Use of Third-Party Admin
Private equity fund managers face many pressures to raise and retain capital, find the right investment opportunities, and deliver returns that exceed investor expectations. While it has been common for hedge fund managers to hire outside fund managers for decades, it has only recently become more common for private equity managers to hire fund managers. The reasons for this vary, but several private equity managers said their decision not to hire a fund manager was due to (i) performance carry calculations (hurdles and waterfall) being too complex. (ii) They wanted to maintain a close relationship with the investor base; (iii) They felt that the function could be done in-house due to the low reporting; (iv) Because the fund is closed,independent portfolio accounting and valuation was not a requirement requested by investors.
To be successful, you need to keep pace with industry changes without compromising your primary goal of managing your investment portfolio. This includes investor demand for greater transparency and increasing reporting complexity without compromising the primary purpose of managing investment portfolios. Successfully managing third-party funds requires focusing on critical areas to ensure your funds stay ahead of the curve.
Fund managers are faced with many challenges. Complying with evolving regulations and meeting investors’ demands for complex data often gets in the way of what they do best: raising and investing capital. Third-party administrators review and verify everything you do with the fund. They help with membership statements, capital calls, distributions, etc. As I said, "Any time money flows from a fund to an investor or vice versa, you are involved." Today, the tide seems to be turning as more private equity managers seek to leverage the resources and expertise of third-party managers. This may be due to investor pressure or the need to reduce the cost of hiring a strong back-office team amidst the growing complexity of running a business. It makes sense to use a fund manager. Here's why:
a) Broad and experienced professionals:
When private equity managers decide to hire fund managers, they get more than just service providers. As an example, he brings together the extensive experience of a team of experts, many of whom are qualified CPAs, who have examined various variations of carry fee calculations, addressed the complexities and nuances of the multiple funds closing process, and seen multiple reporting formats. We have GAAP-compliant financial statements and a good understanding of what is required to provide investors with a complete set of reports. Experienced fund managers also provide an excellent source of industry best practices and help manage the growing demand for the interpretation of fund reporting and document delivery. Essentially, the fund manager strengthens and expands the capabilities of the fund manager's back-office team while reducing over-reliance on one or two staff members.
b) Second eye:
Hiring a fund manager allows investors to have an (ideally independent) third party prepare financial statements, calculate fees and investor allocations, and be involved in the financial management process. You can rest assured that you are also involved. One of the most common questions asked in investor due diligence meetings concerns cash management controls, employees authorized to make money transfers, and the number of signatures required to transfer funds. A fund manager is generally involved at some level in the cash management process, and many banking platforms today allow three levels of approval: wire initiator, wire approver, and wire release. Additional oversight by third-party fund managers, an integral part of this process, will undoubtedly reassure investors.
c) Best-in-class technology:
Fund managers typically invest heavily in their technology infrastructure to provide clients with efficient service and effective management capabilities. Today, many private equity systems automate the nuances of funds, such as the capital acquisition and distribution processes, and also have the ability to encrypt sensitive investor information. Automation reduces the risk of error and saves time for functions previously performed in Excel. The industry's leading technology solutions also improve the control environment by providing system-driven manufacturer check capabilities and audit trails. It's also important that investor reporting adhere to the latest industry standards, and managers are in the best position to keep abreast of these trends.
d) Robust Control and Process Environment:
Today, reputable fund managers received the SSAE 16 Type II report, assuring clients that their control and process environments have been audited by a third party. Usually, a PCAOB-compliant accounting firm A non-accredited SSAE 16 Type II report is essentially checking a box during the seal of approval or due diligence. Both private equity managers and investors will ensure that service providers have such reports in place to ensure that systems and procedures have been tried and tested. This stamp of approval has become a mandatory requirement for institutional investors, large funds, and a growing list of limited partners.