Fund administrators play a vital role in the smooth—and compliant—operation of offshore funds. Andrew Tyson and Rafael Elias outline the advantages of using a third party administrator.
Irrespective of their domicile, type of investment profile or strategy, all offshore funds need to ensure that the establishment and ongoing operation of the fund are competently and efficiently administered: this is a litmus test for investor confidence.
Today, more investors are performing enhanced due diligence not only on the fund sponsors, but also on the fund administrator. If investors do not examine the credentials of the administrator directly, they certainly expect the fund sponsors to have carried out this exercise.
While alternative investment funds can undertake the administration of a fund in-house, best practice today is to outsource the function to third-party administrators for five compelling reasons:
• Independence Appointment of an independent third party to report on the performance of the fund increases investor confidence.
• Focus Outsourcing the administration of the fund enables the fund manager to focus more closely on investment strategy and marketing.
• Skills Offshore administrators generally have a large portfolio of diverse funds under administration, meaning they can bring to bear experience of a broad range of structures, portfolios and reporting requirements.
• Regulatory knowledge Fund managers can rely on the local expertise of the administrators, as they have experience of dealing with the regulatory and corporate requirements of the fund domicile.
• Systems Administrators have in place sophisticated IT platforms and systems which can often be uneconomical for a single fund to maintain.
When selecting an independent administrator, and considering how that relationship will be managed, a fund sponsor should consider a number of criteria:
1. Quality assurance
4. Fee structure
5. Subscription and redemption procedures
6. Net asset valuation frequency
7. Regulatory compliance.
Accuracy and reliability are of paramount importance to the position of fund administrator. An administrator that has been independently examined to a recognised international standard, such as SOC 1, or is subject to external regulation, provides a higher level of assurance that it has strong processes and systems in place that underpin consistent and reliable delivery of services.
The complexity of fund administration requires people with formal qualifications and several years of experience. Administrators with well-qualified, experienced teams, with low staff turnover, are in a better position to deliver high quality service. Look also for administrators who assign designated teams and team leaders to the administration of specific funds, which leads to better client service and deeper knowledge of the fund.
The increasing automation of the fund business means that administrators must have a robust fund administration IT platform in place to meet client needs. Your administrator should have recognised industry-standard software in place, with good hardware and data back-up and recovery procedures.
Technology has an increasingly important role with respect to investor communications, with investors expecting secure online access to their portfolio details, fund performance and management reports. Administrators should have the ability to communicate information via the web but still be able to ensure investor privacy and security of the information.
Fund administrators generally charge for their work in one of two ways:
• As a percentage of the assets held by the fund; or
• By the amount of time spent working for the fund. The percentage-based model means the fund sponsor will know, based on the fund size, what the administration fees are likely to be. However, the sponsor faces higher fees if the size of the fund increases, even if the administration workload changes very little.
Fees charged on a time-spent basis mean that the fund sponsor pays only for the services that it requires, and the fees do not follow market fluctuations in the value of the fund.
It is generally considered that the time-based approach will normally result in overall lower costs, but may not provide the certainty looked for by fund sponsors. Administrators who typically charge fees on a timespent basis will usually agree to a fixed (non-percentage-based) fee after a fund has developed a predictable level of administrative activity.
Subscription and redemption procedures
The method by which subscriptions and redemptions are reflected will normally be detailed in the offering memorandum. However, in practice it is important for the fund sponsor to obtain clear guidelines from the offshore administrator as to how subscriptions and redemptions will be dealt with on a regular basis. Communication between the fund sponsor and the administrator is vital to avoid situations arising where an investment is received in the fund’s bank account without the administrator being informed that a subscription is expected.
Similarly, a clear protocol needs to be established with the administrator for the notification, calculation and payment of redemptions. For example, unreasonable turnaround times, as may be contemplated by the offering memorandum, serve only to irritate investors when they are not met.
Net asset valuation frequency
An important element of all fund administration is the calculation of the fund’s net asset valuation (NA V), since it represents the fund’s performance report card. Generally speaking, NA Vs are not provided on a daily basis in the offshore fund environment. The majority of offshore funds will report on a monthly basis, with a smaller percentage reporting on a weekly or quarterly basis. Nevertheless, because of the amount of information that has to be collated in order to prepare and publish an NA V, fund sponsors need to familiarise themselves with the process and make sure that the administrator has the capacity to provide NA Vs within the required time frame.
In the NA V process, the administrator is dependent on reporting institutions providing information on a timely basis. This means that custodians, brokers, banks and other vendors whose reports and accounts are necessary for the compilation of the NA V, must provide information to the administrator on an expedited basis. A successful fund sponsor should obtain acceptable assurances from all parties involved in the NA V process that they will meet the deadlines required of them.
In today’s regulatory environment, directors, advisors, administrators and other service providers are required by law to carry out extensive due diligence on all parties to a structure, with particular emphasis on the investors and the source of the funding. Such procedures can often become burdensome as work is duplicated by the various service providers and form may start to override substance. There must be a sensible approach to the whole question of due diligence, with procedures that not only satisfy the regulatory requirements but also provide a meaningful deterrent to undesirable activities. Automation becomes increasingly important as multiple pieces of information need to be tracked and the ‘black lists’ issued by a variety of regulatory bodies need to be consulted on a regular basis.
Managing your administrator
Most offshore administrators are highly professional and very experienced and are a source of practical advice for fund sponsors. However, their ability to do what is asked of them successfully requires the cooperation of the fund manager once the fund is established. For example, the administrator is required to maintain a continuing historical record of the financial activity of the fund, including comprehensive documentation of all decisions and judgments made. On an annual basis the competence of the administrator—and the performance of the fund itself—are subject to audit by external accountants.
The collating, filing, indexing and cross-referencing and storage of transactions and their supporting records is a time-consuming task. A competent administrator should be able to justify every transaction and the accounting thereof at any time, even several years after the fact. Adequate documentation is particularly important, especially in view of the litigious and regulated society that we live in. Administrators must be able to justify the probity of the operations of the funds to auditors, regulators and potential litigants. There must, at all times, be a proper segregation of duties, a proper audit trail and the appropriate checks and balances.
By viewing the administrator as being just as important as any of the other professionals involved in the establishment and ongoing activity of the fund, the fund sponsors will derive the maximum and most cost-effective benefit from them.
Andrew Tyson is a director of Trident Fund Services in the Cayman Islands. He can be contacted at: firstname.lastname@example.org
Rafael Elias is an associate director of Trident Fund Services in the Cayman Islands. He can be contacted at: email@example.com
Andrew Tyson is a member of the Institute of Chartered Accountants in England and Wales, a member of the Society of Trust & Estate Practitioners and has been a senior member of Trident Fund services’ Cayman office for the past 20 years, responsible for fund accounting and administrationn.
Rafael Elias is a Certified Public Accountant with more than 25 years’ experience, a member of the Puerto Rico Society of Certified Public Accountants and has been a member of Trident Fund Services’ Cayman office for the past 10 years, specialising in fund accounting and administration.
For more information on Trident Fund Services, a division of the Trident Trust Group, visit ww.tridentfundservices.com