How much influence do investors have on a fund’s choice of administrator?

Conventional wisdom has it that investors are in the driving seat post-2008. However, not all investors have as much influence as they may want in the selection of fund administrators.

Liam McNiffe at Bank of Ireland Securities Services agrees investors may not be involved in the process. However, he says all investors are now aware of the importance of an independent and impartial administrator to a fund’s activity.

“Institutional investors will carry out due diligence on all of the service providers to a fund and are unlikely to include a fund administered by an unknown, unregulated administrator,” he notes.

He also says larger investors will have preferred choices of administrators. “Larger investors can exert a lot of influence on choice of administrator. A lot of investors will carry out their own due diligence review on a fund’s administrator,” he concludes.

“The voice of the investor has now become a roar compared to the silence of the past,” is the pithy remark from David Aldrich at BNY Mellon.

Oliver Scully at Citco agrees that investor influence has increased substantially over the last two years. “As a general comment, investors look for a recognised name with renowned expertise in the field,” he says.

“Investors are demanding independent valuations and are increasingly looking towards larger, more established fund administrators that can provide robust controls, defined processes and transparency by way of risk compliance, as well as traditional net asset value (NAV) reporting,” advises Citi’s Richard Ernesti. “Investors will demand greater sharing of information regarding investment options, underlying risk and operational procedures,” he adds.

Dermot Butler at Custom House takes a slightly different view. He believes the influence that an investor has on the choice of administrator depends on the size of the investor, and at which stage in the offering the investor joins.

“A large seed investor can normally dictate the choice of the administrator, whereas a large investor subscribing to a fund when it is up and running, albeit in a very small way, with an existing administrator, will have to be very persuasive to force the manager to change the administrator,” notes Butler. “Changing administrators is a very time-consuming hassle and few people do it willingly,” adds Butler.

Hans Hufschmid says GlobeOp has seen a significant increase in the number of fund investor due diligence questionnaires and meetings in the past year. “In 2009 we responded to or met with approximately 480 investors, up from about 365 the previous year. Before investing capital with a fund manager, investors should understand clearly the services, technology strength, reporting and operational risk management capabilities of the fund’s administrator,” he advises.

In general, fund managers are heavily focused on getting assets into their funds, says Paul Stillabower at HSBC Securities Services, so investors have much more bargaining power to influence fund managers in a variety of ways. “Institutional investors with large pools of investment dollars can and do influence a fund’s choice of administrator on a much more frequent basis,” he says. “Over time, this will clearly favour administrators that have the balance sheet to underpin their service to the fund,” concludes Stillabower.

Joseph Truelove at Kleinwort Benson agrees early-stage investors “have huge influence” on selection. “It is difficult to change an administrator once in place so it is important to appoint a firm from the outset that has the skills, systems and capacity to provide the required levels of service. The right name on the prospectus gives investors confidence that they will receive information on a timely basis and that the fund will be properly serviced,” he says.

As the industry becomes more institutionalised, John McCann at Trinity believes the choice of administrator has also become more institutionalised. “We have experienced more frequent and extensive due diligence visits by investors, who are drilling down to test our infrastructure,” he says. “Depending on how we fare in such inquiries will inevitably have an impact on a fund’s selection of our services,” he admits.

The investor, ultimately, has influence over everything, declares Ian Headon at Northern Trust. “If an administrator is unable to meet the needs of the underlying investors then they are unlikely to be selected by the fund manager,” he comments.

SEI’s David Morrissey believes more investors are playing a larger role in whether hedge fund managers outsource their operations and to whom. “Power has shifted,” he declares. “Institutional investors and their representatives are increasingly asserting themselves, changing the rules of hedge fund investing as they push managers toward greater transparency, on identifying demonstrable sources of alpha and intensifying their focus on operational effectiveness,” he concludes.

Deborah Yamin confirms State Street over the past year has seen increased pressure from prominent institutional investors for hedge fund managers to establish independent third-party administration relationships. “There has also been a significant increase in investor due diligence requests, which indicates that investors not only want an independent administrator but also seek the peace of mind that the administrator employs best practices in operational risk management,” she says. 

Jonathan White at Viteos Fund Services says in a challenging fund-raising environment, managers are sensitive to the need for ‘brand’ name fund administrators. “The question then becomes if choosing a brand as a primary factor in the choice of a mission critical partner is the best practice,” he says.

Akshaya Bhargava at Butterfield Fulcrum takes a different stance. “Some large institutional investors and funds of funds may have personnel who have worked in the fund admin space and there may be an allegiance to a specific provider. There may also be a preference for a blue-chip name,” he says. “Family office investors or high net worth investors will not usually try to influence the manager’s choice of fund administrator,” says Bhargava.

Peter Hughes at Apex believes there is usually little influence exerted by investors. “Managers will look for web-based reporting which can often enhance their reputation and scale in the eyes of investors and some institutional allocators will insist on having an administrator with a recent SAS 70 report,” he says.

Martin Tolcher at Legis Fund Services also believes clients have less of an influence than the sponsor/promoter, often through the legal advisors. “Depending on the nature of the fund, the need for a ‘big name’ service provider has become less important – more is given to local reputation and perceived service quality,” he concludes.