Navigating Fund Administration Oversight in Private Markets

While these benefits are often well understood, Alpha Alternatives has observed many GPs struggling to obtain the full ROI of their investment in third-party administration.  This has been due in large part to not establishing the oversight model and controls to harness the full value of functions which are outsourced to third party providers. This article will dive into the different approaches and considerations to support private markets firms in establishing a successful framework and maximizing the value of third-party relationships. 

Why Oversight is Necessary 

Effective fund administration oversight is not merely a best practice; it’s essential for maintaining control, mitigating risk, and ensuring the accuracy and reliability of financial reporting. Although core functions may be outsourced, the manager is ultimately responsible for the firm’s reporting and compliance.  While oversight is important when the manager is outsourcing to a single administrator, the benefits and risks are both heightened when engaging multiple administrators, which is becoming increasingly common due to the need specialization. 

Without a proper oversight model, firms may face challenges related to:    

• Accuracy of Financial Reporting and Fund Accounting: Ensuring the integrity of financial data is paramount for investor confidence and regulatory compliance.    

• Real-Time Data Accessibility: Front-office decision-making requires timely and accurate data, which can be hindered by reliance on external administrators.  

• Inefficient Workflows: Scale and efficiency benefits are likely to be elusive unless the manager and administrator collaborate closely on designing the optimal process for key events such as calls, distributions, and quarterly reporting.  

• Regulatory and Compliance Risks: Firms remain responsible for regulatory compliance, even when outsourcing, making oversight crucial for risk mitigation.    

• Fund and Investor Reporting: Meeting reporting requirements necessitates readily available and accurate fund and investor data.    

• Fund Administrator Transitions: Being prepared for potential disruptions or transitions to a new fund administrator (or a co-sourcing model) is essential for business continuity.    

Key Considerations for Oversight Models 

Private equity firms must carefully consider several factors when choosing the most appropriate fund administration oversight model. There is no one-size-fits-all solution; the optimal approach depends on the firm’s specific needs, risk appetite, service provider relationships, and resources. Key questions to address include:    

• Internal Capabilities: Does the firm have the internal resources and expertise to manage a shadow book in-house?    

• Real-Time Data Needs: How easily accessible is data for front-office decision-making?    

• Technology Alignment: How well does the fund administrator’s technology align with the firm’s reporting needs?    

• Fund Structure Complexity: How complex is the fund structure, and does it justify deep oversight?    

• Cost-Benefit Analysis: What is the cost-benefit of each oversight model related to headcount and systems?    

• Regulatory Landscape: What are the regulatory and compliance risks associated with each approach?    

• Transition Preparedness: How prepared is the firm for potential fund administrator disruptions or transitions?    

Fund Oversight Models: A Spectrum of Approaches 

In today’s environment, the level of fund administration oversight can vary significantly, ranging from minimal to comprehensive. Here’s an overview of the different models which Alpha sees being deployed currently: 

Full Shadow Model (High-Touch): This model involves tracking all positions, transactions, and investor-level allocations in-house, with daily or weekly reconciliations between the service provider and the GP. It provides the highest level of control and independent validation but is also the most resource-intensive. This model may involve the internal accounting team manually recording transactions daily in parallel to the fund administrator, or ingesting accounting transactions via a data feed from the fund administrator into the GP’s accounting applications. 

• Best Suited For: Large, complex firms with specialized investment strategies, and high-volume/ liquid strategies (e.g. hedge, publicly traded credit)  

• Key Advantages: Increased reporting controls, flexibility to quickly respond to investor queries, ability to more easily switch fund admins, improved data management, and minimized reporting risk 

• Key Disadvantages: Resource-intensive, costly, and can create scalability challenges    

• Resource Requirements: Requires significant staffing levels to support the increased workload, and a high level of investment in internal software applications (up-front and ongoing) 

Partial Shadow Model (Moderate-Touch): This model involves a more moderate approach to shadowing the fund administrator’s work. This may include, for example, tracking activity down to the fund or portfolio company (investment) level but not tracking the investor-level allocations on each transaction. The manager might conduct more in-depth reviews and independent calculations on specific areas or transactions that are deemed high-risk or complex (e.g., carried interest calculations, management fees). Investment and investor cashflow records are often kept internally for validation against the administrator’s workpapers.  This approach can offer a balance between control and resource efficiency.  

