4 Due-Diligence Steps to Find the Best Partner for Your Long-Term Success
“One-size-fits-all” is a term that does not apply to funds, particularly as structures become more diverse and complex with each passing year. Just as funds have different characteristics, the same is true for service providers. That’s why fund managers must carefully evaluate critical variables before selecting a partner they can trust.
To determine whether a service provider can serve as a true partner, fund managers need to assess strategy expertise, jurisdiction knowledge, technology and cultural fit. Particularly when selecting a fund administrator, those factors must address an overarching concern: Is this a partner with the capacity to scale as the fund grows and the fund manager’s strategy evolves?
Additionally, it helps to assess the breadth of a fund administrator’s relationships with other service providers. Are they well known and respected within the industry? Do they work well with other providers, particularly the audit firm? Fund service providers often have to collaborate on valuation, reporting, and tax issues, so it is critical for the fund administrator to have established relationships.
With that in mind, we have provided four steps (including specific questions) to identify the right fund administrator. This due-diligence process is designed to find a partner for your success — not only for the launch but for the long-term.
Leverage Your Business Plan to Find the Right Expertise
When selecting fund service providers, your business plan will help you evaluate the level of expertise required to provide continued support beyond the launch. Consider the primary objectives outlined in your business plan, such as fund jurisdictions, office locations and investor base. Those objectives will inform your due diligence.
For example, you might plan to launch a Cayman master feeder fund structure to accommodate the initial investor base’s needs. You may also have European or Asian expansion plans. As you evaluate service providers, consider how their capabilities can help your fund’s longevity.
Questions to consider:
Can the auditor work with funds domiciled in the Cayman Islands and Europe or Asia?
Does the fund administrator have the ability to administer a fund domiciled in Europe or Asia?
Does the law firm have expertise in foreign jurisdictions to help evaluate different jurisdictional options and potential tax implications?
Assess Technology Capabilities and Employee Experience
To ensure your operational requirements receive the highest level of service, you must carefully consider both the people and technology behind each potential partner. Explore whether the provider has experience with the fund’s strategy, instruments traded and jurisdiction. If your fund has unique trading strategies or complex fee structures, you don’t want to rush through this step. Plan to spend ample time with interview questions that assess whether the technology and staff can fit your fund’s needs.
Questions to consider:
Does the service provider have the proper software to process the securities traded or accommodate atypical fee structures?
Is the service provider compliant with the SEC’s cybersecurity recommendations?
What is the depth and breadth of the employees’ experience? What types of funds have they supported? Have they worked in the industry for a couple of years — or a couple of decades?
Obtain Control Environment Details
Increased regulatory scrutiny places a more intense focus on record-keeping for funds. Before you entrust critical services to a third party, you need confidence in the fund administrator’s controls, processes and procedures. The only way to achieve this is with detailed questions that explore a firm’s control environment’s specifics.
Questions to consider:
Who makes up the client service team?
Who signs off on the Net Asset Value (NAV) before it is sent to the fund manager?
What processes do they have in place to ensure the completion of timely and accurate NAVs calculated on a daily, weekly, monthly or quarterly basis?
Who interacts with the fund investors?
Find a Cultural Match
Although expertise matters, you won’t find an ideal service partner without also having a well-matched cultural fit. If you work closely with the service provider for years, you will need a team with shared values. This is particularly relevant when choosing fund administrators, outsourced compliance teams and even outsourced CFOs.
Questions to consider:
Does the service provider place a high priority on timely, accurate communication?
Do they have a high client-retention rate, reflecting dedication to building relationships and supporting clients’ long-term success?
Do they lead with integrity?
Reach out to learn more about SFS and discover how we deliver on our promise to be a long-term, solutions-oriented partner to fund managers