This is the second post in a two-part series on the operational complexities of investor accounting. Read our first article discussing fee calculations for modern fund structures.
For a variety of reasons, from market outperformance to tax advantages, newer fund structures tend to be increasingly innovative—which is code for more complex from an accounting perspective. Our first post in this two-part series discussed the operational challenges and solutions for managing customized fee calculations for investors. In this post, we will discuss why firms require a purpose-built solution to support navigating fund structures.
Understanding Fund Structures
First and foremost, each fund within a given structure is a “legal entity” unto itself. Therefore, it’s important to account for and report on each entity accurately and allocate profit and loss to the investor level. More complex fund structures include:
- Hybrid Funds: Hybrids combine the longer-term investment strategies, investor commitments, and capital calls of closed-end private equity funds with trading and hedging strategies associated with open-end hedge funds. These funds tend to include a mix of publicly listed equities and private, hard-to-value, illiquid assets, which makes accounting for P&L, generating a NAV, and calculating investor fees extremely complex.
- Special Purpose Vehicles (SPVs): These are legal entities— essentially companies—formed to carry out a very specific investment mandate. SVPs are strictly separated from their parent funds and its balance sheets; therefore, SVPs must maintain its own books and records.
- Multi-tiered Fund Structures: The complexity of multi-tiered fund structures can be a significant operational burden; for example, some fund structures have 50–100 legal entities per fund. When managing these structures—whether it’s a closed-end, open-end, or hybrid fund—it is essential to accurately process allocations through the structure down to the investors, based on opt-outs, deal-by-deal investments, or other parameters.
Reliance on Spreadsheets
Unfortunately, firms are limited in the types of structures they can design depending on the constraints of their fund accounting systems. Often, these firms resort to in-house systems or spreadsheets to support different asset classes or entity types for dozens or potentially hundreds of LPs, which drives up their operational overhead, drags down efficiency, and raises the risk of errors. Delays and discrepancies can have a chilling effect on investor relations and retention.
Firms need a single fund accounting and management platform to support complex, multi-tiered fund structures, from the initial design to accurate investor-level allocations of positions, transactions, and P&L.
The more complex fund structures a firm creates, the greater the need for a system that enables:
- Accurate accounting for all investments, capital, and cash activity, regardless of fund complexity
- Flexible reporting for keeping books and records up to date
- Transparency and tax reporting
Only when fund managers have confidence in the integrity of their accounting can they begin to address the issue of calculating LP fees for complex fund structures.
Fund Structures: You Design Them, We Support Them
It’s up to fund managers to devise fund terms and fee structures that accommodate individual investor requirements and are profitable for the GP firm. Once that is done, it falls to the back office to operationalize the fee arrangements and ensure fees are calculated accurately, executed efficiently, and delivered promptly. Further, firms must ensure they comply with exacting fee disclosure and reporting requirements.
SS&C Advent’s Geneva® portfolio and investor accounting platform fully supports complex, multi-tiered fund structures. Geneva simplifies and streamlines the processes involved in managing fund structures, including:
- Setting up fund structures
- Moving capital from one legal entity to another
- Correctly associating transactions and positions within a given structure and all feeders
- Automatically generating trial balances and NAVs for each legal entity
To learn more about how Geneva Investor Accounting can support your complex fund structures, contact us or request a demo.
