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One of the stories of the private markets in recent years has been the explosion in growth of family offices. Multiple media outlets have cited a Preqin report from earlier this year that suggests a threefold increase, from 1,285 in 2019 to 4,592 in 2023.
Some of those family offices allocate to third party fund managers, many in the private markets. Some of them simply invest from their own balance sheet, competing with private equity, real assets and venture capital funds for portfolio companies and hedge funds for more liquid investments.
But one similarity with the private equity industry, for example, is the slow adoption of the use of third-party fund administrators to support their middle and back-office function.
The reasons why are well-known. Many family offices are famously secretive, and might wish to restrict access to proprietary information and data as much as possible. For those with only a small number of investments, they might not feel that they need it.
But the benefits outweigh the perceived drawbacks. The five main reasons why are as follows:
Enhanced Efficiency and Streamlined Operations
Family offices often juggle diverse asset classes and investment vehicles. A fund administrator takes care of tedious tasks like accounting, investor reporting, and capital call processing. This frees up valuable time for the family office team to focus on core competencies like investment research, portfolio management, and strategic planning.
Reduced Operational Risks
Financial reporting errors, missed deadlines, and non-compliance with regulations can have serious consequences for family offices. Fund administrators mitigate these risks with their expertise and robust systems. They ensure accurate and timely reporting, adherence to investor agreements, and compliance with relevant tax and regulatory requirements.
Specialized Expertise
Family office staff may not possess the deep knowledge required for complex fund structures or niche asset classes. Fund administrators, on the other hand, have the expertise to handle these complexities. They stay current on regulatory changes and industry best practices, ensuring the family office operates at the highest professional standard.
Independent Oversight and Increased Transparency
A fund administrator acts as an independent third-party, providing a layer of oversight and transparency for the family office. This can be crucial for building trust with investors and beneficiaries, especially in multi-generational families.
Scalability and Cost-Effectiveness
Family offices can grow and their investment strategies evolve over time. A fund administrator can seamlessly adapt to these changes, providing the infrastructure and expertise needed to manage growing portfolios. This can be more cost-effective than hiring and training in-house staff for specialized tasks.
That’s not all. Just like investment firms, family offices face several operational and process-related risks that a fund administrator can help mitigate or eliminate.
Accounting Errors
Managing complex investment structures and diverse asset classes can lead to accounting errors. Fund administrators have robust accounting systems and experienced professionals to ensure accurate financial reporting.
Missed Deadlines
Family offices have numerous deadlines for investor reports, tax filings, and regulatory submissions. Fund administrators have established processes and reminders to ensure timely completion.
Non-Compliance Risks
The regulatory environment for investments can be intricate. Fund administrators stay updated on regulations and ensure the family office operates within legal boundaries, avoiding costly penalties and reputational damage.
Fraudulent Activity
While rare, family offices can be vulnerable to internal or external fraud. Fund administrators implement internal controls and segregation of duties to minimize such risks.
Data Security Breaches
Cybersecurity is a growing concern for all financial institutions. Fund administrators invest in robust IT infrastructure and data security measures to protect sensitive financial information.
Hiring a fund administrator allows family offices to focus on their core strengths – managing wealth and achieving the financial goals of the family. By mitigating operational risks, enhancing efficiency, and providing specialized expertise, fund administrators become valuable partners in the long-term success of a family office.
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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
EFSI is an independently owned, SOC-1 compliant, full-service fund administration firm. We provide accounting, reporting, administrative, and capital introduction services to a wide range of alternative investment funds including hedge funds, funds of funds, private equity funds, real estate funds, venture capital funds, and family offices. The center of EFSI’s service incorporates resilient technology and accomplished staff, providing clients a tailor-made service with exhaustive transparency. Give us a call today or reach out to our support team online. We look forward to hearing from you soon.