Fund admin: What LPs really want

Impressing investors these days goes far beyond the right performance figures; more and more LPs are also quizzing GPs on operational matters. Having the right systems in place – including, for example, being fully prepared for LP visits – go a long way towards building trust and instilling confidence. 

And while back office functions are not typically created based on what LPs want, it can’t hurt to at least understand what their expectations are. Fortunately, for the most part those expectations are largely in sync with developments at the GP end: a move away from Excel-based reporting; a more holistic approach towards fund administration tasks; the ability to access and produce data more easily. But in other areas the expectations may diverge, such as the level of access investors are given to GPs’ fund administration systems through web-based portals. 

In general terms, the ability to provide any kind of web portal tends to impress investors. Software providers like to sell these systems to firms by arguing that it reduces ‘out of the blue’ phone calls from LPs seeking information– because it allows them to run their own reports around capital call notices, portfolio company information and other select GP data points independently. 

That clearly has its merits. But some GPs are uncomfortable with the idea of investors running ad hoc reports without some type of screening process to put any information gathering into context.

“On the one hand you give investors something they want, which is an incredible level of transparency. But on the other hand GPs don’t want numbers being pulled up without any type of interpretation or analysis that explains their meaning,” says Shawn Pride, head of P&L Consulting, a private equity-focused consulting firm

OBJECTION HANDLING 

These days, the demand for greater transparency spills over into all aspects of GPs’ back office work. Multiple sources pointed to two areas in particular during interviews for this article: capital call notices and waterfall calculations.

“LPs don’t just want to see a capital call notice for, say, £1 million,” says James Hutter, global head of private equity and real estate services of JP Morgan’s Worldwide Securities Services business. “They want to understand what portion of that money is for the actual investment, and what portion goes towards things like management or legal fees.”  

Some influential LPs are even refusing to sign on with managers unable to provide a capital call notice in the format they want, according to P&L’s Pride. That could mean a loss of capital for any firm running an antiquated software system that’s unable to process the complicated formats requested by some LPs, she suggests.

With waterfall calculations, Hutter says investors want some type of assurance that things are reasonable. “Calculations should spell out GPs’ share of distribution proceeds, as defined by the waterfall calculation in the LPA.”

From an accounting perspective, a major concern LPs have relates to accessibility. “It’s a fraud issue,” explains Jason Scharfman of Corgentum Consulting, a firm that guides LPs through the operational due diligence process. “Investors want GPs to show who has access to the cash management sections of the accounting system, to make sure an employee can’t just release a cheque to himself.”  

One great way to diminish LPs’ fraud concerns is to outsource the accounting function to a third party service provider, says Scharfman. “Third party administrators provide a degree of independence that is not available in self-administered funds.”

And in the eyes of LPs, the benefits of an outside administrator don’t end there. Even though some GPs like to argue that the efforts of a third party administrator can be a duplication of work already done internally, LPs enjoy knowing that an independent entity is running a second set of books and looking over GPs’ shoulders when performing fund administration tasks, says Scharfman. He predicts more LPs will voice their preference for GPs using third party administrators in the years to come. 

There is a flipside, though: those that do go down this road should subsequently be prepared to show LPs how the firm handles communications with its outside administrator. Software systems are not always able to easily share information with one another; GPs have to show that using Microsoft Excel, for example, is compatible with an administrator’s internal software and wouldn’t result in any lost data or operational hiccups if the format has to be converted, says Scharfman. 

On a wider point, the scalability of GPs’ fund administration systems is also being questioned by LPs. While a small system may have been sufficient for a firm’s debut fund, when it was only responsible for (say) $200 million in capital, LPs want to know its systems can handle the increased workload if it plans to grow in size. When it comes to scalability: “taking on new geographies, for instance, or adding more clients, will need to be considered,” says Scharfman