When building an investment management firm, managers will work with a range of service providers. Among the most consequential are those that become embedded in how the fund operates over the long term, such as the fund administrator, the executive-level oversight partner, and the auditor.
For many firms, these decisions are made once, with the providers following the firm as it scales. For others, a change eventually becomes necessary, requiring the manager to select a new provider that will be a better fit.
In this article, we share what we believe matters most when choosing or changing a service provider, and how to protect the relationship once it is in place.
When choosing a service provider, a manager is choosing a long-term partner. As such, we believe managers should optimize for durability, not convenience, for three reasons.
The fund administrator, oversight partner, and auditor play a central role in how the firm operates. When working well, they keep the fund operating at an institutional standard, free the manager to focus on investing, and give allocators confidence in the business.
For it to work well, a high quality of service is non-negotiable.
That level of quality will often command a higher fee, but is worth the difference and is better thought of as an investment than as a line item to minimize. The mistake we often see is making what is a long-term, structural choice on the basis of the near-term budget at launch.
That decision should instead be made on the basis of the standard and scale the firm is aiming for.
Provider quality is a condition for fundraising success, at launch and thereafter.
Allocators conducting operational due diligence ask about the fund’s administrator, the oversight in place, and the auditor. Their decision to commit capital depends in large part on what they find.
When the quality of service is no longer what the firm needs, a switch may be warranted. These transitions are entirely possible, but they require careful management.
Records must transfer and historical data shaped by one provider’s system must integrate with a new provider’s system. The process may temporarily leave the fund with fragmented books and records, inconsistent investor reporting, or inaccurate tax classifications. Switching auditors will, likewise, raise questions among investors, with scrutiny becoming more pointed.
None of this means a change should be avoided when it is the right move. It does mean the choice deserves to be made carefully enough that the firm does not have to make it again.