This article is sponsored by Gen II Fund Services.
The alternative asset industry has long embraced outsourcing, and with good reason. The economics make sense and competition among service providers has them constantly upgrading their tech and talent. As much as these firms can lighten the load for a GP, the best outsourcing relationships still require some thought, and some work from their clients. A hands-off policy with service providers can court misunderstandings or worse, between client and vendor, and among the vendors themselves.
This is especially true with regards to the relationship between the staff servicing the management company and the provider administering the funds. It may not be as obvious to foster a relationship between the two, but like most best practices, it’s easy to discount until something goes awry.
Given LP demands and regulatory oversight these days, there is little room for error, says Michael Tesoro, a principal with Gen II, who has long worked in fund administration.
It can be easy to overlook all of the ways that the management company and funds need to collaborate together. What are some of the events or situations that require the administrators of both to work in tandem?
We clearly have four key events of the year: three quarterly reports and the annual reporting, and in many ways, there’s a clear process and timeline. There are also a number of times when the GP or the fund manager will need information and collaboration of both teams: the investor conferences, fundraising, significant LP meetings and the annual meeting all require compiling and aggregating data for these meetings and presentations.
Another key area of focus is the SEC exam, which for us is the final test to see if everyone is doing their job correctly. There’s no hiding in those situations. They either have the data to meet the SEC’s requests, or they don’t.
We pride ourselves in proving our capabilities when the stakes are high, such as that regulatory exam, the important LP update or that fundraising meeting that can make all the difference for the future of that GP.
How can a GP gauge if those servicing their funds and those servicing the management company are collaborating effectively?
The relationship has to have all the standard signs of a positive working relationship, which include effective communication, corroboration and trust. These may all sound intangible, but there are ways to tell if they’re in place. Maybe they don’t finish each other’s sentences, but in group calls, they already know each other’s needs and when those needs have to be met.
“We’re going to better understand the unique needs and challenges of that particular client because we’re handling both”
This means that no one is asking a second or third time for a set of deliverables. This may be counterintuitive, but when that collaboration is humming, the GP doesn’t need to manage the relationship any longer and can take a more hands-off approach. But that kind of trust doesn’t just appear out of nowhere; it’s cultivated by the GP, and the staffs servicing the management company and the funds.
Let’s say the GP starts out with everyone on the same page, but perhaps one side or the other doesn’t maintain adequate rigor in process or communication. Are there any red flags that something has gone off the rails?
As soon as someone in the process says, “Hey, we needed that yesterday,” that’s a red flag. This implies someone was unaware of a deadline, or unable to meet it. So much of the administration of both funds and the management company involve recurring processes, timelines and deliverables; these shouldn’t trip anyone up. The other thing is any misunderstanding on a group call, where it’s clear the parties haven’t been updating each other on a given situation or project.
It’s been popular for emerging managers to start their firm by handling the management company internally, and outsourcing fund administration. How do these managers set the relationship between the two up to succeed?
When you have a GP that has a fund administrator and an internal staff handling the management company, there has to be a regular cadence that’s clear and defined. This means standing calls, calendar deliverables, recurring meetings and additional touch points as needed. Not every meeting or call needs to be three hours; sometimes it can be a simple 15 minutes. But these guardrails ensure nothing gets missed.
It’s good for the GP to check that this cadence has been established, but they shouldn’t have to micromanage the relationship. The GP should trust that when they walk away, the fund administrator and management company staff will talk without them. Ideally, they’d develop an informal pattern of calls and emails as needed.
It’s always a balance since it can start to feel robotic if every meeting is overly formal. In the best-case scenario, a shorthand is developed, which adds efficiency and can even spark some useful innovation between the two. A perfect example is when the management company staff notices a stack of invoices arrive in the last week and gives the fund administrator the heads-up. Those informal connections are the best sign that the relationship is thriving, and the GP can trust both sides of that relationship.
Gen II offers services to both the funds and the management company, so what’s the benefit to having both under the same roof?
The GP does not have to micromanage the relationship. There’s a consistency in reporting, in efficiency, in scalability, since everyone is using the same standards, the same processes and the same technology for both. The collaboration has already been refined by us in-house, and we’re going to better understand the unique needs and challenges of that particular client because we’re handling both. Let’s say I get off the phone with the CFO of one of our clients and I realize there’s an issue relevant to the management company side; all I need to do is walk down the hall to discuss it.
And that shared tech stack also allows the GP greater control over their data across both the funds and the management company. It just makes that collaboration so much easier. When we do vendor payments, and the client wants to bill those to funds in real time, we can, whereas they might normally only do them quarterly. We’re constantly finding ways to improve the work streams, which also reduces the chances for human error.
We also have a special quality control team, outside of the fund or management company teams, that independently verifies the work of both before sharing with the client, adding another layer of review. The QC team only gets smarter about the issues that come up most often with that client, making them more efficient over time. In the end, we know the best relationships – between client and vendor, between vendors, even among staff at a single vendor – never stay static and have to be constantly improved.