WHAT IT IS AND WHY YOU NEED IT
Third-party fund administration is a collection of services and activities that support the operations of a collective investment vehicle. Fund administrators offer a wide variety of customized services to fund clients including, but not limited to administration, accounting, audit support, investor reporting, compliance, governance and regulatory reporting.
In the aftermath of the financial crisis a decade ago, the mandate has been to provide greater transparency to clients. The regulatory landscape is ever-changing and there is a demand for institutional quality infrastructure. Operational efficiency and timely, accurate reporting to investors are paramount. This has created an evolutionary movement to address conflicts of interest and deal with one of the greatest challenges; what does a firm do when there are not ample resources to have enough diversification of responsibilities?
The sting of the financial crisis is ever-present, and most investors scrutinize prospective investments by conducting thorough due diligence assessments before they invest. This is primarily due to the emergence of more complex investment models, the structure of different investor groups within the same fund, an inherent lack of liquidity and investors being subject to longer lockup periods.
As the hedge fund industry has done in prior years, private equity firms are migrating towards the third-party administration model. Fund service providers have partnered with asset management firms allowing for the better overall health of the alternative asset class. This allows fund professionals to focus on their bottom-line core competencies, grow their businesses and adapt to the evolving regulatory environment.
With Level III assets often at the heart of private equity investing, it is essential to have the assets properly valued and accounted for by an independent third-party and have certain non-core back-office operations outsourced to remove any circumspect valuations and conflicts of interest. By mitigating this risk, it reduces the potential inflation of the balance sheet to collect performance fees.
Last, but certainly not least, fund governance overall has become crucial. It gives credence to the fact that utilizing third-party service providers for back-office support and having independent fund directors on the board of funds helps to keep things in check, reduces conflicts of interest and gives investors a comfort level that there is an outside, trusted resource involved. It also speaks volumes that the fund managers themselves care enough to invest in the necessary third-party resources to assist them in the ongoing success of their firm’s overall strategic objectives while maintaining a fiduciary responsibility to their investors.