What is fund administration?

The rapid growth of the private markets industry during the last 15 years has supported growing demand from alternative assets managers for middle and back-office support and expertise to support their expanding franchises.

The fund administration sector has been a crucial service provider to managers seeking middle and back-office assistance, but what exactly is fund administration and what services do fund administrators provide?

What is fund administration?

Fund administration involves the third-party provision of middle and back-office services to private equity, private debt, real assets, venture capital and hedge funds.

Managers of these alternative asset funds will rely on fund administration service providers to manage their middle and back-office services requirements so that they can focus on their core, front-office functions of sourcing and executing deals, managing portfolios, securing exits and delivering returns for investors.

Tasks that fund administrators will manage for alternative asset managers include:

• Fund accounting
• Financial and investor reporting
• NAV (Net Asset Value) calculations
• Managing capital calls and distributions
• Fund compliance
• Regulatory assistance
• Audit and tax support
• Anti-money laundering (AML)
• Investor services
• Technology and advisory services

What are the benefits of fund administration?

Outsourcing back-office functions to a third-party fund administrator has become more important for alternative assets managers as the industry has grown, and regulatory, compliance and investor demands have increased.

The private markets industry started out as a small, niche asset class, led by entrepreneurial teams of dealmakers who ran their firms with small back-office teams and simple IT infrastructure.

As private markets assets under management have significantly increased, similarly the demands on the operational infrastructure of managers and firms have intensified. Managers require much larger back-office teams and more robust technology platforms to service a larger, more global and sophisticated investor base.

Working with an established fund administrator means that managers can address these rising demands without having to invest large sums of upfront capital expenditure in back-office infrastructure, and take advantage of the global reach, economies of scale and technology infrastructure of specialist fund administration providers.

What are the primary functions of a fund administrator?

The role of the fund administrator is to assist clients by managing the tasks related to fund accounting, investor onboarding and reporting, compliance, and regulatory obligations, while ensuring that all requirements are met on behalf of the firm.

When working with a trusted fund administrator a private fund manager can rest assured that all fund accounting is timely and accurate, that the issuance of capital calls and distributions to investors are prepared, coordinated and delivered, that investor reporting and portal requirements are fulfilled and and that their fund is in compliance with regulatory, know-your-client (KYC), know-your-transaction (KYT), and anti-money laundering (AML) obligations.

A fund administrator’s primary responsibilities will include:

• Fund accounting
• Investor, regulatory and tax reporting
• NAV calculation
• Capital call and distribution management
• Cash management
• Financial statement preparation

In addition to performing core back-office functions and assisting the manager in meeting the obligations outlined in fund documents, a fund administrator can leverage its experience and scale to offer additional, related services that add further value.

Other services fund administrators will provide include:

These services can free up additional in-house resources, help managers to provide additional financial information to investors outside of set reporting periods and give investors comfort that a manager has strong, comprehensive operational infrastructure in place to support their firm.

Technology and software services are one particular area where there has been a transformation in additional value a fund administrator can offer.

Technology has become a crucial enabler for faster, more comprehensive reporting that investors and regulators require.

Fund administrators, who work with multiple clients across a wide range of asset classes and jurisdictions have built up invaluable experience and knowledge of how to implement configure best-in-breed industry software and help managers to select the best software and technology to meet their bespoke requirements.

This is one example of how the value and services a fund administrator can provide expanded value beyond the foundational disciplines of fund accounting and investor reporting.

What teams are involved in fund administration?

In order to deliver the various services, fund administrators draw on the expertise and skills of a wide range of professionals.

The teams of professionals comprising fund administrations teams will include:

The depth and breadth of skills required to manage fund administration is difficult for managers to replicate in-house. Outsourcing to a third-party provider that has economies of scale and can offer professionals with career development opportunities can be a much more efficient way for a manager to access these skills and knowledge.

What are the different requirement for different managers?

Some managers will be raising their first funds or only be managing one or two funds, while other managers will be managing multiple funds across a range of private markets strategies. Fund structures can also vary in complexity and size.

Different investors will also have different requirements. Some investors will demand frequent reporting and portfolio analysis, while for others quarterly reporting will suffice.

Fund administration services can be tailored to the specific requirements of individual managers and their investors.

Fund administration models will also vary by asset class, and each asset class will have its own specific fund administration requirements:

Private equity, real estate & infrastructure and private debt are the main asset-class specific fund administration models.

There requirements are as follows:

Private Equity:

• Capital call management
• Distribution processing
• Waterfall calculations
• Deal structuring
• Aggregate valuations

Real Estate & Infrastructure:

• Property valuation services
• Real estate asset management
• Lease administration
• Property acquisitions services
• Real estate financial reporting
• Asset management
• Infrastructure valuation services

Private Debt:

• Loan servicing and administration
• Debt fund compliance reporting
• Private debt portfolio management
• Covenant monitoring services
• Credit risk assessment

A stamp of assurance for investors

For private markets LPs the knowledge that a manager has an experienced fund administrator in place provides confidence.

LPs will be familiar with the leading fund administration providers and can ease due diligence requirements knowing their operational knowledge, processes, technology and cybersecurity.

A credible fund administration provider can give a manager’s LPs, who are investing for the long-term, the comfort that a manager has a robust and scalable operational model in place that has been tried and tested.

LPs can leverage third-party administrators to support them in navigating the everchanging regulatory landscape and help them provide transparent and accurate reporting efficiently. Managers working with fund administrators can also benchmark their fund administration costs against market rates, further strengthening investor confidence that back-office functions are not only robust, but also economic.

Fund administration: a key partner in a mature industry

The private markets industry has grown and matured over the last decade, and the expectations of managers when it comes to fund accounting, investor reporting, and regulatory compliance have intensified.

Managers do have the option of keeping these functions in-house and investing significantly in back-office teams and operational infrastructure to keep pace with increasing back-office expectations. For managers that want to focus on the core business of investment management, however, third-party fund administration has become an essential service that frees up managers to focus on creating value for its LPs by doing deals and growing their franchises, all by knowing an administrator provides knowledge that their operations are secure and that they count on the support of the administrator’s reporting and regulatory teams to navigate the various regulations in the jurisdictions a manager is operating in.

If you are a manager seeking back office, technology and operational support, Alter Domus’ Fund Services team is available to discuss how you can future proof your operational model, simplify your back-office infrastructure and harness technology and best-in-breed industry software to its fullest potential.