The Role of a Fund Administration — Past and Present

In the private equity space, “fund administration” has become something of a catch-all term. Traditionally, private equity fund administration includes accounting, reporting (both to investors and regulators), and a host of other back-office tasks necessary to the smooth running of the fund.

It’s commonplace for fund managers to regard administration services as something needed only later in a fund’s life cycle, once capital and investment priorities have already been established. However, while today’s funds still need these traditional services, the increased complexity of specialized funds means many managers are looking to fund administrators for help with a much more varied array of tasks — and often much earlier in the process — than ever before.

This fund administration guide is intended to describe the full range of ways that fund administration serves and interacts with today’s fund management, as well as to address many of the common questions managers have — including the outsourcing debate, administration of specialized and alternative funds, qualities to look for in a fund administrator, the role technology, and how a good fund administrator can position a firm for global expansion.

Table of Contents

  1. A Primer: Q&A with Industry Experts
  2. Outsourcing Fund Administration: 4 Key Drivers
  3. 5 Qualities to Look for in a Fund Administrator
  4. Technology’s Role in Today’s Fund Administration
  5. Fund Administration for Alternative and Specialized Funds
  6. How a Fund Administrator Can Help Firms Expand Internationally
  7. What’s Keeps U.S. Fund Managers from Fundraising Internationally?
  8. The JTC Advantage

A Primer: Q&A with Fund Administration Experts

To lay a foundation for this guide, we spoke with Wouter Plantenga, ICS Head of Group Client Services, and Michael Richards, Group Head of Institutional Solutions, about the benefits of thinking about fund administration earlier (rather than later) in the process.

How has the role of fund administrators changed with regards to fund formation? Are there pitfalls that can be avoided by involving a fund administration earlier?

Wouter Plantenga: The big thing that’s changed for fund managers is the increase in specialization and customization. There are areas in which JTC has particular expertise, such as Private Equity, Venture Capital & Real Estate, and specialized funds like Opportunity Zones or Impact/ESG funds. While this may be the manager’s first attempt at one of these fund types, it isn’t ours, so we can provide helpful support based on our experience.

Michael Richards: The beginning of the fund formation process is document creation that must be done by a law firm, and we provide complementary services. We’ve found that clients have been most satisfied when they’ve retained us in tandem with a law firm with whom we have a solid history. If we can work alongside the legal team with mutual understanding and similar goals, we can provide the best services to our clients.

Plantenga: There’s a common refrain we hear from clients about why they chose JTC: we really know the market, and we understand what their needs are going to be. We employ some of the latest technology to automate processes and get them working faster and more efficiently from the start. What JTC offers – institutional-grade solutions, a best-in-class online portal, investor transparency – can be a crucial point to investors from the very beginning, and working with new fund managers from day one, we can start helping right away with their fund raise and enhance the overall investor experience.

When is the right time to bring in a fund administration?

Plantenga: When the legal fund documentation is in draft, or even before, if managers are contemplating the early stages of their fund structure. You want to make sure what is put in the legal documentation ultimately meets the administrative reality. We can offer guidance on what that reality will be so the fund is minimizing its risk profile while enhancing and supporting operational efficiencies.

Richards: JTC’s fund administration best practices are highly complementary to most fund structures, so we can make sure your connection to your investors and your ability to generate fund and investor level reporting is in line with the type of fund you’re hoping to establish. Also, by putting our technical expertise to the test early on, we eliminate the likelihood of miscommunication later regarding things like waterfall. Engaging in these discussions at an early stage in the fund formation process is what sets us apart from other administrators.

What could go wrong if an administrator is not brought in at the right time?

Plantenga: If the legal documentation is not drafted consistent with what is feasible from an operational standpoint, the implementation process can be dragged out and delayed, not to mention being much more costly. It could also lead to a more complicated audit process. We know what works from an accounting and audit perspective, and can help managers avoid mistakes that will be time-consuming and costly down the road.

Third-Party Fund Administration: 4 Key Drivers

The move toward third-party fund administration is usually motivated by several key internal drivers, so it is useful to have these in mind and anticipate when they may begin to affect your firm. Leaving the subject too late can end up pressuring fund managers themselves, distracts them from their core competencies.

