fundraising special - BVCA admin

Comment
To do or not to do,
that is the question
The dilemma over whether to outsource back office activities remains as pointed as ever.
David Bailey, managing partner at Augentius Fund Administration explores the issues.
With higher levels of regulation, increasing demands from LPs and
greater needs for transparency, the GPs world is getting more and
more complex. More often than not GP groups, particularly new
GPs, do not have the capabilities to meet and service all the specific
demands being made of them. GPs are expert in identifying portfolio
companies, enhancing their value and then taking a profit. They are
not necessarily expert in IFRS or US GAAP, putting in place disaster
recovery technology and strategies or implementing accounting
technology installations and updates.
Similarly fund structures have become more complex and diverse.
The reality is that life has got far more complex and, with impending
legislation, is likely to get even more complex, i.e., the need to produce
multiple GAAP accounts plus the need for compliance with the AIFM
and the regular production of NAV calculations.
In recent years more and more GPs have turned to specialised private
equity fund administrators to provide a professional and expert service
to their fund. Initially only located in offshore locations, the private
equity fund administration business has come ‘onshore’ over the last
10 years and now provides full service to GPs across a wide range of
domiciles. With administrators expanding their global spread it is now
possible to appoint one administrator to deal with all the entities in
a multi-jurisdictional fund/structure thus streamlining processing and
reducing costs elsewhere.
Fund administrators whether they are servicing onshore or offshore
structures generally deal with all aspects of the ‘back office’ work of
the fund. This includes:
• Operational reviews of fund documentation
• Design and setting up of all drawdown/distribution notices;
quarterly and annual accounts in the ‘look and feel’ of each GP
group. Everything should be tailored to each individual manager –
the use of a fund administrator should not lead to ‘standardization’
if this is not appropriate
• Carrying out all limited partner due diligence to include AML and
KYC checks as appropriate along with ongoing annual checks
• Maintenance of all accounting/financial records to include regular
reconciliation of bank accounts with financial records
• Generation and distribution of all call letters to cover costs/deals
and monitoring for receipt of cash from all LPs
• Payment of all expenses in accordance with instructions from
the GP
• Calculation and payment of all management fees on a quarterly
basis – or as per the agreement
• Modeling and systemisation of carry distribution and subsequent
calculation and payment of carry once payable
• Calculation and payment of all distribution monies, taking into
account all ‘opt-outs’
• Preparation and distribution of quarterly/periodic investor
reporting to all LPs to include individual capital statements for
each LP
• Preparation of annual audited accounts, management of the audit
process and subsequent distribution to individual LPs
The quality of staff and systems are the key components that
determine the quality of service provided by any administrator. Given
the nature of the complexity of the structures involved it is imperative
the funds are serviced on a day to day basis by properly qualified staff,
who understand private equity structures and the processes involved.
A service level agreement (tailored to the individual needs of the fund
and client) should be put in place and actual performance should be
monitored against the SLA on a regular basis. Given the pressures from
LPs it is imperative that all reporting is delivered within all promised
deadlines. LPs do actually monitor who delivers what and when – and
late delivery may mean a reluctance to re-up in future funds.
But people change from time to time and it is important that any
administrator has sophisticated technology to aid LP reporting and to
ensure both the integrity and security of data. Without proper systems
(which does not include Excel!!), the opportunity to automate many of
the processes will be lost and errors will be made. Again, this can only
create problems and the potential for criticism from LPs. In addition
proper disaster recovery facilities must be in place – it’s a regulatory
requirement.
It goes without saying that ‘you get what you pay for’. Some
administrators will provide a cheap service, using lower quality staff,
minimal technology and inflexible service levels. Others provide a hitech
environment ensuring the integrity of data and use fully qualified
professional staff providing a tailor-made solution. Each GP will
determine the solution that suits them best but they should be aware
of the cheap solutions – economy in the first instance can give rise to
higher costs in the future if errors are made or data lost. In any event
the cost of a professional administrator (which is generally paid for out
of the fund) is rarely little more than a few basis points. A small price to
pay for complete piece of mind.
January 2011 BVCA Briefing 9