SS&C Technologies : Why 'Proof of Concept' is vital when selecting a fund administrator

Real estate and hard asset managers have traditionally administered their funds in house. However, given market shifts due to regulations and technology, the opportunity for partnering with a fund administrator like SS&C is tremendous. As managers continue to move toward outsourcing to meet their individual goals, they are faced with the difficult decision of choosing the best administrative partner.

In a recent KPMG[1] survey of 107 global real estate investment professionals, 51% of respondents stated that focus on core real estate activities is the most critical contributor in their firm's decision to outsource fund administration. Other factors include a desire to reduce costs, either through avoiding further technology investments, reducing headcount or cutting other operating expenses. 42% of the respondents look to outsourcing to improve performance and service delivery; while 35% of the respondents expressed access to accounting and administrative talent as a critical consideration.

From this survey, it's clear that different managers have different reasons for outsourcing. To ensure that a potential administrative partner meets those goals, fund managers need to understand an administrator's people, process and technology. Proofs of concepts (POCs) go a long way in preparing fund managers to make informed decisions - for themselves and their investors. Done the right way, the POC should go beyond demonstrating how a manager's data will be presented in the respective systems. Instead, it should be a comprehensive exercise that provides critical insights, including:

• The administrator's understanding of and commitment to the business.
• The administrator's competency, personalities of its people and their demonstrated technical qualification.
• The capabilities of the administrator's technology and reporting capabilities to support the finer nuances and complexities of the industry's fund structures.
• The administrator's ability to give the fund manager access to their data 24x7.

POC's present some challenges to the fund manager and third-party administrators

The benefits of a POC cannot be stressed enough. Conducting a POC is a powerful exercise to help choose the right partner. Success, however, depends on the level of commitment from the manager and the administrator. In addition to dedicating time and resources to the exercise, the fund manager may want to consider the following items to ensure successful execution:

• Identifying the various transaction scenarios for testing.
• Sourcing data that represent the scenarios.
• Ensuring data integrity such that the amount of information is complete enough to create accounting data.
• Risk of sharing proprietary and confidential data with numerous vendors, especially investor data and excerpts from the LPAs and/or fee agreements.
• Executing non-disclosure agreements and ensuring compliance with them.

Over the years, we have been fortunate to have performed and participated in many POCs. It is not uncommon, given the complexity of pulling representative data that provides enough coverage of skills to be tested, to receive incomplete data or contradictory information thus making this a challenging exercise. Here are two examples:

1. The fund manager provided the detail of a fund structure as well as the respective allocations and commitments for a fund and special purpose vehicle (SPV). However, it was accidentally omitted that the SPV had other participants besides the fund. This was discovered after continued attempts to reconcile irreconcilable numbers and calculate accurate allocations.
2. The fund manager inadvertently omitted side letters and sufficient language from the LPA needed to accurately calculate fees and carried interest.

The POC exercise requires constant interaction to help interpret the data and reporting requirements correctly. Although this is a great way for a manager to gain comfort with the expertise and personalities of the administrator, the back-and-forth can take a fair amount of time. This could result in losing steam and incorrectly assuming that a similar transaction will take this long in a live scenario when that is not always the case.

An approach that highlights people, process and technology

We've given a lot of thought to how we can clearly demonstrate our capabilities, provide insight into our competencies and demonstrate our commitment. To that end, we have created a demonstration IT environment that includes accounting and reporting capabilities along with tools such as GoWire, Investor Vision, and SS&C fund services portal for liquid assets. We also show various industry specific scenarios like waterfall calculations to present a comprehensive experience.

With this approach, fund managers have access to the system along with various reporting tools to evaluate at their own pace. Subsequent conversations with SS&C will confirm our team's technical aptitude as they discuss the accounting methodology and assumptions applied to demonstrate the underlying transactions.

Our goal is to ensure that fund managers walk away from a POC knowing that we understand their needs and are committed to their business; we are competent and have the professionals with demonstrated technical qualification; our technology can handle the nuances and complexities of the industry; and we provide access to each manager's data 24/7.

To learn more about our services and how we can prove they are suitable for you, please visit: SS&C Real Asset Services.

Asset Management, Alternative Investments, Fund Administration

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