1. Keeping up with growth in fund administration

The single biggest challenge, for many managers, is the resource challenge. How far can a fund grow with its in-house resources? There is a real risk of delaying the launch of new funds if resources are not available as needed and adding resources in a pinch is difficult. Many managers look for the natural transitional break when outsourcing starts to make sense. But is there even such a thing as a “natural” or obvious time to make this step?

Many times, this occurs with the transition from private capital to more institutional investors. This shift immediately increases the administrative burden and the investor’s expectations. At this point, managers really need to start rethinking their operation.

There’s also a difference in approach between established managers and emerging managers. Established managers typically take more of a gradual approach to outsourcing, and structure the move around launches or reporting cycles or new fund launches. Emerging managers, on the other hand, tend to decide on outsourcing much earlier, because they see this resource challenge on the horizon.

However, if the onboarding process is not carefully managed, it takes away critical time from the actual focus on their investment strategy.

2. Back-office turnover in fund administration

Back-office turnover is another internal driver, and it’s also a type of resource challenge.

When people leave the firm, there is a real risk of losing institutional knowledge — and of course, it seems to always happen at the wrong time. Therefore, many administrators have processes in place to safeguard continuity. Protecting institutional knowledge also relies, increasingly, on technology. In fact, we’ve seen technological adoption act as a key differentiator during the pandemic, such as the managers who rely on self-administration tend to have less of a technology focus, and they instantly became stretched. Others who had already outsourced their processes could lean on the support of their third-party administrator’s technology solutions.

3. The changing role of the CFO

The role of the traditional CFO has fundamentally changed as well. CFOs are now faced with a much larger set of responsibilities than in decades past. It’s becoming increasingly clear to funds of all sizes that a CFO’s time is not best spent on internal administration, and this has increased adoption of third-party solutions.

4. Competition for capital

Obviously, among fund managers, there is significant competition to attract capital. Back-office excellence, achieved through outsourcing, can actually differentiate funds in this regard — a majority of institutional investors want to see a third-party administrator in charge of the fund accounting. When a fund begins to attract the attention of institutional investors, it’s certainly time to outsource.

A lack of third-party fund administration will almost certainly be a deal-breaker during the due diligence processes, whereas outsourcing signals to investors that the GP embraces the highest levels of security, transparency, and compliance.

Learning Together

Now that you know the internal drivers of fund administration, get one step ahead of your competitors by reading the external factors that drive fund administration!

5 Qualities to Look for in a Fund Administrator

So, you’ve chosen to outsource your firm’s fund administration. But what makes one fund administrator better than another?

Here are the 5 must-have qualities to look for when choosing third-party fund administration.

1. Credibility, marketability and fiduciary oversight.

Your reputation is that of a discerning, smart investor. That’s why you set out to start your own fund. You will want every aspect of your fund to exhibit that same degree of quality and sophistication. Aligning with the right fund administrator can not only bestow instant credibility in terms of your infrastructure, it can also help you “punch above your weight” — compete for limited partners with the kinds of capabilities and advanced services, such as personalized reporting and portfolio analytics, that institutional investors expect from larger funds. And the assurance that you have expert third-party fiduciary oversight can help investors feel secure in the services and reporting they will receive from you — especially important when marketing in the alternative asset class.

2. Fund administration cost and process efficiencies.

As more and more fund managers have discovered, outsourcing your non-core operational functions is both cost-effective and process-effective. Not only does it make sense to benefit from the deep specialization and scale of an experienced fund administrator — rather than trying to build your own infrastructure from scratch — doing so can also help protect your margins. That’s because fund administration’s costs are often passed through to the fund, rather than absorbed directly by the manager, enabling you to keep a lid on your overhead and internal headcount: especially helpful in the early stages of a fund. The key here, as with any expense allocation, is to provide transparency regarding fee disclosures in your PPM and LPA. The costs for fund expenses here align well with the fiduciary oversight a third-party fund administrator provides to the investors.

3. Fund administration compliance best practices.

When it comes to compliance, the margin for error is zero. Yet the web of legal complexity around fund formation facing this asset class — including setting up entities, mechanics and fees —continues to grow. Given continued interest by the SEC in the Private Equity asset class you’ll want to make sure you incorporate best practices that can satisfy regulations and have internal controls in place tied to conflicts of interest, fee and expense allocation and related disclosures. There is also the web of anti-money-laundering (AML) and Know Your Investor (KYI) regulations, as well as conventions regarding internal controls and financial statements — obligations which multiply exponentially should you decide to market across borders. Working with outside fund administration such as JTC Americas (which conducts voluntary independent audits of our technology, processes, and financial controls, and which offers in-house AML/KYI services as part of our solution set) can give you both the clarity and peace of mind you need.