• Best Suited For: Mid-sized firms with low-to-medium volume of funds and medium-to-high confidence in their service provider 

• Key Advantages: Allows for oversight of investor, fund and portfolio-level detail and balances oversight with efficiency by reducing operational costs when compared with a Full Shadow 

• Key Disadvantages: Limited control, elongating response times for investor inquiries; can also be challenging to transition away from the fund administrator in the future if required 

• Resource Requirements: Can be supported by a smaller finance team, requires some investment in technology applications but less than a Full Shadow model 

Minimal Shadow Model (Low-Touch): A minimal shadow model for a private markets manager overseeing a fund administrator represents the lowest level of internal oversight and duplication. It relies heavily on the fund administrator’s expertise and processes, with the GP primarily focusing on high-level reviews and exception-based monitoring. The manager may perform minimal re-calculations of management fees and carried interest, but will primarily review NAVs and financial statements for overall reasonableness and will focus on any significant fluctuations. No true “transactions” are replicated in the GP’s environment or systems. This model prioritizes cost efficiency and operational simplicity but increases reliance on the administrator.  

• Best Suited For: Smaller or emerging firms with simple investment strategies and firms with high degrees of confidence in, and tenure with their service provider    

• Key Advantages: Reduced cost, simplified operations  

• Key Disadvantages: Dependency on the fund administrator, limited real-time access to data, increased risk of reporting errors, and difficulty changing service providers 

• Resource Requirements: Requires the lowest internal staffing levels of the options, and basic technology tools to support oversight 

Co-Sourcing: This model involves the GP retaining specific high-value or critical functions in-house while outsourcing the more routine and volume-driven tasks to the fund administrator. Typically, the GP might handle portfolio valuation inputs, complex waterfall calculations, final NAV review and approval, and direct investor query management. The administrator handles day-to-day bookkeeping, cash and position reconciliations, draft NAV package preparation, and processing capital calls and distributions based on GP instructions. Reports can be run in real-time by the GP for review, verification, and final sign-off. In a co-sourcing model, there is a strong reliance on defined workflows and communication protocols between the GP and the administrator. 

• Best Suited For: Firms seeking more control than full outsourcing without the cost of full shadowing, GPs who wish to retain operational control over specifics funds, strategies, or GP entities 

• Key Advantages: Balances cost-efficiency with GP control, allows internal teams to focus on high-value analysis and oversight, leverages the GP’s technology and scale for processing, maintains a single, centralized version of all accounting records, offers more scalability than a purely in-house model. 

• Key Disadvantages: Requires robust oversight procedures and clear delineation of responsibilities, GP still needs significant internal expertise for review and retained functions, GP typically pays licensing costs for software 

• Resource Requirements: Varies depending on the specifics of how many funds are maintained by the administrator vs internal team members but generally allows for a smaller internal staff. Technology is licensed by the GP in this model, and requires up-front implementation effort/cost and ongoing maintenance (upgrades, etc.) 

Essential Requirements for Engaging with Service Providers 

Regardless of the oversight model selected, adherence to fundamental requirements is necessary to ensure your organization maximizes the value derived from its service providers. 

• Robust Service Level Agreements (SLAs): Define clear SLAs with the fund administrator, including turnaround times for reconciliation breaks and communication protocols for exceptions. SLAs should translate into contractual agreements and commercial models put in place between the organizations. For example, if the contract specifies capital call notices are to be generated 3 business days from the time the GP initiates the request and they are 2 days late, that should be translate to a reduced fee percentage for the applicable time period for the GP. 

• Strong Due Diligence on Administrator: Thorough initial and ongoing due diligence on the fund administrator’s capabilities, controls, and reputation is critical. Many firms fail to make this a continuous exercise once the relationship has been established. Technology is ever-evolving, and staying in tune with new capabilities service providers can offer will ensure you are getting access to the most modern platforms to scale your operations. 

• Regular Communication: Regular check-in meetings between a GP and fund administrator foster proactive communication, ensuring alignment on upcoming deliverables, timelines, and potential challenges before they escalate.  

