Key Considerations When Choosing a Fund Administrator

When starting a Fund, it is easy to underestimate the complexities of the operation: raising capital, originating deals, managing cash flow, investor relations, regular reporting requirements, tax returns, and so on. There are a lot of moving parts, which is why many Managers choose to outsource their Fund Administration to an independent third-party.

Whether you are starting a Fund, or contemplating a switch from your current Fund Administrator, finding the best fit can be challenging. There are many different Administrators in the market, big and small, and making the right choice can be a critical factor in the success of your Fund. There are several key considerations you should keep in mind when reviewing your options.

Knowledge of your Industry

The number one consideration when choosing a Fund Administrator should be their experience in your industry. You wouldn’t take your car to a mechanic who specializes in boats, so why trust your small balance real estate (SBRE) fund to a firm that specializes in multi-billion dollar Hedge Funds?

Engaging an Administrator with deep knowledge and experience in the real estate industry means working with accountants who are experienced and able to ask the right questions and provide the right guidance throughout your Fund’s lifecycle; from launch to wind down, through the ups and downs of the market. Quality Administrators also have connections to others with direct experience in the SBRE industry, including Loan Servicers, CPAs, attorneys, and other partners, who can help you grow your business.

Strategic Partnership vs. Outsourced Accounting

Some Fund Managers may be concerned about losing the insights and understanding of a Fund’s dynamics if they outsource administration and rely on a third-party firm to maintain financial and reporting requirements. This is where choosing the right Administrator is critical; you don’t need to lose the experience of having an individual who understands your Fund inside and out. This is the difference between engaging a Fund Administrator in a strategic partnership and simply outsourcing your accounting.

Finding a firm with low staff turnover, where you will have a single point of contact, will give you the benefit of the expertise and independence that comes with engaging a third-party, as well as maintaining the personal touch of having a dedicated individual working on your Fund, with whom you have a strong working relationship. Your Fund Administrator should be an extension of your own team; someone you trust and partner with to deliver accurate and timely reporting to you and your investors.

The Investor Experience

High up on the list of the complexities of managing a Fund is investor relations. Finding a Fund Administrator who can deliver a great experience to your investors through an investor portal is a worthwhile investment. This professionalizes the investor experience through the entire process: from onboarding to delivery of statements and ultimately through wind-down or redemption. Finding an Administrator who can provide a seamless, technology-driven investor onboarding process, including taking care of all the accreditation and compliance requirements, including AML, can play a key role in helping you raise capital from new and existing investors.

Technology can also deliver the transparency many investors now require. Investor portals can save you time responding to investor inquiries by enabling investors to make changes to their contact information and distribution preferences, providing up-to-date information on how their investment is performing, and providing access to Fund and tax documents in a secure environment.

Keeping these three considerations – industry knowledge, finding a strategic partner and managing the investor experience – in mind when exploring your options for Fund Administrators will help you select the right partner from the beginning.

 

Lance Pederson

As the only third-party Fund Administrator specializing exclusively in real estate, Redwood can provide deep industry knowledge and expert insight to its clients. To learn more about the benefits of partnering with Redwood for your administration needs contact Lance Pederson at Lance.Pederson@redwoodrea.com.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.

Making the Transition to a Fund

Transitioning from a single deal structure to a Fund can be an appealing proposition; chasing investors for one-off deals can become incredibly frustrating and inefficient. However, it is common for experienced real estate entrepreneurs to underestimate the challenges of making the transition.

Is now the right time to transition?

Before converting to a Fund structure, first consider the following:

  1. Do you have a consistent monthly deal volume?
  2. Are your deal sizes smaller, with shorter hold times?
  3. Do you have experience and success raising capital?
  4. Do you have clear goals and objectives for your potential Fund?
  5. Are you ready to commit long-term to the industry?

Transitioning to a Fund might not be for you if your entire focus is on a handful of bigger deals with longer hold times, or if you are not ready to be patient and really put the time in – most Funds take at least three to five years to reach maturity. Managing a Fund is its own business above and beyond the real estate business.

Get the right advice – early

It goes without saying, but do your due diligence before making the transition to a Fund. You should do some financial modelling to compare the economics of what you are doing today versus a Fund, to understand what makes sense and what doesn’t. Good financial modelling will give you insight into key variables you’ll need for success, such as how much capital you need to raise, anticipated costs at the Fund level, profit splits and your target returns for investors. Many entrepreneurs don’t know enough about Fund structures to effectively produce a financial model, so engaging outside consulting to assist in both the financial modelling and overall Fund structure is a smart move, ensuring that you are moving in the right direction from the outset.

Fund administration is a function you won’t have in your current operation and it is a key factor I recommend considering before drafting your Offering documents. Understanding how you will administer the Fund and incorporating this into your Operating Agreement and PPM will make it easier to launch. Keeping the admin in-house or outsourcing is another consideration. If you do commit to doing the admin internally, ensure you are strong on systems, processes and details; if these aren’t your core competencies (and this is often the case for entrepreneurs), consider outsourcing to a third-party such as Redwood.

Good administration provides confidence to your investors, with transparent operations and consistent and accurate communication. It sets the tone with investors about how you’re going to operate and can help you raise more capital from new and existing investors.

