Nowadays, almost every business owner and investor is familiar with the concept of private debt. Private debt is known as the best and most popular alternative investment asset. It trails only private equity and venture capital in volume. But with the regulatory environment becoming complex for private fund managers over the past decades, it can be challenging for fund managers to scale private funds when launching new ones.
Here comes the need for well-designed operation and finance functions to keep the private debt safe. Read on to explore the best practices for private fund managers.
Table of Contents
1. Build Effective Finance Team
The real job of a private fund manager is to focus on fundraising and investing. However, without an effective operation and finance team, the responsibility to manage the project increases.
However, having a knowledgeable operation and finance team unburden most of the responsibilities from the private fund manager’s shoulders. A solid team, whether you hire them internally or outsource, can help in interviewing and allow the fund manager to select the right fund administrators, auditors, and other vendors.
It might be costly for a direct lending company to build an operation and finance team, but the long-term benefits of having a team with operational and finance knowledge will outweigh all the costs.
2. Understand Regulatory Cost
It can be expensive to start a private fund, especially for emerging private fund managers. This increases the need to structure a private fund in a pattern that helps in the reduction of private fund compliance costs in the long run while giving the edge to continue asset growth.
Learn how to do fund structure:
The common fund structuring for private debt includes understanding and budgeting the cost of setting and maintaining blocker funds. It also includes alternative investment vehicles and special-purpose vehicles.
When looking to raise add-on capital for closed-end private funds through investments, fund managers should understand the additional cost of launching new funds and budgeting them.
3. Connect With the Right Service Providers
The role of a service provider is similar to the role of an operation and finance team. It evolves from providing operational and compliance solutions, which end up becoming a strategic advisor, to providing fund manager.
When it comes to making your private debt successful, a fund manager should select the right service provider that compliments the operation and finance model. Here are a few factors that are required from a service provider:
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Technical depth
There are several current complexities in the regulatory environment faced by private debt. This requires the need for in-depth technical help from the service provider to the fund manager so the professionals navigate the new environment.
This states the importance of a well-skilled service provider who can handle all the technical complexities in the private fund structure, investors, and multiple investments.
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Technology support
As the need to manage the work remotely, the need to ensure cybersecurity to protect data becomes a necessity for fund managers.
That’s why the service provider should be able to provide technological innovation for private funds, which is operationally efficient. A private fund manager can opt for a modern suit for private debt management that supports the entire credit investment cycle.
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Scalability
When taking help from a service provider, fund managers need to ensure that the service provider has the ability to scale the private funds by offering solutions for future growth of the fund.
4. Implement a Strong Governance Framework
In the early days, during the formation process of a private fund, there were a small number of officers and employees that might not find any need for a governance framework. But the moment a private fund is started, the roles and responsibilities of employees and officers start to evolve.
Here comes the need for a proper organizational structure that helps in the maintenance of efficient workflow within the organization.
5. Offer Flexible Operational Terms
There are several factors that need to be addressed earlier during the fund formation process. These factors are fee structure, investment objectives, and distribution waterfall that, if reviewed earlier, result in tangible costs and allow fund managers to save ample time in the long run.
Here is how fund managers can handle flexible operational terms:
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Consultors with auditors
By the time of audit completion and tax filings, private fund managers should consult all the information to their auditors and tax accountants.
Flexible audit filing timelines have proven beneficial to the private fund manager, service provider, and operation and finance team, depending on regulatory rules applicable to them.
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Acceptable fund costs and expenses
Depending on the lifespan, a private fund will incur a variety of costs and expenses. That’s why clear and well-defined terms related to the acceptable fund costs help in clearing the ambiguity related to the costs of a fund recorded by the provided fund manager