• Process & Workflow Definition: When engaging with a fund administrator, private markets firms must meticulously define and document their core processes and workflows to ensure both parties are aligned on expectations. Clearly documenting procedures, handoffs, and data flows ensure that the GP and admin are in sync and there are no “grey areas” on how core operational processes are to be handled. Without proper process documentation in place, firms risk misaligned expectations, operational inefficiencies, and potential disruptions to their financial reporting and investor communications. An example of this is when issuing a capital call, defining each step of the process in a process map, agreeing on documents or data to be exchanged for review (e.g. allocation schedules, notices, wire instructions, etc.), agreeing on required review points, and identifying what technologies will be used to support each step of the process.  

• Data Accessibility: A critical aspect of effective fund administration oversight for private equity firms is understanding data accessibility before committing to an agreement. Firms must ascertain how, when, and in what format their fund and investor data will be available, including direct access to source data, real-time reporting capabilities, and the ability to extract data for internal analysis or integration with other systems. Without clear contractual stipulations around data access, firms risk losing control over their own critical information, facing delays in crucial decision-making, or encountering significant challenges when transitioning administrators or fulfilling investor and regulatory reporting demands. While this historically this has presented a challenge for many firms, emerging and tech-forward administrators are offering modern solutions to overcome these challenges.  

Leveraging Technology to Enable Oversight: 

Private markets firms are increasingly leveraging a variety of technologies to enhance their oversight of fund administrators. Instead of relying solely on traditional methods like spreadsheets and email, leading firms are adopting more sophisticated tools to automate workflows, improve data accessibility, and streamline reporting.  

• Business Process Management (BPM) tools such as PowerApps, Appian and Unqork are utilized to automate workflows across different functions and applications. These solutions can provide the manager with full transparency into the status of routine calendar (e.g. financial statements) or event-driven (e.g. capital calls) tasks and offer the ability to view supporting documentation directly within the application.  

• Collaborative calculation and modeling platforms like Anaplan and Pigment can help to centralize and transform Excel-based processes and integrate data from various sources, allowing both the GP and admin to work from a central source of information. Common use cases for these platforms include waterfall calculations and management fee calculations. Instead of re-creating these critical items offline in Excel, these solutions allow both firms to work from a central location facilitating review processes.  

• Reporting platforms such as Workiva, which some admins provide as part of their service offering, also allow the GP finance team, fund admin, and even auditors to collaborate on reports within a central platform. 

• Reconciliation tools, such as Fund Recs and Duco allow firms to move away from spreadsheet-based reconciliation processes, by quickly ingesting and comparing datasets or reports from the fund admin and GP. These solutions can easily identify data anomalies or significant changes in datasets and provide auditability allowing clients the ability to review previously executed reconciliations. 

• Data platforms such as Snowflake and Databricks have become a core solution within many private markets firms’ technology ecosystems. Layering on Power BI reports and dashboards offers GPs another mechanism to review key data, identify anomalies, and flag any potential errors with their service provider.  This shift towards industry-agnostic platforms allows PE firms to automate and streamline oversight requirements more efficiently and cost-effectively than extending point solutions that are not fit for purpose, but requires up-front investment. 

Many GPs still require core accounting data within their environment to produce track record reporting and other marketing materials. This, in turn, necessitates building data feeds from the admin’s technology platforms into the GPs tech stack to enable a central reporting platform that can be leveraged by other teams, such as IR.  

In addition to these technologies, many leading fund administrators offer portals that provide PE firms with enhanced oversight capabilities. Some admin portals offer workflow functionality, allowing the manger full transparency into the status of routine tasks and the ability to view supporting documentation directly within the application. Some of these portals can also offer GPs near real-time data accessibility, facilitating self-serve reporting and allowing firms to easily respond to investor inquiries. That said, there are some limitations with leveraging the administrator’s tech stack to facilitate the oversight. For example, large managers with multiple administrators may still face challenges due to a lack of standardization in formatting and source systems used across different admins.  

Conclusion 

Fund administration oversight is a critical component of successful private markets operations. By carefully considering their specific needs and implementing a well-defined oversight model, firms can mitigate risks, maintain control, and ensure the accuracy and reliability of their financial data. As the private markets outsourcing trend continues to grow, a proactive and strategic approach to fund administration oversight will be essential for achieving sustainable growth and maintaining investor confidence. 

How We Can Help 

At Alpha Alternatives, we help private markets firms navigate these complex outsourcing decisions and establish robust oversight procedures from a people, process, and technology perspective. Our team of subject matter experts supports alternative managers in scaling effectively as AUM grows, helping them drive profitability through enhanced operational efficiency.