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.

Why Outsource your Fund Administration?

The number of Fund Managers choosing to outsource their fund administration continues to grow, with as many as 45% fully or partially outsourcing their administration needs this year (KPMG 2018). Right now, with new Opportunity Zone Funds popular with investors looking to avoid capital gains, those looking to set up new Funds (or even those with existing Funds) should consider the pros and cons of keeping the administration in-house or outsourcing to a fund administrator.

Redwood, working with new Fund Managers and those with many years of experience, has heard a variety of reasons why our clients choose to outsource their fund administration. Here are some of the top reasons to consider outsourcing:

Greater investor confidence through third-party oversight: The impartial oversight provided by a third-party Administrator is invaluable, lowering barriers for new investors into the Fund in a competitive capital raising market. Knowing an independent party is involved in preparing financial statements, fee and waterfall calculations gives existing and potential investors peace of mind.

Access to experienced accounting talent and technology: Outsourcing fund administration provides access to a team with deep expertise and experience, with a proven process extending beyond basic accounting principles. The Fund Administrator acts as an extension of your own team, without adding headcount, with the additional benefit of providing a wealth of knowledge and breadth of experience, having worked with a variety in clients, both in size and asset strategy.

Investors have an ever growing demand for transparency and real-time data (FIS Global 2014). According to BankDirector.com (2016), engaging a Fund Administrator to implement and manage technology (both financial and investor accounting) is often more cost effective for Managers, with Administrators able to spread the cost across their client base. Engaging a Fund Administrator gives you access to technology and expert staff who understand how to extract the most value from the system.

Lower fund operating costs: Many Small Balance Real Estate (SBRE) entrepreneurs find that the cost associated with engaging a third-party Administrator is lower than keeping the work in-house. A variable fee structure based on Assets Under Administration (AUA) can eliminate future commitment to the costs associated with expanding your back-office as your scale your business (J.P Morgan 2013). Most Funds pay the administration fee directly out of the Fund so that it does not increase expenses for their operating entity, unlike hiring additional staff.

Greater focus on core capabilities – real estate: Despite the value in third-party oversight, lower operating costs, and access to expert staff and technology, the primary driver for Managers to outsource administration is the desire to focus on core real estate activities (KPMG 2018). Ultimately, having a third-party firm focus on the accounting and administration aspects of the Fund frees up the Manger’s time to raise more capital and do more deals.

At Redwood, our clients see the value of outsourcing their fund administration to a company specializing exclusively in real estate. If you know a real estate entrepreneur who wants to spend less time doing accounting and more time doing deals, please reach out to us at info@redwoodrea.com or call 971-222-0288.

 

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.