In-House Fund Administration

Best PracticesA GUIDE TO PERFORMANCE EXCELLENCE FOR IN-HOUSE

FUND ADMINISTRATION

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In-House Performance ExcellenceThe past 10 years have brought rapid change to the alternative asset investment community and elevated the expectations for today’s back offices. Is your back office ready?

With increased regulatory scrutiny on one side and increasingly sophisticated investors on the other, the back-office function faces growing pressure to administer funds with greater speed, transparency, accuracy, and thoroughness than ever before. In fact, a recent report estimated that compliance costs had doubled between 2012 and 2015 alone.1

In a competitive and highly regulated environment, investment firms must not only deliver strong returns to attract new investments, they must also demonstrate the flexibility to navigate rapid change while delivering exceptional levels of service and transparency to their investors.

Are you ready for the challenge? Find out by reviewing these guidelines for performance excellence. Based on service levels across both in-house and third-party fund administration, these areas represent key benchmarks that set the expectation for investors, regulators, and other industry stakeholders.

1 The Post Dodd-Frank Act Evolution of the Private Fund Industry: Comparative Evidence from 2012 and 2015.

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TECHNOLOGY1Technology has become one of the key ways in which both in-house teams and third-party fund administrators can manage costs without compromising on performance. By automating administrative processes and maintaining a centralized database, supporting technologies can dramatically reduce administrative costs.

Relying exclusively on spreadsheets is not only labor-intensive but also exposes your firm to the risk of errors. In fact, a staggering 88 percent of spreadsheets are estimated to contain errors.2 Switching from spreadsheets to a private equity platform such as Investran that automates the collection of data and generates customized analytics and reporting can help to streamline compliance, reduce the time your staff spends on compliance-related activities, and help your firm meet investor, auditor, and regulator requirements. If you prefer not to take on the costs and maintenance of a private equity platform, consider outsourcing compliance to a technology-enabled fund administrator as another way to reduce costs.

BENCHMARKS INCLUDE:

AUTOMATED ADMINISTRATIVE PROCESSES

CENTRALIZED DATABASE

CUSTOM ANALYTICS AND REPORTING

2 POLICIES AND PROCEDURES

Having documented policies and procedures is essential to consistency, continuity, and risk reduction in fund administration.

The development of a procedures manual is associated with enhanced diligence and investor service levels. A firm that develops, maintains, and adheres to a procedures manual is more likely to avoid errors, meet compliance and audit obligations, and deliver timely service to its investors. At a minimum, your procedures manual should cover the services provided by your firm, the workflow, permission levels and detailed tasks and procedures related to financial reporting, administration and compliance, capital management, books and records of the funds and subsidiary entities, along with the documentation of procedures to access reports. It should also contain the location of original source documents, cash transactions, journal entries, general ledgers and other financial reports.

2 Journal of End User Computing, “What We Know About Spreadsheet Error,” 2008.

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Back offices and third-party fund administrators alike can often fail to document their privacy policies, but the consequences of putting investor information at risk can be devastating. Protecting investor privacy and data security is an important issue for General Partners, impacting both regulatory compliance and investor relations. If your back office has documented privacy and security processes and standards in place, your firm is meeting a key benchmark for service excellence. Your policies should cover the storage and transmission of both paper and electronic data, including the investor portal.

Documenting internal controls is another best practice that enables your firm to meet industry benchmarks for data reporting accuracy and service continuity. Internal controls include the processes, checks and balances that support quality control, risk mitigation, and business growth. In fund administration, internal controls and segregation of duties are critical in safeguarding assets and investments. By defining the rules governing information access and control, and by establishing a segregation of duties that provides the right level of oversight for specific types of data, your back office can minimize the risk of error while maintaining an acceptable level of speed and efficiency. Documenting those rules and responsibilities makes it far more likely that your firm will meet these benchmarks.

BENCHMARKS INCLUDE:

PROCEDURES MANUAL

DOCUMENTED PRIVACY POLICIES

DOCUMENTED INTERNAL CONTROLS

3 DISASTER RECOVERY AND BUSINESS CONTINUITY

Many back offices, and even some third-party fund administrators, fail to document a disaster recovery plan. However, without a plan to protect your investor and fund data and maintain service to investors, your firm’s operations and reputation are at risk. This can range from a flood or fire to a serious technology malfunction or information security incident.

Having a disaster recovery plan for your IT systems isn’t just about keeping computers and other hardware safe; it’s also about protecting your ability to maintain business continuity, including providing customer service, managing your funds, addressing regulatory reporting in a timely manner, keeping your website running, and performing other business-critical tasks that are supported by IT. Protection of your IT assets and capabilities should be at the top of your disaster recovery priorities.

As back-office service delivery becomes more technology-dependent, it’s critical that your preparations include a production site, multiple redundant sites, and automatic daily backups to protect your technologies and data. Business continuity also encompasses personnel planning, whereby members of your staff are able to perform their duties outside of your firm’s physical locations through secure Internet connections.

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Turnover can also affect business continuity. If your firm experiences high turnover, consider putting processes in place to protect service continuity and retain institutional knowledge, including documented processes and supporting technologies that facilitate knowledge sharing and provide access to current and historical fund administration data.

