Providing a holistic, portfolio-wide view of fund data that satisfies the needs of in-house management, investors and regulators is a technological nirvana for fund managers across the private capital spectrum. However, achieving this is getting harder as the data management and reporting tasks grow in size and complexity, while expectations for accessibility continue to rise. This presents fund managers with a fundamental choice in how best to meet the challenge: invest in and manage fund administration technology in house, or hand the task over to a specialist provider.
Whether meeting the needs of portfolio accounting, investor reporting or capital calls – or satisfying Know Your Client (KYC) / Anti-Money Laundering (AML) requests – the list of fund accounting and reporting requirements gets longer by the day for venture capital (VC) and private equity (PE) firms. With increasingly stringent rules and regulations, regulators are also requiring more in-depth reports to satisfy compliance and risk management needs.
Technology rises to the challenge
Meeting these diverse needs requires fund managers to find new ways to automate and streamline their fund administration functions, without adding significant additional running costs. They need ways to make fund data work harder and smarter – and create additional value for their own fund management team, general partners (GPs) and limited partners (LPs).
Buying and operating the required set of tools and platforms is no mean feat. Not only does it involve selecting, operating and maintaining expensive technology, it also means devoting management attention and hiring systems and data specialists to manage and maintain it. This is typically beyond the reach – and capabilities – of all but the largest VC/PE firms.
This is why many firms are choosing to outsource fund administration. Many fund administration service providers have teams of developers that research, implement and maintain best-in-class technology solutions that help VC/PE firms maintain the highest levels of operational robustness and service excellence. Fund managers can avoid the risk of operating on outdated or sub-optimal technology, and focus on the task of delivering return on investment.
What should private capital fund managers consider before they choose to either maintain fund administration technology in house or outsource?
In house – control at a cost
Managing fund administration in house does offer some advantages for VC and PE firms.
For example, it can provide greater levels of control and customisation, enabling technology to be tailored to specific needs, with the flexibility to align operations more closely with business strategy.
It may also be beneficial to build in-house expertise and knowledge. With employed staff able to gain a deeper understanding of the various technology platforms, VC/PE firms may be better able to leverage its capabilities. They may also be able to adapt quickly to changing requirements and address issues promptly, enhancing overall efficiency.
While establishing an in-house fund administration infrastructure incurs initial set-up costs, it may be cost-effective in the long run. Instead of paying ongoing fees to a third-party provider, firms can leverage economies of scale, eventually reducing costs over time.
However, keeping fund administration technology in house also presents some challenges.
Perhaps the biggest of these is the high initial investment required. Building these systems and processes involves significant costs in terms of technology infrastructure, software, hardware, and skilled personnel. This is especially onerous for smaller firms with more limited resources.
Managing fund administration technology in house represents a substantial burden on internal resources. It demands the allocation of time, effort, and skilled personnel to handle daily operational tasks, which might divert focus from core investment activities. This burden can be particularly challenging during peak periods or when faced with complex administrative requirements.
Outsourced – flexibility requiring a mindset change
Third-party providers that specialise in fund administration bring extensive knowledge and expertise to the table. They have a deep understanding of industry best practices, regulatory requirements, and the latest technological advances. This enables them to choose and develop cutting-edge fund administration technology and software, which client firms can benefit from without the need for significant upfront capital expenditure or ongoing maintenance costs associated with building and maintaining in-house infrastructure.
Additionally, with outsourcing, firms gain flexibility and scalability – enabling them to adapt their fund administration needs to changing business focus and growth.
Creating a single source of truth
One of the biggest challenges faced by VC/PE firms is maintaining a single source of truth for fund data as the basis of all analysis and reporting, when data needs to be drawn from many different sources and in different formats.
All too often, the data needed for effective fund administration is stored in an unstructured, siloed way – maintained in different systems by different people – sometimes in spreadsheets. The information is there, but can be hard to extract, analyse, and share in a timely, accurate and, above all, holistic way.
The challenge becomes more acute as firms become larger and there are more funds raised and operated.
This is why TMF Group is currently focused on creating a data platform specifically for this purpose. The solution uses a modern, cloud-based data warehouse solution to collect, curate and present data from disparate systems in a holistic way.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
