Perhaps the largest inhibitor to the growth of private equity and venture model of investing has been the scarcely available knowledge of this niche industry and the kind of structures it employs. The niche nature of waterfalls, fees-structures and investment instruments has meant that fund managers have traditionally outsourced their operations to expensive experts or hired specialist internal teams to run their fund operations.
The list price on the services of third party administrators are useful to attract young fund managers who rightly wish to focus on their core competencies of managing investors’ money. Indeed, hiring the right internal team can be time-consuming, expensive and with a delayed return on investment.
However, indirect overheads such as those related to liaisons with the fund administrator, quality control and running parallel operations to verify reporting are easy to miss. These hidden costs make outsourcing cost effective only for funds in a narrow band of commitment sizes.
Fund managers lean towards in-house operations because of their greater transparency, higher data-control and mitigation of third party risk. A high rating in the above factors help fund managers offer better aligned and future ready operations, which are especially important for long term managers planning to launch subsequent funds.
However, any manually run team is bogged down with complicated spreadsheets that are rendered difficult to use over time, are susceptible to errors, and are infamous for hiding errors in plain sight. Also, thanks to lack of knowledge management practices at most internal teams, operations can be temporarily handicapped on the departure of a key person.
Fundwave helps managers take control of their data and operate their funds with best practices at a fraction of cost of either outsourcing or hiring a specialist in-house team. Figure 1 summarizes the various costs associated when outsourcing fund operations, administering internally manually and administering internally with Fundwave. Note that the funds continue to spend on internal teams even when operations are outsourced, which is often not evident at purchase.
Figure 2 compares the key value add factors to consider in the outsource versus in-house debate. Clearly, Fundwave brings the best of both worlds by lowering cost, reducing errors and increasing the control of fund data.
By helping managers take control of their data, reduce administration costs and follow best practices, Fundwave presents a natural evolution to fund managers who want to keep fund administration in-house for the benefits of greater transparency and control of their data but lack the expertise, budget or resources to do so.
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