If your back office relies on third-party service providers, you will also want to ensure that those providers have earned their SSAE No. 18 SOC 1 Type 2 Certification. This provides independent, third-party verification that a service organization’s policies and procedures meet or exceed industry standards. The exam is a comprehensive review of the firm’s procedures and business process controls related to new client setup and administration, fees and expenses, money movement, and IT security.

BENCHMARKS INCLUDE:

DOCUMENTED DISASTER RECOVERY

BUSINESS CONTINUITY PLAN

TURNOVER MITIGATION PLAN

SERVICE PROVIDER CERTIFICATION

4 INVESTOR SERVICE

The ability to deliver satisfactory service to investors is integral to your firm’s success. According to EY, between 2014 and 2015, there was a 400% increase in investors who ranked a firm’s ability to handle reporting requirements as the most important selection criteria.3

Today’s investors are demanding a wider array of financial data, customized reporting, and greater communications frequency, all of which are placing more pressure on the back office. To meet these demands, your back office should consider developing and documenting streamlined processes as well as leveraging automation and reporting technologies to ensure greater transparency and efficiency.

A survey conducted by PEI, Pepper Hamilton, and PEF Services revealed that 13% of GPs are using ILPA templates for both capital call and distribution notices and quarterly reporting, while 37.7% are using a modified version.4 The survey also indicated a rising trend: 17.1% of firms who don’t currently adhere to ILPA guidelines are in the process of implementing ILPA templates,

3 EY and Private Equity International, 2016 Global Private Equity Fund and Investor Survey.4 PFM. Fees and Expenses 2016: A PFM Benchmarking Survey, October 2016.

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and a further 38.2% are planning to adopt a modified format. To meet the industry benchmark, your firm should plan to adopt ILPA reporting standards for all investor reporting.

Investors also expect greater speed when it comes to reporting, and the benchmark for optimal speed and efficiency in processing capital calls and distributions is two business days (within 48 hours of notification and receipt of required information). If your firm takes significantly longer, you may wish to re-examine your internal processes and consider an investment in technologies that streamline and automate the process.

According to EY, 26% of Limited Partners expect timely delivery of reports.5 If your firm has missed reporting deadlines in the past, you are missing a key benchmark for efficiency. More importantly, you may be jeopardizing your reputation in the investor community. If missed deadlines are an issue, consider outsourcing this function to a third-party fund administrator, especially one with a service-level agreement (SLA) that specifies and guarantees reporting timelines.

Investors also overwhelmingly expect their reports in digital format. The same EY report showed that 87% of investors want to receive reports through digital portals, and an increasing number require specialized reports (29%) and customized templates (27%). If your back office is still communicating with your Limited Partners through email or regular mail, your firm is trailing behind its peers significantly in terms of investor services. Supporting their preferences and delivering more customized communications requires a digital approach to communications. For firms that prefer not to take on the cost and maintenance of additional technology, a third-party fund administrator with a technology-forward approach may be the best solution.

BENCHMARKS INCLUDE:

ILPA REPORTING STANDARDS

2-DAY TURNAROUND FOR CAPITAL CALLS AND DISTRIBUTIONS

ON-TIME REPORTING

DIGITAL INVESTOR PORTAL

5 EY and Private Equity International, 2016 Global Private Equity Fund and Investor Survey.

5 GROWTH & STRATEGY

In addition to delivering service excellence today, the back office needs to be able to meet the firm’s needs in the future. Being able to manage growth, scale activities swiftly as required, and carve out time for strategic endeavors is critical to a firm’s continued success.

If the CFO and their team spend all their time on day-to-day activities, it could signal a need to re-examine the back-office workflow to create greater efficiencies. The CFO should ideally allocate 15 percent of their time at minimum to strategic planning and high-value activities. To reclaim more time, consider investing in technology supports such as a portfolio accounting system, an investor portal, and a client self-service reporting portal. Alternatively, you may consider outsourcing

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FOR MORE INFORMATION ON OUTSOURCING OPTIONS FOR FUND ADMINISTRATION, DOWNLOAD THE “FUND ADMINISTRATION OUTSOURCING” WHITE PAPER AT

WWW.PEFSERVICES.COM/WHITE-PAPER-FUND-ADMINISTRATION-OUTSOURCING.

the administration of your fund. By shouldering high-intensity, day-to-day activities, including fund accounting, investor reporting, and capital call and distribution processing, a third-party fund administrator gives you back some time and space to focus on projects that support the firm’s strategic goals.

Managing growth can also pose a threat to investor service levels. Most firms experience a point beyond which their existing back-office staff can no longer cope. For some, it’s Fund II. For others, Fund III. The issue can be especially critical when the new fund is in a complex strategy such as debt, SBICs, or real estate.

Long before the fund launch, the back office should research the options—including investing in supporting technologies, hiring additional staff, or shifting to an outsourced fund administrator—from a performance and cost perspective. The resulting information should then be used to identify the growth plan that will enable the back office to support the firm as it continues to evolve.

BENCHMARKS INCLUDE:

TIME FOR STRATEGIC PLANNING

GROWTH PLAN

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ABOUT PEFSince 2002, PEF has helped some of the most complex fund types

meet stringent regulatory and investor requirements. We are

nationally recognized as one of the top boutique fund administrators

and back-office specialists for General Partners, Limited Partners,

and management companies in the alternative asset space.