4. Quality, scalability and security.

Our platform is based on a commitment to quality and continual improvement — and, consistent with our Silicon Valley tech heritage, a desire to build our service offering on a proprietary, fully integrated technology stack. Trying to cobble together spreadsheets and disparate solutions — such as CRM, portfolio management, accounting, and document management systems — and interfacing them with a client portal, can create “data noise” in the form of errors and inefficiencies, since they require more human intervention. The gaps between these systems can also make your fund vulnerable to cyber-breaches. By contrast, our data warehouse approach has the top qualities for fund administration that is most needed by managers: efficiency, consistency, compliance and security.

5. Orchestrating the right combination of people, processes and technology.

The ideal fund administration solution is a highly intelligent hybrid — one that combines the right technology and domain expertise, and guides you carefully through the process, adjusting to your evolving needs . That means not only fitting you with appropriate tech solutions, but also connecting you with the channel partners — such as counsel, auditors, tax accountants and placement agents — you will require at various stages of your lifecycle. This bridge to domain talent is especially useful for emerging fund managers, who may not yet have established their reputation, but who need both credibility and a rock-solid platform to work from.

JTC can help with (or can connect you with partners to help with) a wide variety of necessary tasks, including: forming your fund, drafting documents such as the PPM and LPA, thinking through marketing strategies, providing transparency to your investors by utilizing the latest technology, and addressing the flow of evolving regulatory requirements.

Beyond efficiencies, beyond performance, beyond services, perhaps the most important intangible asset of all in our industry is trust. It’s the secret sauce; a quality that exceeds the sum of the parts. It leads to peace of mind and confidence for both the private equity investors and the fund manager.

Trust is easy to lose and hard to establish — especially in the nascent phase of a new enterprise. Our many years of experience working with general partners and fund managers have shown us that trust is directly connected to the expertise and capabilities that a fund administrator brings to the table, to its deep bench of people, processes and technology.

Adapting Together

JTC Americas’ fund administration embodies these top qualities through security, transparency, and compliance. We’ve built our business on that trust and, in aligning that business with the interests of our clients, have helped to bring about positive results for them, as well as for their limited partners. Learn more and download our Fund Administration Collateral!

What is the role of technology in Fund Administration?

One thing the COVID-19 pandemic has brought into focus is the need for technology in fund administration. Firms that were still using outdated methods had to quickly wake up to the new realities of remote working and document sharing. One sector that was already prepared? The kind of specialty fund administration that JTC Americas is known for.

Due to their complexity, specialty funds have long required purpose-built technology to automate workflow and adapt to shifting and complicated compliance reporting requirements. As has been pointed out, impact investing is only as effective as the technology used to deploy and track those investments, and with the U.S. market ripe for an increase in impact investing, being able to demonstrate impact to investors quickly and accurately is more important than ever.

Financial markets and investment products are emerging and shifting at a pace never before seen. This rapidly changing environment demands an increasing level of agility and flexibility for fund managers to satisfy more demanding investors and address diverse regulatory requirements. Technology has become the critical ingredient for funds large and small, domestic and global, to successfully operate in this ever-complex new world.

This is one area where JTC Americas sets itself apart from the crowd. With a long history of award-winning technology developments and a proven ability to create solutions that meet complex market needs in ways that our competitors cannot, we can offer the same solutions we’ve brought to specialty fund administration to the larger market with our global reach.

How do limited partners evaluate performance in fund administration?

Fund managers’ specific objectives differ from firm to firm, but the themes are the same: attracting and retaining capital, maximizing return and minimizing risk, keeping investors happy, helping comply with regulatory requirements, and keeping fund assets and information secure.

Fund administration — in particular, recent technological advances— can help in all of these areas and the value of a fund administrator hinges on its ability to aid fund managers in achieving these goals.

Data management is a huge part of the value-add in fund administration today, but many fund managers don’t appreciate the ways that data and technology solutions can drive investor satisfaction. Limited partners want more immediate and far-reaching information than ever before, and funds that excel in communicating data more accurately and efficiently than the competition will have an advantage in attracting capital.

