace. This is borne from a number of factors that include external pressures, but equally internal operational considerations. In this article we explore some of the compelling reasons why managers are re-evaluating their operating models and outsourcing back-office functions, as they seek to unlock added value, whilst also driving efficiencies.
Surge of Regulations and Subsequent Reporting
Significant and overwhelming changes in the regulatory landscape in recent years, has had a major influence in the investment funds industry. Examples include the Alternative Investment Funds Managers Directive ("AIFMD"), the Foreign Account Tax Compliance Act ("FATCA"), and more recently the quickly expanding agreements for the automatic exchange of information via the Common Reporting Standard ("CRS").
Each of these regulations is designed to achieve ever greater transparency and subsequently demand increasingly detailed and rigorous reporting obligations. In turn, this reporting requires all of us caught by the regulations to develop progressively sophisticated and scalable technology platforms which importantly must be underpinned by robust policies and procedures; all of which require considerable effort and financial investment.
As adherence to these regulations is absolutely critical, fund managers need to consider whether they have the resources in place now, and going forward to continue complying themselves. Many managers have found the answer in an external party such as their fund administrator, to help alleviate the burden and mitigate the risk of staying on top of this ever-changing environment.
The question is not just about considering the regulatory reporting requirements of today, but also considering future changes as it is almost certain that the volume of reporting will continue on an upward trajectory.
Meeting Investor Expectations and Focusing on Core Competences
Clearly the influence and expectation of a fund manager's investor base is of fundamental importance. Following some of the highly unsavoury and well publicised fraudulent activities in the investment funds industry, investor groups understandably take comfort in, and increasingly demand independent fund administrators to be appointed in addition to independent investment valuations. Indeed, for a manager to partner with an independent and reputable fund administrator can often help with the success of their fund raising activity.
Searching for the best return on their investment is paramount to investors. They want their fund managers to focus on what they do best, while not having the distraction of overseeing back-office functions. By outsourcing these functions the manager can optimise their efforts and focus on maximising returns. This allows greater alignment between the manager and their investors and contributes to better fund performance. With more and more funds coming to the market, chasing the same dry powder; successful manager track records are vital in securing future investor commitments.
Streamlining Costs & Driving Efficiencies
Fund managers with existing back-office teams are faced with time consuming, non-revenue earning responsibilities that require considerable investment in human capital, and the maintenance of up-to-date technology platforms. Operational infrastructure must be scalable and sufficiently flexible in order to adapt to a landscape of continuous change. By outsourcing this function to a specialist fund administrator the overall costs are likely to be materially lower, as the administrator is able to leverage the economies of scale that arise from servicing other funds. In short, a good fund administrator will build and continue to develop an ecosystem that is as future proof as it can be.
For smaller or start-up managers, it may simply not make sense to invest in a back-office and commit valuable capital in building and resourcing an operational infrastructure, when a proven specialist fund administrator is able to fully support the manager as their portfolio begins to grow.
Making the Call
Whilst this article outlines the merits of fund managers adopting a strategic partnership with a proven fund administrator, it is equally acknowledged that such a decision needs to be carefully considered. For some managers, they may be reluctant to cease control. Furthermore, there might be certain aspects of the manager's operation where there are good reasons for retaining these duties in-house. For example, some managers may wish to retain all, or the majority of the investor reporting function so they manage and build upon their relationships with their investors. This can also be used as a method of encouraging feedback directly from their investors. Alternatively, a manager may wish to outsource investor reporting in order to utilise their fund administrator's technology capabilities. Today these are typically offered via 24/7 online portals.
The critical point is that when making the decision to outsource or not, a manager needs to be clear about which aspects they wish to delegate and which they prefer to retain. A one size fits all model certainly does not need to be adopted.
If the decision is ultimately to proceed with an outsourced model, the risks of doing so can be sufficiently mitigated by undertaking a thorough due diligence process of the proposed fund administrator. In particular, a manager should prudently examine the administrator's policies, controls, procedures, technology and also seek client references from other managers. A cultural fit between both parties is also of key importance because ultimately, the fund administrator should be seen to behave as an effective extension of the manager's team.