In a post Madoff, heavily scrutinised investment era, more investors are requiring independence and more investment managers are searching for the benefits obtained by outsourcing to an appropriately qualified fund administrator. The following article sets out some key criteria for selecting a fund administration partner.
Services offered by fund administrators
Pre-launch phase or issuing of retail fund offering document (PDS)
A knowledgeable fund administration provider will potentially add significant value in this phase through advice or counsel around fund structure, valuation methodologies, market acceptance around incentive and performance fees and appropriate benchmarking. In addition, a reputable fund administrator will have the requisite personnel able to liaise with the investment manager and their legal counsel in the preparation of Offering Documentation. The administrator will coordinate the receipt of all completed subscription documents and perform the appropriate Anti-Money Laundering / Know Your Client (AML/KYC) checks. At the same time, the administrator will check the fund’s applications trust account and match receipts to appropriate subscription documentation. The fund administrator should work closely with the investment manager to ensure they are aware of how much money will be available for investment on launch date. On launch date (just prior), the fund administrator moves the funds (after AML/KYC checks have been done) to the prime brokerage or trading account.
Unitholder (registry) services
The fund administrator will maintain the unitholder register, review all application, redemption and transfer requests, perform the required AML/KYC checks, respond to unitholder enquiries and distribute unitholder statements, as required. As completed subscription documentation is received, the fund administrator will review them to ensure they are completed accurately. As the subscription funds are received, the AML/KYC controls are completed. The applications and redemptions trust account should be reconciled on a regular basis to ensure all funds are appropriately matched to application, redemption and transfer requests.
One of the primary responsibilities of a fund administrator is the independent calculation of the net asset value of the fund. Many investors nowadays expect a fund’s net asset values to be ascertained by an independent source and the fund administrator will need to be able to price these funds to match application and redemption frequency/liquidity. If a fund accepts daily applications, then the selected external provider of fund administration services will need to able to accept daily trade files from both the investment manager and the prime broker. These trade files will then need to be reconciled on a daily basis. At valuation date, the portfolio must be independently valued using third-party sources. If the fund holds unlisted or complex securities, the administrator will need to obtain a fair value for the securities. Fund administrators are usually rated on their capacity to deliver accruate, timely NAVs. It is essential, thus, that in order for the administrator to deliver a quality product, they must have a robust technology platform and highly qualified personnel.
Making the right selection
In selecting an independent fund administrator, the following factors ought to be considered:
Reputation in the industry — It is important to remember that the fund administrator will be representing your fund and interacting with your investors. You want to make sure the administrator has a strong reputation and offers a credible service. Do some background checks and get some references from other investment managers.
Technology — It is important that the administrator uses the latest cutting-edge technology. This is one area that the investment manager and the investors will benefit, as it is crucial to ensuring that the NAV is calculated accurately and quickly sent to investors. The key is straight through, efficient, secure processing. Information should flow in to the administrator, be processed, and flow out to the investment manager and their investors.
Quality of personnel — Make sure that the administrator has experienced and qualified staff. Investment managers should look beyond just the engagement or sales staff and spend time meeting the team and ensuring that the chemistry is right. Service delivery is essential and typically would involve an account team approach to handle each client relationship with a single source of reference or “one-stop shop” for dealing with fund enquiries.
Communication – one of the keys to a successful relationship with your fund administrator is communication, not only at the beginning of the relationship (during the sale process) but during the service delivery. During your due diligence, find out how your fund administrator communicates with other investment managers post engagement.