What is fund administration?

October 23, 2021
Jessica Straus

Fund administration is a third-party service that handles a venture fund’s accounting, LP reporting, asset valuation, capital calls, and capital distributions. By outsourcing these back-office tasks to a trusted partner, you’ll have more time to spend with entrepreneurs and investors. 

A reliable fund administrator doesn’t just save you time; it also builds your investors’ trust. Having a respected fund administrator lets LPs know two things: that you’re laser-focused on your portfolio, and that you care that your accounting is in order. Some LPs are so bullish on the value of a fund administrator that they require emerging managers to select from among a trusted group of service providers. Limited partners expect their fund managers to provide polished financials outside of regularly scheduled reporting. A fund administrator will help you demonstrate this level of managerial efficiency.

Why every first-time fund manager needs a fund administrator

As a first-time fund manager, you already have a lot on your plate. Building relationships with LPs and entrepreneurs is exciting work—but it’s also time-consuming. That’s why delegating back office support to a trustworthy fund administrator is such a worthwhile investment. 

According to Winter Mead, an LP and the CEO and co-founder of Oper8r, working with a fund administrator is a requirement for emerging managers’ success in today’s competitive market:  “I have worked with 62 emerging managers through our program in the last year and a half. Every manager seeking institutional capital used an external fund administrator. Having a strong fund admin team to support your back office is instrumental when you’re scaling a VC firm.”

When to start working with a fund admin 

As you set up your first fund, you’ll need to decide which service providers you’ll partner with. The most important of these are your fund administrator, legal counsel, bank, and payroll and benefits administrators. (For some pointers on finding the right partners beyond your fund admin, check out our post on selecting your service providers.)

The optimal time to start working with a fund administrator—and all your key service provider options—is when you’re six to 12 months from your first close. This will give you a head start on setting up your back office. In this pre-first close period, carefully consider all of your key provider options at the same time, as one decision will often inform another. This might be due to the way the teams work together using the same platform, or how technologies from different providers will integrate. While there’s no fixed order or timeline for establishing these partnerships, you’ll want to avoid paying for the same service twice.

Ideally, you’ll be onboarded with your fund administrator and trained up on its processes before your first close. Onboarding early makes the whole process easier—you’ll need less documentation to get set up, and you’ll be able to onboard LPs immediately after the close. This will ensure that your first capital call and subsequent fund updates will be smooth and efficient. A fund administrator can also work with you to set up a regular cadence of capital calls to help your LPs plan for efficient capital deployment. At Carta, we offer funds a capital call line of credit that will let you start making investments from day one.

What to look for in a fund administrator

To evaluate prospective fund administrators, you first have to know what kind of support you’ll need. 

Here are some things to ask about:

  • Robust service: Your team is unique. Your fund admin should provide a level of support that works for your needs and experience. First-time fund managers stand to gain the most from a high-touch support team with decades of cumulative experience. If you have questions about anything related to your fund beyond what the software can provide, you’ll rely on your fund admin team for answers. Ask each provider about how long you’ll have to wait for responses to your questions. A more responsive team will save you some sleepless nights.
  • Software solutions: Sophisticated fund admin software can supply metrics that deepen your understanding of your portfolio, including real-time IRR. These data insights are valuable not only for strengthening your fund’s performance—they’ll also inspire confidence in your LPs. Requests for data from a traditional fund admin can take time to turn around, but a software platform can help you pull up-to-date information easily, so that you can do your job faster. When evaluating competing software platforms, ask how frequently their products are updated. In particular, regular security updates will help you protect sensitive company financials and prevent fraud and identity theft. 
  • Audit defense: While not all investors require a fund audit, and forgoing an audit may reduce cost, many institutional LPs have mandates to invest only in funds that are audited. This means that fund audits are still fairly common, so it helps to plan proactively. Ask potential fund administrators how they can help you be prepared, what you can expect from the process, and how they’ll guide and support you through the audit.
  • Compliance assistance: Regulations surrounding investment financing are complex and subject to change. In some areas of compliance, such as know your customer (KYC) and anti–money laundering (AML) regulations, there is no standard industry protocol that’s observed across funds—but you still need to be aware of how the law applies to your fund. Some providers have built-in features to address KYC/AML and make sure your firm remains compliant. 
  • Experience and advising: A fund administrator is much more than a big-ticket accountant, but that doesn’t mean you shouldn’t call upon your fund admin’s collective expertise for answers to your financial questions. Look for fund administrators that hire experienced investment and accounting professionals who are ready to talk you through common problems. Try to get a feel for how accessible and supportive their staff will be. You’ll want a team with depth of experience and empathy for emerging managers.

Leverage fund administration to strengthen LP relationships

Choosing your fund administrator is an opportunity to think through your strengths and weaknesses as a fund manager, as well as what kind of brand presence you’d like to project for your LPs. Think about the community and communication style you want to establish: Are slide decks limited to your annual meeting, or will you send one along with your quarterly report? Will you need up-to-the-minute data and charts to illustrate your points? Will you want LPs to be able to access fund documentation themselves? These aspects of your fund’s brand identity are traits that the right fund administrator can help you establish. 

Being a venture capitalist requires creative, convincing storytelling. When LPs commit to a 10-year fund, they’re investing in the vision of the future that you’ve articulated. After your first close, LP communications will be your opportunity to reinforce and readjust your narrative. Your fund administrator’s features can help you craft this narrative. 

To tell an inspiring story, you’ll first need to make sure you’re an expert on your own portfolio. A fund administrator lets you become that expert by supplying data insights and freeing up time for you to meet and mentor portfolio entrepreneurs. To gain trust and credibility with your LPs, you’ll want to be transparent about your progress: Frank assessments of uncertain bets matter just as much as exciting breakthroughs. Engaged LPs are looking for more than percentages and returns. They want to evaluate a manager’s ability to execute on a strategy, as well as the thought process behind any potential pivots. 

As you move toward your first close, your fund administrator will help you demonstrate the high level of operational competency that institutional LPs expect. The right fund admin can help highlight your team’s strengths, offset any weaknesses, and offer the wisdom, experience, and support you need to get your fund off to a great start.

To learn more about how Carta helps emerging managers with fund formation, fund administration, and more, visit Carta Edge to get in touch with our team.

DISCLOSURE: This communication is being sent on behalf of Carta Investor Services, Inc. (“Carta”), an affiliate of eShares, Inc. dba Carta, Inc. Certain transactional fees may apply. This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.

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