A Guide for Fund Admin Start-Ups

Starting a fund administration business is not much different than starting any other entrepreneurial venture. It’s important to understand why the particular business is of interest to you, determine the upside potential, and be realistic about the barriers to entry and resources needed to get it off the ground and ensure long-term viability. The back office is an often overlooked aspect by new start-ups. Is off-the-shelf software like Excel, QuickBooks or similar going to cut it? Is the cost of going a more robust route affordable? 

What is Fund Administration?

Fund administration is a third-party service that handles investment fund accounting, limited partner (LP) reporting, asset valuation, capital calls, and capital distributions. Any type of investment fund may use fund admin services, including private equity funds and hedge funds.

Essentially, a fund administrator is an outsourced third-party service provider that protects the interests of investors by independently verifying the assets and valuation of the fund. By outsourcing the fund administration function, fund managers are allowed the freedom to focus on portfolio management internally. Typically, fund administration comprises two parts: fund accounting and the activities of registrar/transfer agent.

Services Provided by Fund Administrators

The traditional role of a fund administrator includes the following services:

• Net Asset Value Calculation: Daily, weekly and monthly Net asset Value calculation (NAV)
• Financial Reporting: Calculation of the fund’s income and expense accruals and the pricing of securities at current market value, financial reporting, financial statement preparation and audit liaison
• Bank Account Management: Opening and control of fund bank accounts
• Shareholder Reporting: Preparation of reports to shareholders
• Reconciliation: Reconciliation of the broker, custodian, bank and investment manager statements
• Accounting Services: Accounting services; maintenance and filing of the fund’s financial books and records
• Expense Management: Payment of fund expenses
• Settlement: Settlement of daily purchases and sales of securities, ensuring collection of dividends and interests
• Dividend and Distribution Management: Calculation and payment of dividends and distributions to the transfer agent
• Regulatory Compliance: Preparation and filing of local regulatory body filings/reports
• Portfolio Pricing: Pricing the portfolio of the fund
• Performance Measurement: Calculation of the total returns and other performance measures of the fund
• Compliance Monitoring: Compliance and anti-money laundering monitoring and reporting
• Liquidation Supervision: Supervision of the orderly liquidation and dissolution of the fund (if required)

Considerations and Challenges

When launching a fund administration business, there are several considerations and challenges to keep in mind. Industry-standard software is important, as is selecting affordable, award-winning software that can handle multi-asset classes, master-feeder structures, side pockets, nested entities, etc.

It’s also important to choose an independent provider with quick and easy onboarding. Getting accurate NAVs can be a challenge due to data sources, the right systems, lack of automation, manpower, and the time it takes to get data to report to clients. Reporting flexibility and speed are also important factors to consider.

Next, consider automation. QuickBooks and similar vs specialist software can make a big difference in the success of your fund administration business.

Technology Infrastructure

Unless you plan on supporting your entire operation with Excel (which will only take you so far since it is not scalable), selecting a technology platform is the single most critical decision for future success. It becomes the “plumbing” upon which your business is built.

The platform you standardize on can have a long-lasting, material impact on the business you create. It must be robust enough to accommodate all types of clients, markets and services. Changing platforms once installed is difficult, so choose wisely from the start.

Assiduously research vendors, perform due diligence on all viable options and ensure the selected accounting platform can support your current needs and more importantly, future growth. While cost is always a factor in launching a new business, think long term and don’t be penny wise and pound foolish with technology.

Additional Considerations when Choosing a Back Office for Your Fund Administration Start Up

Following are some specialized criteria to take a closer look at before taking the leap:

Scalability

When choosing a new accounting software package, it is important to consider scalability. Can the software seamlessly manage the demands that come with more clients and more business? When considering the cost-benefit tradeoffs surrounding this question, keep in mind the future cost in terms of both dollars and in turmoil from future upgrades. Ideally, the solution you may wish to focus on is one that is configured to manage all current and future aspects of your business, including hedge funds, private equity, mutual funds and any other area you could potentially expand into in the future. In this way you are only limited by business interest, not technology. The ability to stay flexible is important in an industry where the winds can shift.

Data Accessibility

The internet and Wi-Fi industries have settled on established protocol so that you can log on using virtually any internet-ready device. Unfortunately, the financial industry isn’t quite there yet. Data still comes in many shapes and forms, presenting a dilemma when it comes to importing. FundCount has its own exclusive tool that automates the process – Extract Transform Load (ETL). ETL is built into the FundCount system creating smooth access to any data source. ETL doesn’t require additional programming and anyone with Excel knowledge can use it to develop interfaces with data sources and import routines. For clients who run into anything unusual or unique in some way, FundCount technicians can help. Built-in tools export data in a similar fashion.

As new clients come on board, new client data must be migrated into your system. This is a key area you will want to explore when evaluating a new system. If it doesn’t have a clearcut way of extracting, formatting and importing data from sources such as your bank, equity market feeds, labor outlays or programming workarounds will be an additional expense added to your total cost calculations.

Control Over Reporting Data and Function

Other than system integrity, there is perhaps no other area more important to a fund administration business than reporting. The ability to have up-to-date information for decision making and be able to present it to the client in a meaningful, professional and persuasive way can mean the difference between being a first-tier firm or a backwater office.

Software capability can provide you with the slick, professional, flexible tools you need, or it can be that thing that hinders you from doing your job in the way you want to due to built-in limitations. Flexibility factors in a wide portfolio of readily available reporting packages that give you control, and choice overlook and feel. It also includes, importantly, customization. Undoubtedly, you know best how to present your data and you aren’t going to want to wait around for software engineers to program your vision.

FundCount has integrated customizable reporting templates designed to give you a starting point, but not limit you. It also has a large, intuitive library of reports and a wide range of professionally developed holistic packages that incorporate with your own logo, colors, font and more that you can individualize.

Price

When calculating the price of a new accounting software package, be aware that the costs can stretch beyond the basic purchase price and associated user fees. When crunching the numbers, you will need to account for downtime while the new system is being installed, transition costs such as time for your office workers to learn the new system. There may also be programming fees for such things as integration with legacy and other systems.

The ability to have up-to-date information for decision making and be able to present it to the client in a meaningful, professional and persuasive way can mean the difference between being a first-tier firm or a backwater office

Starting a fund administration business is not much different than starting any other entrepreneurial venture. It’s important to understand why the particular business is of interest to you, determine the upside potential, and be realistic about the barriers to entry and resources needed to get it off the ground and ensure long-term viability

Conclusion

Starting a fund administration business requires careful planning and consideration of various factors such as technology infrastructure, value proposition, and potential challenges. With the right tools and support from companies that specialize in back-office solutions for Fund Admins, startup Fund Admins can successfully tackle back-office hurdles and focus on growing their business.