To this end, JTC Americas offers an Investor Portal (built into our proprietary technology platform) that gives investors 24/7 access to fund status, capital account financial data, document sharing and personal alerts, thereby decreasing the number of customized reporting requests that fund managers receive. This leads to higher investor confidence as well as reduced overhead on the management team.

The Investor Portal allows custodians and investment managers to track performance and analytics in real time, and it alleviates other common pain points, including compliance and data security. It also gives managers a more holistic picture of their capital flows, allowing them to make better decisions.

Ultimately, what fund managers need is the confidence and flexibility to run their businesses the way they see fit. The blend of technology and client service JTC Americas offers as a third-party fund administrator provides managers with the strong foundation they need to maximize their strategic advantage — all while offering best-in-class service and transparency to limited partners.

Fund Administration for Alternative and Specialized Funds

One size fits all? Not in fund administration. If you manage a specialized fund, or one that caters to a particular asset class, you should seek an administrator with experience and a tailored product offering in your space. Here are a few examples.

Real estate fund administration

It’s no secret that there are the large administrators that primarily service hedge fund managers who claim to provide services to private equity and real estate managers. However, these organizations are generally running private equity and real estate firms through basic formulaic services for a different fund structure and different investing regimen. The technology platforms and operating structures weren’t built for Private Equity (PE) and Real Estate funds, so the firms must work around the technology to provide an “also does” service.

This basic approach fails to take into account the unique requirements of PE and Real Estate fund administration, which are unlike the basic GAAP accounting needs

“Ultimately, what all real estate fund managers need is the confidence and flexibility to run their businesses the way they see fit,” said JTC Group’s Wouter Plantenga, ICS Head of Group Client Services, who also shared the top seven benefits of outsourcing private equity managers need to take into consideration.

“Real estate investment vehicles generally contain complex waterfall structures for profit sharing related to realized investments. It is important for the administrator to demonstrate their understanding of this complexity up front, so there is no confusion as the fund matures about how profits are to be split among the investors and the manager. The ideal solution is to work with an administrator that has built a technology platform designed specifically to service real estate funds.”

Fund administration for projects using EB-5 investor capital

Unlike traditional PE investments, the end goal of EB-5 investment is not to yield an above-average return. Investor motivation is much different here. The investor in EB-5 funds is an immigrant whose primary concern is receiving his/her green card, along with permanent residency for his/her family.

Thus, the stakes are always high and personal. If something were to go wrong within the process, the immigrant and his/her family could face deportation. This result is devastating to the family who, after living in the country for a couple of years with kids in school, are now forced to go back to their country of origin — which can be utterly embarrassing in some cultures.

The regulations involved with the EB-5 program are unique and constantly evolving. The program has been subject to increased oversight from the USCIS and the SEC. As a result, it is imperative to either be well versed on rules and compliance requirements, or partner with someone who is. If the mandatory compliance requirements are not met, once again, the results can be devastating.

Lastly, the tracking requirements involved with EB-5 Fund Administration extend beyond the financial. Achieving permanent resident status for an immigrant and his/her family also requires the tracking of the immigrant’s status and the project’s status throughout the process.

EB-5 Fund Administration requires a great deal of specialized expertise, so working with a traditional Fund Administrator is not going to cut it. JTC Americas is the only companies that has developed a purpose-built solution for fund administration specific to the EB-5 industry that provides automated workflows, real-time dashboards, and broad reporting functionality so that you can streamline the EB-5 process and offer the security that builds investor trust.

Stronger Together

Download our  EB-5 Fund Administration Solution sheet to learn more!

Opportunity Zone fund administration

Opportunity Zones have become popular places to invest, both because of their tax incentives and because they offer the chance to help lift communities out of poverty. We continue to see OZ investments have a tremendous economic impact while generating positive returns, and we believe the sector is poised to continue its growth.

However, managers should think carefully about their choice of fund administrator for Opportunity Zone projects. Specialized funds require specialized solutions, and a fund administration solution that is malleable enough to meet a firm’s varying needs based on size, specialization, and fundraising goals must be carefully selected. To understand which fund administration solution is right for your OZ fund, you need to understand what makes Opportunity Zones different from private equity fund administration.

Here are three ways in which Opportunity Zones fund administration differs from traditional fund administration that may affect your choice of administrator:

1. Impact tracking will be necessary to attract investors

Opportunity Zones fall under the category of impact investments, projects designed to do good in addition to offering competitive returns. Impact investors expect a lot when it comes to the information a fund provides to them because they want to be sure their investments are actually making a worthwhile impact.

