Ask any private equity or venture capital fund manager and they’ll tell you that fund administrators provide an invaluable service to their firm. From supporting the fundraising process, to calculating NAV, to performing key accounting duties for the firm, fund administrators become an investment manager’s “right hand” over time.
Investment firms too often overlook the ways that fund administrators can protect the organization against risk. Regularly occurring fund activities such as capital calls and fund distributions can be particularly vulnerable to hackers, especially as bad actors are increasingly targeting the private capital markets industry.
In this article, we list the six ways fund administrators protect private equity, venture capital, and other investment firms against risk by leveraging technology.
- Fund administrators send credible communications regarding capital distributions.
When the calculations of net capital gains are complete, it’s the job of the fund administrator to facilitate payment to the fund’s investors. Fund administrators will not only ensure that these notifications reach their intended audience, they provide the recipients with a clear, credible, and secure message about how to collect payment. Without this sophisticated communication that the admin provides, it’s easy for LPs to get confused or distrustful of your firm.
- Fund administrators provide secure links to the wire distribution portal.
After the distribution notification reaches the intended recipient, the fund administrator provides the recipient with a secure way to upload their personal identification card (a government-issued ID such as a license or passport), insert their banking information, and access their payments. By providing the recipient with an encrypted link, LPs can rest assured that this sensitive information will not be stolen or intercepted by a bad actor.
- Fund administrators verify the age and name of the recipient’s account.
When a fund administrator collects the fund distribution recipient’s banking information, it first scans the name on the account to ensure that it matches the government-issued photo ID the recipient has uploaded. Then, it checks the age of the account. Newly created accounts and mis-matched account names are a tell-tale sign of fraud, so these measures are extremely effective in reducing the risk of wire fraud for your firm.
- Fund administrators require 2-factor authentication before facilitating wire transfers.
Even after preliminary security measures are taken, fund administrators provide their private equity and venture capital clients with extra assurance by requiring two-factor authentication. First, the admin uses technology to check the location of the recipient to ensure it’s not a likely fraudster. After that, the admin requires access to the recipient’s camera so it can perform a scan of their face. It even asks the recipient to move their face to ensure it’s not a photo that a sophisticated fraudster stole off the internet.
- Fund administrators reduce the time it takes to verify the identities of distribution recipients at scale.
Since capital distributions happen regularly (typically every quarter), and since any given fund can have dozens of distribution recipients, it’s important that your fund administrator’s process be scalable. Best-in-class fund administrators leverage next-generation technology to facilitate this entire process, which ultimately reduces the time it takes to perform a wire transfer securely, and drastically reduces the number of opportunities fraudsters have to steal from your LPs.
- Fund administrators reduce confusion throughout the distribution process and act as a trusted partner to senders and receivers.
Because fund administrators use technology to perform smooth and secure wire transfers, they also gain access to key data that increases the level of trust senders and receivers have in the process. Not sure if the distribution recipient has entered their banking information? The admin can check to see the status. Has the distribution recipient clicked on the secure links that were provided to them? The admin can verify and communicate that back to the sender. These logistical improvements, while seemingly inconsequential, can provide both the fund manager and the LP with the assurances they need that they are not at risk.
If your firm works with a fund administration partner, it’s important to ask them how they are reducing the risk of wire fraud and identity theft in the capital distribution process. If they are performing manual checks or do not have a scalable technology solution in place, be sure to recommend that they use leading technologies like WireSecure so that your firm can be properly protected.