Finding the Right

ROUNDTABLE Anne Anquillare, PEF Services John Truehart, Hudson Ventures Steven Schaefer, Graycliff Partners Jim Cass, SEI FUND ADMINISTRATION Finding the right fit As managing the back office becomes more complex, CFOs and COOs are under pressure to make sure their fund administration services are meeting all regulatory and investor demands. But how exactly then do GPs go about finding the right fund services provider? And from there on, how does one know when the relationship is working? Nicholas Donato sits down with a mix of fund administrators and chief financial officers to find answers 1 www.PRIVATEEQUITYMANAGER.com ROUNDTABLE PE MANAGER | MARCH 2013 | ISSUE 103 hen deciding whether to partner with an outside fund administrator, private Wequity chief finance and operating officers have heard all the arguments both for and against. But often the party weighing in on the decision will come with their own prerogatives, making it difficult to objectively determine if outsourcing certain back office functions is the right move for the firm. Here’s what we mean: fund administration providers have a compelling case to make that their expertise and familiarity with capital call notices, distributions, investor reporting services and so on can provide significant value to private equity firms. This after all is the core focus of their business. Anquillare (right): find an administrator right for your firm’s size But explaining that value to prospective clients can sometimes seem little more Nonetheless, if current trends are equity firm can experience significant than a smooth sales pitch. anything to go by, fund administrators operational boosts if the right service Chief financial or operating officers, have been overcoming these obstacles to provider for their needs is found. With on the other hand, are stewards of the become a lasting presence in the industry. the right partnership in place, concerns back- and middle-office. And when it’s Handling everything in-house is simply over control, quality (and for some, job your name that’s responsible for any not practical for a large percentage security) suddenly become nonfactors. operational slipups, you tend to want of firms as LPs demand better, faster But how then does a GP considering as much control over the processes as reporting and conduct more exhaustive outsourcing certain back-office functions possible. Relinquishing some of that operational due diligence on GPs. In find its service provider match? oversight to a third party administrator similar vein, regulators are requiring It starts with an honest look into can feel like a leap of faith. What’s more GPs to put in place strict controls the firm’s operations, and discovering is that some finance and compliance over accounting, valuation policies, where improvements can be made, says professionals fear that outsourcing a cash monitoring and other back office Jim Cass, a managing director at fund portion of their work could even place functions. services provider SEI. their job in jeopardy. A three-person “Are you looking for lift in your accounting team, for example, may MATCHMAKING portfolio accounting turnaround time? worry about being kept on when a good In early February, PE Manager gathered Could your K-1s be sent out any quicker? deal of heavy lifting is done externally. a mix of fund administrators and chief Is the firm tax efficient?” Then again, some private equity firms financial officers in mid-town Manhattan Cass advises firms to take a consistent aren’t even fully aware of the various to talk about the ideal relationship approach in deciding which back-office third party fund services now available. the two parties should cultivate. Our functions have room for improvement, The technology and sophistication of conversation touched on many aspects and then ultimately select an outside outside administrators has matured of this dynamic, but one underlying service provider based on those needs. rapidly as the industry institutionalized theme present throughout the During the evaluation, “the same people over the last decade. roundtable discussion was that a private who made the decision to outsource 2 ROUNDTABLE should take the lead in finding the right receptive to a fund administrator’s service provider,” says Cass. “Often guidance and methodologies. SEI, which Smaller LPs problems can arise if it was one person’s in comparison services GPs with larger decision – who may have had their own operations, encounters more ingrained generally place way of thinking about the matter – and practices, says Cass. As such, it’s vital less demands on the it then falls to a team of partners who for both parties to clearly lay out their firm’s systems, but more select and enter into the third party goals and expectations from the start, agreement. You need consensus.” which if done sufficiently, can help a institutional investors can Anne Anquillare, co-founder and service provider introduce new ways of be harder to impress chief executive officer of PEF Services, thinking or methodologies to a GP who a fund administration provider, adds has grown comfortable with their own own, the consultants often ask more that the decision will also need to internal practices over a number of years, pointed and educated questions,” says consider the firm’s available resources. he explains. Cass. “The downside is it can prolong “There are many different kinds of fund “When their expectations for why the search process, but more times than administration providers that specialize they made the decision to pick you, and not, you’ll end up with a better model in different segments of the market,” says your expectations for why you think they in the end.” Anquillare, commenting that her firm picked you, start to deviate for different A little known secret during this caters to small and emerging private reasons, you can create unnecessary matchmaking process is that “while GPs capital funds – a group that has relatively challenges in the relationship,” warns are completing their due diligence on limited resources for fund administration Cass. us, we’re performing due diligence on but in greater need of an outside partner Another strategy for large and/ them,” says Anquillare. “Will the GP be who can keep them up to speed with the or complex firms to consider when proactive in their communication with latest best practices. searching for an outside service provider its fund administrator? Where does the Anquillare describes small and is to hire a consultant. “Compared to back-office stand today in its level of emerging fund managers as being more firms that go out and search on their organization and discipline? And how can we take it to a place where it needs to go?” Indeed, while GPs may believe that any third-party service provider would jump at the chance for their business, the reality is far more complicated. Some fund administrators prefer working with clients who have a point person at the firm who can help them implement change, and ultimately improvements to internal systems. For them, having a chief operating or financial officer intimately familiar with the firm’s reporting, accounting, tax and valuation systems helps foster a “team dynamic” in administration, says Anquillare. TALK TO PEERS Diving into more detail, Graycliff Cass: create consistency in how outside providers are both selected and engaged Partners chief financial officer Steven 3 www.PRIVATEEQUITYMANAGER.com ROUNDTABLE PE MANAGER | MARCH 2013 | ISSUE 103 Schaefer says firms can make use of a number of channels MEET THE ROUNDTABLE to find the right administrator. “Talk to members of the Private Equity Chief Financial Officer Association about if they outsource and who they’ve selected. There’s a lot Jim Cass is a managing director at of information sharing that takes place in that network SEI, a fund services provider, where he about industry experiences, where any dirty laundry on an focuses on SEI’s alternative investment administrator is going to be aired out.” manager clients. Cass has been with SEI since 1990 and has held various roles Schaefer went on to say that many chief financial officers during that time, including serving as will also seek their auditor’s opinion during the selection the managing director of operations and process. “They’ll ask: Who have you seen in this space? Many working in the product solutions team. administrators just want to focus on the larger players, those that will bring in up to several hundred thousand dollars of fees per year. It means you need to find a service provider that fits your fund size – and sometimes that can be done Anne Anquillare co-founded PEF by simply picking up the phone and calling funds of similar Services, a fund administration provider size for their insights.” for small and emerging fund managers, PEF Services’ Anquillare went on to add that client referrals in 2002. She is the chief executive make up a big portion of her firm’s business. “And referrals officer of the company. Anquillare has been active in the private equity doesn’t just mean from one chief financial officer to another, industry since 1993 and was a general but from fund formation lawyers as well.” partner of Walden Capital Partners, an As with most matters in the private equity sector, what LPs SBIC fund licensed in 1996. want is a final piece of the puzzle, adds Hudson Ventures chief financial officer John Truehart. “Smaller LPs generally place less demands on the firm’s systems, but more institutional investors can be harder to impress.” Steven Schaefer is a partner and With the conversations turning towards LPs, it wasn’t chief financial officer of Graycliff long before costs became the next focus point of discussion. Partners, a New York-based mid- GPs must walk a fine line when deciding which fund market and mezzanine firm.

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