Choosing the right Fund Administrator

With economic and political climates often so volatile, it is imperative to select an administrator that is pragmatic and commercial in its approach to provide services which support compliance and good governance of a fund structure.

A fund manager needs an administrator that is pragmatic and commercial in its approach to provide services which support compliance and good governance of a fund structure. Ideally an administrator will be able to provide bespoke solutions, as specific requirements often differ, and ensure that any functions which are outsourced are done so seamlessly, without causing operational and/or reputational risk or delay to the client.

Fund managers usually base a fund in a jurisdiction which is the most acceptable to their investors as a whole. An easy concept – but one which is getting increasingly harder to achieve in practice. Traditionally this has meant choosing a regime which could also accommodate the fund manager entity and, of course, one which assisted the executives in receiving their carried interest (or promote) in a tax efficient manner. However, with more regulation being
implemented in all fund centres and with an increasing focus on governance, accountability and
transparency, greater thought is needed about where to domicile a fund and which fund
administrator should be appointed to provide the most efficient back office services to the structure and its investors.

Where should a fund be domiciled?

The received wisdom has been to choose a location which would work optimally for tax (so the fund itself should be tax transparent or tax exempt and as far as possible the structure should not suffer from any irrecoverable VAT). Investors investing through a fund should not be placed in a worse position than if they had invested in the assets directly – and ideally the position should be better. However, most investors are fairly conservative and prefer a route/structure which has already been tried and tested.

A fund jurisdiction should provide political and legal certainty plus a workable fund law (most are based on common law limited partnerships which provides considerable flexibility for the manager and the investors). Most fund centres provide structures which are suitable for the vast majority of international investors including state and corporate pension funds as well as charitable foundations, sovereign wealth funds and high net worth investors. The fund centre should also have a strong and respected (but not too rigid) regulator and rules which permit a clear route for marketing to the “right” kind of investors, be they institutions, family offices or high net worth individuals in the countries in which they are based.

A fund centre must have an appropriate infrastructure and high-quality service providers which are easy to deal with in terms of language and responsiveness. Costs must be reasonable and, at least, in line with those offered in other fund centres. Some investors may have a preference for a jurisdiction that does not require public disclosure of investors or any register of beneficial ownership. Although, the impact of the Panama papers has, of course, made many think more carefully about the jurisdictions they choose for structures.

OECD Base Erosion and Profit Shifting initiative (BEPS)

One of the most recent drivers is the OECD Base Erosion and Profit Shifting initiative (BEPS). Viewed by many as a black cloud, it does mean that structures should be put in place for an obvious reason, not purely for tax avoidance purposes or the ability to use double tax treaties and that showing “substance” in a chosen jurisdiction is extremely important. Those who claim to be undertaking activities in a particular place should actually be doing so – and should
not be controlled or directed from elsewhere. Rubber-stamping is totally unacceptable. Fund managers will also have to grapple with the EU Anti-Tax Avoidance Directive.

Which administrator should be appointed?

A fund manager needs an administrator which is efficient, responsive and understands the client and its strategies intimately. This combination will provide the highest probability of success for the manager and the investors. If things do happen to go wrong on either side, there needs to be a good and clear dialogue between the two parties. An administrator which will not face the issue or pick up the telephone is not the right partner for the job.

In this digital age, concerns about cyber security have also increased. Having a reliable and secure system with which investors feel wholly comfortable is vital. Confidentiality is a given but confidence that information is safe and cannot (or will not) be revealed is also important.

Although in the past, many managers wanted to be in the same time zone as the administrator, the advances in technology (providing managers with 24/7 access to data and reporting) mean that this is probably less important. Although a fund with a strategy that is more esoteric in nature may still require extra resource from service providers to optimise operational efficiency.

How ZEDRA can help

Expertise in the particular regulatory environment and detailed product knowledge gained through a local presence can still add considerable value. A fund manager needs an administrator that is pragmatic and commercial in its approach to
provide services which support compliance and good governance of a fund structure. Ideally an administrator will be able to provide bespoke solutions, as specific requirements often differ, and ensure that any functions which are outsourced are done so seamlessly, without causing operational and/or reputational risk or delay to the client. Contact us to find out how we can help.