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 email@example.com or call 971-222-0288.