With the regulatory environment becoming increasingly complex for private fund managers over the past decade, the operation and finance functions have increasingly evolved to become value-added functions of a private fund.
Well-designed operation and finance functions can not only keep the private fund safe, but also drive long-term asset growth for the fund. Furthermore, implementing effective operation and finance functions can potentially enhance overall returns for the private fund manager by managing the bottom line of the private fund and potentially increase investor demand for future investments in the fund.
Explore five operational best practices for private fund managers when scaling existing private funds or launching new ones.
Building an Effective Operation and Finance Team
A knowledgeable operation and finance team—whether hired internally or outsourced—can help keep the private fund manager from spending time as a project manager and instead focus on fundraising and investing.
An experienced operation and finance team can also help the private fund manager interview and select the right fund administrators, auditors, tax accountants, compliance firms, and other vendors.
Ultimately, the size and depth of an operation and finance team will depend on the needs of a particular private fund, but the long-term benefit of having a team with institutional operational and finance knowledge outweighs the short-term cost of building a team.
Partnering with the Right Service Providers
Similar to the role of a well-functioning operation and finance team, the role of service providers has evolved from simply providing operational and compliance solutions to becoming strategic advisors to private fund managers.
Whether a private fund manager implements a fully outsourced or hybrid operation and finance model, selecting the right service providers that complement the operation and finance team of the private fund and are long-term partners of the private fund manager will be of the utmost significance to the long-term success of a private fund.
Technical Depth and Expertise
The current complex regulatory environment facing private funds requires service providers to offer exceptional technical depth and expertise to help private fund managers navigate the new environment.
Private fund managers should select service providers who can handle the technical complexity inherent to the private fund’s structure, investors, and investments.
Scalability
As the total assets and investment offerings of a private fund grow, so does its need for more comprehensive service solutions.
A private fund manager should assess service providers’ ability to scale alongside the private fund by offering added solutions that will be required by the future growth of the private fund.
Technology
As remote work has become a norm, the need for strong cybersecurity to protect data and innovative solutions to operate a private fund more efficiently continues to be of paramount importance for private fund managers.
Technological innovation provided by service providers, especially fund administrators, can be a differentiator for a private fund to remain operationally efficient in an increasingly remote working environment.
Understanding Short- and Long-Term Private Fund Management Compliance and Regulatory Cost
Starting a new private fund can be expensive, especially for emerging private fund managers.
It’s important to structure a private fund in a manner that will reduce a private fund’s compliance costs in the long run while still allowing the private fund to continue its asset growth and achieve its investment objectives.
Fund Structuring
Common private fund structuring considerations include understanding and budgeting the cost of setting up and maintaining blocker funds, alternative investment vehicles (AIV), and special purpose vehicles (SPV).
Private fund managers looking to raise add-on capital for closed-ended private funds through co-investment funds should also understand and budget for additional costs of launching such funds.
Foreign Jurisdictions
Accessing foreign private markets typically requires legal entities in foreign jurisdictions.
In addition to fund structuring costs, private fund managers should account and budget for other ongoing costs of doing business in foreign jurisdictions, which can include:
- Inbound and outbound fund tax filing
- Compliance-related disclosures
- Annual audits
- Maintaining books and records in a foreign jurisdiction
- Monitoring a changing foreign regulatory environment
Importance of Strong Governance Framework, Policies, and Controls
With all the pressing matters that come with starting a private fund, drafting compliance-related policies and procedures might not make the top of the priority list for a private fund manager.
However, implementing clear and strong governance framework and policies can result in significant time and cost savings in the long run for the private fund manager and the operation and finance team.
Governance Framework and Organizational Structure
A private fund starting with a small number of officers and employees might not see a need for a governance framework or an organizational structure. However, once a private fund starts to scale, and the roles and responsibilities of officers and employees start to evolve, a well-designed governance framework can help maintain an efficient workflow within the organization. Furthermore, a transparent current and future state organizational structure can help officers and employees understand their current and future roles and responsibilities in an expanding organization.
Expense Allocation and Valuation Policies
Regulatory bodies continue to focus on expense allocation and valuation policies with respect to private funds.
Fund managers should prioritize drafting these policies not only to keep the funds safe, but also to address investor and lender due diligence that have increasingly focused on such policies.
Cash Management Controls
A strong control environment is important for all types of organizations.
To maintain investor and fund safety, private fund managers should design effective cash management controls around:
- Capital contributions and calls
- Investment fundings
- Capital distributions and withdrawals
- Capital transfers
- Expense payments
Flexible Operational Terms within Private Fund Governance Documents
In addition to terms discussing investment objectives, fee structure, and distribution waterfall, reviewing certain operational terms of a governance document early during the fund formation can result in tangible cost and time savings for a private fund manager in the long run.
Timing of Audit and Tax Filings
Private fund managers should consult early with their auditors and tax accountants in conjunction with their attorneys on the timing of audit completions and tax filings.
Depending on regulatory rules applicable to a particular private fund, flexible audit completion and tax-filing timelines can be beneficial to the private fund manager, operation and finance teams, and service providers.
Fund Costs and Expenses
A private fund will incur a variety of costs and expenses over its life.
Clear and well-defined terms related to acceptable fund costs and expenses helps clear any ambiguity relating to how such costs and expenses should be recorded by the private fund manager.
We’re Here to Help
For further insights on operational matters related to starting or scaling your fund or to learn more about investment fund audit, tax, consulting, and transaction services, contact your Moss Adams professional or visit our Asset Management Practice.