Capital Raising in a Fund isn’t easy

Before launching your Fund, have a comprehensive written-strategy in place, which you are prepared to evolve over time. Just because you have good access to capital now, does not mean you will in a Fund structure; a good Fund investor is not necessarily the same as a good individual investor.

Working with your existing investors to prepare them for the transition by sharing your plan and your goals is important; change is hard. As a rule of thumb, you can expect 20% to 40% of your single asset investors to come over to the Fund, but generally they won’t invest as much as they had before, and it will take time to convert these investors to the Fund format.

Consider a dual strategy

Making an all-or-nothing transition to a Fund is generally unwise and you can expect to run a dual strategy for some time. You will likely continue to do one-off deals to generate income while the Fund is getting off the ground. By following a dual strategy, you are still able to leverage your existing investors to Fund one-off deals, maintaining your existing relationship.

Making the transition to a Fund is a long process and one where it pays to get the right advice early to make sure your economic model is financially conducive to a Fund. There are layers of complexity to converting to a Fund structure you won’t understand until you are in the middle of it. Remember that success takes a significant amount of time, dedication, and pairing with the right advisory partners.

 

Lance Pederson

If you are considering transitioning to a Fund and have questions on how to get started, contact Redwood’s Manager Partner, Lance at Lance.Pederson@redwoodrea.com. As the only third-party administrator specializing exclusively in real estate, Redwood can provide the right advice as you launch and beyond, to help you succeed.

 

 

Neither Redwood nor any of its affiliated entities offer or provide any legal, accounting, or other advice that requires a professional license. None of the materials in this post or any related materials are intended to be or should be considered legal, accounting, or similar advice. No one receiving these materials may rely on them as a substitute for appropriate professional advice. Redwood strongly encourages and advises anyone receiving these materials to consult with their own independent attorneys, CPAs, and other professionals in order to ensure that any actions taken in connection with the materials complies fully with all applicable laws, rules, and regulations.

[WEBINAR] The Three Secrets to Raising Capital from High Net Worth Individuals

The three secrets to raising capital from high net worth individuals are…

  1. Connect emotionally
  2. Always be educating
  3. Focus on execution

<<DOWNLOAD SLIDES>>

SECRET #1 RESOURCES: Connect Emotionally

The story I referred to during the webinar where Matt details the various trials and tribulations begins at 3:32. He will typically share some version of this story at every investor event we host.

Stephen Seal’s personal story starts at 0:39 in the video. In a very short period of time Stephen gives you a glimpse into what he’s all about.

Blake Hansen begins his presentation with a video that is narrated from the perspective of a prospective investor. In two minutes, it sets the stage for what Blake is all about as a person and a real estate investor. Very powerful!

SECRET #2 RESOURCES: Always be educating

SBRE Investment Summit

In this video Matt explains the genesis of the SBRE Investment Summit and what the true purpose of the event is. This event really hits on all three of the secrets. There are emotional connections on many levels, the entire purpose of the event is to educate and the event itself is executed perfectly from the way people are invited, to how they are treated the moment they step off the plane and the venues are always world class.

37th Parallel Properties

This is one of the best, if not the best, website I found when pouring through hundreds of real estate investment sponsors website in search of the three secrets being executed.

Hughes Capital (Greg Hughes and Steve Sixbury)

Greg and Steve are masters of the educational investor event. I believe this is the playbook that every sponsor should run. It is the perfect format to execute on all three of the secrets and all things being equal should have a really great return on investment. Not everyone can pull of an SBRE Investment Summit but you can pull this off.

Mile Marker Club (Ryan Parson)

The combination of the Mile Marker Club and Ryan’s Motorhome & Money Tour are absolutely brilliant. Ryan drives a motorhome all around the country and creates a built-in excuse to throw a party. The motorhome is ostensibly a moving billboard as it has a graphics wrap with a call to action for high net worth investors to reach out if they want to learn more about how to maximize their retirement funds. Genius!

Self Storage Investing (Scott Myers)

 

Pacific Private Money (Mark Hanf and Edward Brown)

[WEBINAR] How to Launch Your Own Fund

<<DOWNLOAD SLIDES>>

Are you a real estate entrepreneur who has considered launching your own fund? You know other people have done it, but the prospects seem daunting. Maybe you have even spoken to legal counsel but have more questions than answers about what it is really like to launch and manage a pooled investment fund.

If so, then look no further. The experts at Redwood will tell you the real deal, the street level truth, about launching and running a fund. It certainly isn’t for everyone, but for some, it represents the freedom to make decisions they have worked their whole real estate career to achieve.

We have consulted with more than 100 SBRE entrepreneurs around the country on the formation of their own pooled investment funds. Additionally, Redwood administers over 120 fund and real estate entities across every asset structure. From those experiences, we have distilled the secrets to success in launching a fund into a handful of the most important factors which we shared in this hour-long interactive webinar.

You will Learn:

  • The 3 musts to having a great fund
  • How to raise capital in a pooled fund format
  • Why structure matters and how to know which one makes sense for your asset model
  • Why some funds grow rapidly and other fizzle
  • Do’s and don’ts to a successful launch