Fund Administration

What every Fund Manager needs to know about Fund Administration

By Mohit Garg Sep 15, 2015

As fund managers, we leave no stone unturned in ensuring that we are working our investor’s capital optimally to ensure them a good return, because after all the investor commitments form the backbone of a fund. However, running a fund is not just about placing good bets or hunting those unicorns. As a professional fund manager, you need to maintain a reasonable drawdowns schedule, show early distributions and ensure all amounts are allocated to each investor correctly. The notices and reports that we send to investors tell them the progress of their capital investment and that’s why reporting transparency has remained the top priority among institutional investors, and lately individual investors too.

Fund Manager

But what all exactly constitutes as fund administration and where does it fit the processes of a close ended fund? The answer is simpler than you think. Let me break it down for you:

1. Investor Allocations:
Allocating amounts between your investors based on a variable, such as their commitment or undrawn commitment. Among common exceptions to the rule include ‘excused investors’ (investors don’t invest in particular geographies / industries). Also, capital returned within the defined period may be called back by the fund. Fundwave will let you allocate on variables defined by you and even excuse investors.

2. Investor Closes:
When you do another close, new investors pay a late-interest to the fund, which in turn is passed to the investors who had joined in the previous closes. All previous transactions are reallocated as if all the investors joined on the same date.

3. Capital Notices:
You don’t want to completely draw your commitments in advance if you want a good carry. Instead, you draw capital from time to time as you make investments. For every capital notice, you need to include bank details and investor contact details. Often you’re also calculating management fees for a drawdown notice and a performance fees / carry for a distribution notice. Fundwave can seamlessly allocate numbers, generate and send capital notices.

4. Management Fees:
You need to be able to ask for different management fees from different investors, and the basis of calculation of management fees may switch from ‘commitment’ initially to ‘cost of investment’ or ‘net asset value’ during the later life of the fund. Fundwave can maintain different rates for different investors and calculate your management fees.

5. Carry / Waterfall:
This is the money going to the ‘Carried Interest Partner’. You need to be able to calculate your carry based on ‘deal by deal’ and ‘fund as a whole’ basis and make a distinction between ‘hard’ and ‘soft’ hurdles. Some LPA’s have checks to ensure that a clawback situation is avoided. For example, for ‘fund as a whole’ carry, you may assume that all ‘undrawn commitment’ is valued at ‘0’ before you distribute a carry. Fundwave can calculate carry fees for various scenarios.

6. Quarterly Reporting:
At the very least, LP’s will need a ‘Net Asset Value’ statement which shows an overview of the growth of their money for the period. You may supplement this by visuals and other supplemental data.

7. Fund Accounting:
You need to maintain your books for your investments, so that your balance sheet, profit loss and trial balance can be generated. Since you’ll invest in portfolio companies, you will need keep track of number of shares purchased, and transaction currency amounts. When you realize an asset, Fundwave can calculate the cost of sales automatically.

8. Valuations:
You will need to value your investments periodically. When you enter valuations, Fundwave will automatically calculate the unrealized gain, even when the transaction is done using a foreign currency.

9. CRM:
You don’t want to send a drawdown notice to someone at your investor who has moved roles or is no longer working there. Effectively maintaining a single source of truth will save you from a lot of operational trouble down the line. Fundwave stores investor contacts, bank information and sends notifications.

10. Commitment Transfers:
If an LP wants to exit, partially exit or simply invest using another of their SPV’s, you need to be able to transfer the commitment between LP’s. With Fundwave, you can transfer commitment between multiple LPs.

So what isn’t fund administration? Apart from core functions of your team such as deal flow management and portfolio monitoring, fund administration typically doesn’t include incorporation of partnerships, legal expenses, and regulatory reporting.

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