Fund administration is a complex challenge for many private equity and venture capital firms. No matter the check size or strategy, it is best practice to leverage outsourced support from a third party for your fund administration needs.
Over the course of a firm’s lifetime, fund administrators create time-savings, institute operational efficiencies, and serve as the primary force for risk mitigation. Because fund administrators facilitate some of the firm’s most important activities like capital calls and LP portal reporting, they leverage leading technologies that eliminate the risk of fraud and identity theft and enable other operational efficiencies.
To learn more about what venture capital and private equity firms should look for when choosing a fund administrator, we spoke to the industry experts at VentureBackOffice (“VBO”). With over 14 years of experience in fund formation, fundraising, ongoing fund accounting, and everything in between, North Carolina-based VentureBackOffice provides independent fund administration support to countless firms in the capital markets industry.
Below, we outline their key tips for ensuring that your firm’s fund administration strategy is secure and streamlined.
- Pick the right fund administration partner
Especially when setting up a new fund, it’s important to consider your fund administration needs and how they will evolve over time. While the operating models of venture capital and private equity firms may seem similar side by side, there may be customized workflows and unique processes your firm needs to design in order to maintain a strong relationship with limited partners and to maintain legal and regulatory compliance. If you’re selecting a third-party vendor to support your firm, it’s important that they “advise you to find a customized solution to fit their fund, not try to fit the firm into a boxed-in fund administration solution or technology platform,” says Chris W. Smith of VBO. “We listen to our clients’ challenges, goals, and priorities to help solve problems through service model and delivery. By utilizing numerous technology platforms to provide the best solution for the specific fund, we make it possible for firms to find success based on their unique characteristics.”
- Focus on optimizing repeatable and regular tasks
Since the fund administration process will be a constant throughout the firm’s history, it’s important that the focus be placed on automating repetitive and administrative tasks. “I would challenge VC/PE professionals and their consultants to install technology that streamlines repeatable tasks and provides real-time updates and reports, says Smith. “Importantly, that technology should be able to drive a similar result in a parallel process. This ensures that there is not a break in the technology or coding of the capital allocation or investor allocation process.” These kinds of efficiencies, when instituted soon after the fund’s inception, can make a huge impact in the long term and help funds focus on what’s most important: originating and executing on transactions. These kinds of operational efficiencies help to reduce or even eliminate manual efforts, such as the process of identity verification in the wire transfer process that is a common and regular occurrence for most private equity and venture capital firms.
- Always think ahead in the fund lifecycle
It’s only natural for private equity and venture capital firms to set up a technology-enabled fund administration process and think that their work is complete. “Reliance on software is a great tool, but it can’t be the only tool,” says Smith. “Your fund administration partner should be forward-thinking regarding processes or governing documents that may change that would affect the inputs of the allocation process. Especially as the firm grows and changes over time, we would recommend ensuring you have the correct checks and balances in the process and the right team in place with the knowledge to get that key function correct.”
- Invest in a CIO or outsourced CIO
With the ever-changing cybersecurity landscape and increasing threats on financial institutions, it’s important that venture capital and private equity firms invest in security protocols early. “We expect to see the role of the CIO increase or be a requirement paired with another hat in the VC/PE professionals organization – and will most likely be as top an advisor to the Managing Directors of these investment firms alongside the CFO,” says Smith. “Most firms in this industry prioritize security and technology, however breaches in data at the public accounting firms and other fund administrators still occur every day. It’s imperative that venture capital and private equity firms have a CIO or outsourced CIO in place or work closely with investment managers that can closely advise on those needs.”
Simply put, fund administration is a crucial part of any private equity or venture capital firm, and as such, should not be overlooked. The good news is, your firm does not need to go it alone. Whether establishing and maintaining the investor registry, processing forms, payments and distributions, managing capital calls, or communicating with limited partners and financial advisors, fund administrators play an integral role in keeping the firm competitive, compliant, and credible.
Most importantly, fund administrators use leading technology to keep your firm secure.
WireSecure and VentureBackOffice have teamed up to provide venture capital and private equity firms of all shapes and sizes with the technology and human capital support they need to be successful. To learn more, click here.