The more information you can provide that proves the effectiveness of your investments, the more enticing they will be. But not every fund administrator has experience with impact funds and the increased level of scrutiny they’re given by investors.

JTC has worked with a broad range of impact and ESG fund types, and has led the way in areas such as social impact tracking that helps investors quantify types of impact that traditional fund administration has found difficult to measure. We’ve also pioneered methods to help investors compare impact across different kinds of investments.

While traditional fund administrations can show the returns of an investment, with JTC, you can help investors understand how your projects are making a difference in their communities.

2. Transparency is vital for tax-advantaged investing

Aside from impact, another big reason people want to invest in OZ is because of the tax incentives that come from investing realized gains into projects in Opportunity Zones. In order to take advantage of those tax incentives, investors need access to key documents and information, and they don’t want to have to wait for slow delivery of data that could make a huge difference on their tax returns.

JTC Americas’ proprietary eSTAC technology platform provides 24/7 investor access to key documents and real-time reports so investors can access important information when they want it, ensuring they have everything they need to meet the requirements for OZ tax incentives. By employing industry-leading technology, JTC ensures your fund can offer investors the access they desire.

3. Compliance requirements are continually evolving

It’s not just investors who seek advances like impact reporting. The industry itself has been clamoring for proper impact standards that will help separate legitimate OZ investments from those that don’t make the grade. If industry leaders are successful in getting strict standards put in place, you must need to be ready to implement the proper practices.

But it won’t end there. Reporting requirements could change at any time, and funds that have already deployed capital may need to alter their back-end procedures according to changes in reporting standards. You need a fund administration solution that can keep up with the times and incorporates efficient data management that will allow you to generate reports when they are needed.

Leading Together

New to Opportunity Zones? The OZ tax incentive can seem complicated to new investors. To help you understand the potential tax savings to your prospective investors, we created a quick and simple benefits guide – download the one sheet today!

How a Fund Administrator Can Help Firms Expand Internationally

For successful private equity firms, there comes a time when, despite healthy capital inflows and solid return performance, the U.S. market can begin to feel constrained.

Perhaps you’ve read about the growing overseas interest in U.S. investments, and you’d like to make your offerings available to a wider investor base. Or maybe you’re interested in deploying capital into investments abroad — reaping the rewards of diverse markets, which may be in different phases of their development or economic cycles.

Whatever the reason may be, if you’ve considered going global, you’ll do yourself a great service by researching all options in advance. There’s no need to reinvent the wheel here, and you can save yourself considerable time and expense by following in the footsteps of those firms who have successfully made this transition before you — and learning from their challenges, mistakes and successes.

What’s Keeps U.S. Fund Managers from Fundraising Internationally?

Despite the obvious potential benefits, most U.S. fund managers never expand operations beyond their home market. Why might this be?

A recent survey of fund managers suggests that, despite widespread interest in global expansion, fund managers tend to perceive the process as being overly complicated, and most lack the knowledge and experience to confidently make the attempt.

This reluctance is particularly notable regarding Europe, which most of those surveyed said they see “as an opportunity but are reluctant to commit to the region strategically” because of “perceived regulatory complexity.”

However, many managers simply aren’t aware of the resources available from fund administrators with global reach and experience, which can ease the process considerably. For instance, JTC has experience in all the major European fundraising jurisdictions and can provide a wealth of services related to domiciliation, regulatory compliance and other specialized services — all with an on-the-ground presence that will help establish a solid reputation with investors.

Needless to say, the requirements of foreign domiciliation — which may be required to solicit or deploy capital abroad — go far beyond the offerings of traditional fund administrators. Read our recent white paper on the subject: “The Road to Global Growth: When, why and how to consider taking your fundraising or capital deployment abroad.”

The JTC Advantage

JTC Americas has a proven track record of success in fund administration for firms of all sizes, with a particular focus on specialized and alternative-focused funds. We’ve developed many of the technologies and best practices that have now become industry standard, and our unwavering commitment to security, transparency and regulatory compliance truly set us apart.

Perhaps most importantly, we’re positioned to scale with our client firms, providing services from fund formation to global expansion (and every step in between).

If you’re considering third-party administration for your next fund, we’d love to have a conversation about the ways JTC Americas could help — just fill in the form below, and we’ll be in touch to arrange a consultation.