Hedge Fund & Private Equity Fund Operational Due Diligence Since 2009


Understanding private equity fund self administration.

For decades now self administation has been largely banned in the hedge fund industry; however it is still alive in the private equity industry. Why is this?

The rationale for private equity self-administration is that investors do not pay performance fees, and carried interest is based on cash realization. With that said, “valuation of the portfolio and valuation of the NAV” are less relevant during the life of the fund. Other principles of private equity self-administration including meeting “current industry standards”.The important areas to assess are fund accounting, GAAP financial statement production, client statement production, method of client statement and financial statement distribution (a manager or vendor supported web portal, instead of a fund administrator web portal), waterfall calculations, production of capital call notices and distribution notices, and the allocation and wiring of capital calls and distributions.What could go wrong? The same things that could go wrong with a self-administered hedge fund, and potentially more: valuation manipulation, accounting journal entry errors, limited AML, lack of oversight on bank accounts, untimely capital calls and distributions, NAV restatements.How can investors gain assurance? Conducting formal and thorough operational due diligence on the manager’s accounting function, team, and systems; can provide comfort over the process. However, true assurance over the effectiveness of internal controls can only be attained through a SOC 1 and/or a quality control platform, which investors do demand from institutional fund administrators.PRISM believes that in 2019, private equity/private debt self-administration is within the boundaries of “industry standards” for permanent capital funds. PRISM also believes that it is preferable and best practice for all private funds, open or closed ended, to be independently administered.