Managers evaluating their fund operating model often face two different choices for fund administration — buying software and managing the process internally, or outsourcing to a specialized provider.
Each solution makes sense for different firms and different scenarios. Here are a few considerations for when an in-house software solution is the right choice and when a third-party provider is best.
What Is Fund Administration Software?
Fund administration software is a technology platform that fund managers can use in-house to help manage back-end operational tasks like fund accounting, NAV calculations, investor onboarding, and distribution calculations.
Typically, this software can handle all aspects of running a fund’s books — maintaining accurate accounting and generating accurate reports, tracking capital commitments, and calculating drawdowns and interest payments. Fund administration software can also maintain investor records, run AML/KYC checks, and provide a portal for investors to view reporting and access tax documents.
One important point to note: fund administration software provides the infrastructure to manage fund accounting and investor relations, but a fund manager still needs people, controls, expertise, and oversight to properly operate it.
What Is Outsourced Fund Administration?
Outsourced fund administration is a third-party service that provides the infrastructure and manpower to manage all of the back-end operational functions fund admin software packages cover, as well as compliance support, investor services, transfer agency, tax services, and audit support. Third-party providers typically have a large staff of experts with a breadth of knowledge and experience to support a wide range of asset classes and fund styles.
Administrators can handle all or part of the following for a fund:
- Fund accounting: Maintain the financial records and statements for a fund
- NAV calculation: Provide timely NAVs that determine the fair value of a fund’s investments
- Reconciliations: Verify that all transactions, balances, and positions match across sources
- Capital calls/distributions: Request capital from and distribute gains to investors
- Transfer agency/investor services: Institute investor onboarding checks including AML/KYC, maintain a shareholder register, respond to inquiries, provide account statements, and distribute fund reports and manager communications
- Compliance: Support common regulatory filings, investor identification, and tax reporting
- Audit support: Provide documents and accounting support for audits
- Tax services: Prepare K-1s/K-3s and quarterly and year-end tax estimates for investors, prepare and file federal and state tax returns, and handle PFIC, CFC, and FDE reporting
Fund Administration Software vs. Outsourced Administration
Opting for fund administration software keeps administration in-house, with an internal team running it day-to-day. An outsourced administrator, in contrast, provides both technology and staff, while the fund manager retains oversight.
| Area | Fund Administration Software | Outsourced Fund Administration |
|---|---|---|
| Technology | Manager licenses/operates platform | Proprietary or licensed tech provided as part of service |
| Accounting Team | Built internally | Provided by administrator |
| Processes | Manager develops and maintains | Established administrator processes |
| Controls | Internal responsibility | Administrator controls + manager oversight |
| Implementation | Software setup + internal workflows | Onboarding/migration to administrator |
| Scalability | May require additional hires/infrastructure | Provider scales resources |
| Expertise | Must exist internally | Access to specialist fund expertise |
| Cost Structure | Software + salaries + infrastructure | Administration fee |
| Oversight | Full operational responsibility | Manager retains oversight while execution is outsourced |
When Does Fund Administration Software Make Sense?
Many times, software alone can work well for large, established managers who have staff with ample fund accounting experience. These managers are more likely to have the resources to integrate the software into their existing systems, maintain complex technology, and implement the controls necessary to protect sensitive investor data. In-house software can also help keep costs down.
Fund managers who want maximum control over their operating processes may also want to keep administration in-house. Emerging venture capital and private equity firms often use software early on, when a simple structure and small investor base keep the accounting manageable without a dedicated team.
When Does Outsourced Fund Administration Make More Sense?
Outsourced fund administration often make sense for fund managers launching a new fund or strategy with little operational experience who need help calculating NAVs, preparing K-1s, and running AML/KYC checks. It can also make sense for emerging managers who want to move away from spreadsheet administration.
While the fee for fully outsourced administration may initially be higher, a fund using software will still need to hire an internal team with accounting and compliance experience to run admin in-house. Hiring a completely outsourced administrator comes with broad built-in expertise for a range of complex fund types, operational efficiency, and tested processes. Plus, an outsourced administrator makes it easier to scale, as operational processes are likely already in place to support growing funds.
Outsourced administrators are skilled at providing on-time, accurate NAV calculations and reporting, an important indicator of a professionally managed fund.
An important note: Many institutional investors require outsourced administrators to ensure fiscal transparency and an independent layer of oversight for fund calculations. Institutional investors may also have complex reporting requirements that could require a large and experienced internal back-office staff to fulfill.
What Does the True Cost of Each Model Include?
The all-in cost for each model varies, but includes several distinct components.
For an internal model, the biggest cost is often the software licensing fee. While costs vary, depending on what’s included, licensing fees typically run from a few thousand to tens of thousands of dollars per year for large institutional funds.
Additionally, beyond pure software costs, firms will still need internal accounting staff to perform NAV calculations and produce reporting and operations staffs to onboard clients and comply with regulatory filings. A firm should account for the time and cost to hire and train staff, implement the software, and apply relevant security checks and protocols.
Managers should also plan for ongoing software upgrades, system maintenance, and cybersecurity costs.
For a completely outsourced administration model, most firms charge a set administration fee that’s a percentage (typically 0.05% to 0.20%) of AUM or committed capital per year.
Some administrators charge onboarding or migration fees, and most charge for additional services like tax preparation and audit support.
The total cost of ownership for both models can vary widely from quoted pricing, especially when factoring in the cost of additional staff and security protocols for software, and add-on services for outsourced administrators.
Key Questions to Ask Before Choosing a Model
Determining whether an in-house or outsourced model is best for your firm is dependent on many factors. Changing fund admin setup after a few years can create operational disruptions in your fund, so it’s important to make a considered decision at the start. Think through the following questions:
- Do you already have experienced fund accounting staff?
- Can your internal team maintain appropriate controls and review processes?
- What is the true cost of building and maintaining the function internally?
- How quickly is AUM or investor count expected to grow?
- How much operational responsibility do you want to retain internally?
- Do investors expect independent administration?
- Will the model still work three to five years from now?
State-of-the-Art Technology and Outsourced Expertise
Increasingly, managers do not have to choose between innovative technology and the expertise of an outsourced operation. A modern administrator can provide both.
NAV Fund Services offers state-of-the-art, proprietary technology with real-time data access through industry-leading banking integrations and APIs, and our all-in-one portal. Our expertise comes from 35 years of experience in fund administration, with client service teams averaging 15 years’ experience.
Fund managers retain control through real-time API access to their fund data, including plain language query and analytics via the MCP Server; fundraising support including the NAV Investor CRM, data room, and e-subscription tools; and white-labeled investor portals.
To learn more about our risk-free NAV Trial, contact us.
