Launching a new fund structure is a critical business decision, and for many Managers, the selection of your service provider is one of the most challenging decisions to make as it impacts the operating stability of your Fund. A Manager’s time is invaluable, and the decisions made in the setup can have a significant impact on your probability of success. The last thing a manager wants to encounter is an operational issue that impacts the business negatively. As a result, selecting the right service provider for your team can make the difference between a successful or unsuccessful Fund. When evaluating third-party administration, several vital factors should be considered. Krypton has prepared the following key questions to assist you in selecting the appropriate Administrator.
What is the True Price of Administration?
This question should not be the first question a manager should ask, but much of the time it is. The cost of administration cannot be calculated without reviewing many factors; it is often a discussion between the Manager and Administrator discussing the complexity of those factors. Unfortunately, the reality is those Managers that select Administrators solely on the price end up spending substantially more due to time spent managing and overseeing the administration process. Also, these managers have additional outsourcing risks to their business compared to the Manager, who recognizes the importance of a high-quality administrator. There is no one size fits all answer to the price of administration per client. However, a diligent administrator will spend time understanding the Manager’s business including the flow and types of information, the offering memorandum, the types of investors, and the scale of reporting to identify the operating requirements and associated costs. A Manager trading his own capital varies from a structure with friends and family or one with third-party seed capital. All of these scenarios require a different level of service corresponding to a different level of cost.
Krypton recommends to Managers to evaluate the price of administration in conjunction with the outsourcing risk of potential error, operational failure and as well internal time for oversight of the Administrator’s quality of service. The key is for the Manager to select a high-quality administrator at a price that enables the Manager and its fund investors to have confidence in the services provided by the administrator.
When Should an Administrator
be Brought into the Fund Launch Process?
The reality is the Administrator is generally brought into the fund launch process too late. Ideally, the Administrator is brought into the process when the first draft of the offering memorandum is complete. A well-experienced administrator has extensive experience in servicing many fund structures over its history and therefore able to provide valuable recommendations on fund operating matters and best practice standards that the Manager may want to incorporate into the Fund’s offering memorandum. Some examples are provided below where the Administrator can add value by presenting best practice standards to the setup and operations of the Fund.
- Present alternative entity structures (e.g. Segregated Accounts Company, Master Feeder, Mini-Master) and class, series, and sub-series structures to optimize the efficient operation of the Fund in terms of segregation of assets and liabilities, differing redemption rights, multi-currency class of shares, dividend class of shares, matching entity structure to investors tax status;
- Provide various industry alternative fee calculation methodologies for incentive and management fees including modelling fee calculations to ensure the language is consistent with the intent of the Manager;
- Provide industry best practice insights for handling difficult-to-value (illiquid) assets including valuation methodologies and valuation process disclosures (e.g. side pocketing, pricing models, broker quotes, independent valuation agent, and valuation committee);
- Description of fund expenses particularly “grey area” expenses and their expense treatment are clearly written to avoid any ambiguity.
Numerous times in reviewing finalized documents we have seen additional cost incurred to correct or update documents which may have been avoided if the Administrator was brought into the launch process at an earlier date.
Krypton recommends to Managers to engage an experienced administrator early in the fund launch process. This will ensure that they can perform an independent operational review of the Fund’s offering memorandum and provide valuable insight into industry best practices that may be adopted to enhance the marketability or operations of the Fund.
Does Size Matter? We Think Service Matters More
There are two buying behaviors in the market with the first group only selecting large administration firms as they believe “bigger is better”. This philosophy can be problematic when placed into practice. Problems arise when the Administrator is not willing or able to provide the necessary bespoke services for your Fund.
For a start-up fund, this relationship should be a partnership, and therefore, Krypton believes that a service track record is most important. Firms such as Krypton, an independent boutique fund services administrator, provides a customized service solution is a perfect fit for emerging managers. We believe that it is better to grow with great clients than to take clients away from other administrators.
What Experience Does the Firm Have and Who is Your Service Team?
Reality is that in many large administration firms, there is the “A” team, and then there is everyone else. Large administrators have great people within their firms who are in high demand and are allocated to sizeable higher-paying fee clients leaving the Emerging Managers as the “small fish in a big pond.
All administration firms should be able to service a long-short equity fund, but the critical question is can they competently handle unstructured, complex issues that arise during rare events or stresses in the marketplace. The Administrator needs to have the technical expertise and experience to identify the issue on a timely basis. They need to be able to expertly guide the Manager and the Fund’s Board of Directors as required, through the proper fund governance process ensuring all impacted parties are treated relatively free from any conflict of interests. Several questions should be asked of your Administrator to determine if they have the right pedigree and skill set for your Fund. From a day to day servicing and overall relationship management view, the key takeaway for Emerging Managers is who is your actual service team and what are the escalation points in the event of issues not being resolved satisfactorily. In looking at your service team assess what is their depth of experience, technical expertise, and are the right resources allocated to your Fund to operate effectively.
Krypton recommends to Managers to meet in person or at least talk to your administrator’s service team in order to assess their qualifications and compatibility to work with your management team. If you have a large management team, ensure the Administrator understands who their respective counterparts are on your team so they can interact effectively to provide the best service possible. Krypton utilizes highly qualified staff both in experience and expertise by employing qualified personnel with professional accounting or chartered financial analyst designations all in good standings with their respective regulatory bodies.
Relationship and Service Philosophy
Not all administrators share the same relationship and service philosophy. This is a harder question to find an answer for as there is no correct check the box answer. The solution must be obtained subjectively by gauging the Administrator’s response to this question to external sources such as industry surveys, other clients of the Administrator, and other service providers such as law firms and audit firms. You may ask the Administrator’s salesperson this question, but his answer may differ from the Administrator’s operational personnel who are not trained in the art of sales. Resulting in a service disconnect and expectation gap resulting in dissatisfaction with the Administrator.
Krypton recommends that Managers conduct sufficient due diligence to truly understand the core values of the Administrator which will set the foundation for building trust and a successful symbiotic business relationship. In addition to performing reference checks, speaking to former clients, law and audit firms that have worked with the Administrator will provide a good source to independently verify the quality of your Administrator.
About Krypton Fund Services
Krypton is an independent administrator with a premium service-based model. We deliver on our obligation to serve our clients and their investors with first-rate market service. Providing this market-leading service by utilizing a unique blend of strategic servicing and market-leading technology. We are committed to the highest standards of service as a strategic business partner; we pledge these same standards for our clients and their investors.
Krypton has offices in Bermuda, Mauritius and Singapore, with strategic plans to expand its offices worldwide to provide a global service solution to its clients.
Krypton Fund Services (Bermuda) Ltd. is licensed by the Bermuda Monetary Authority under the Investment Funds Act 2006. KFS (Mauritius) Ltd. is in the process of being licensed by the Mauritius Financial Services Commission. Krypton offers customized administration services by combining an innovative global service model with expert staff and robust technology. Krypton’s global service model provides a flexible delivery solution enabling Krypton to meet the specialized needs and local responsiveness required by its clients.
Krypton is led by its CEO and founder, Roderick White, who is a Chartered Professional Accountant with over 15 years of fund administration experience. For more information, please contact Rod by telephone at +1 441 338 5285, by email at rwhite@kryptonfs.com , or visit our website at www.kryptonfs.com .