Digital administration will ease fund management pain

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Digital native, back-end fund administrators are a no-brainer, providing a single source of truth that will cut costs, increase transparency and make reporting quick and simple. The next evolution will be adding AI to help manage the portfolio, writes Maximilian Derpa

When I speak to my venture capital investor peers about fund management, they all say the same thing: they’re fed up with the high costs, low service level and cumbersome manual administration processes that slow them down and limit the scale of their operations. My prediction for 2024 is that we will see an acceleration in the shift toward digital fund administration platforms, easing their pain and stimulating growth at lower fees.

There are already some pioneers out there offering end-to-end digital back-office services for fund management. Companies such as Fundcraft in Luxembourg, Vauban in the UK, Bunch in Germany and Carta in the US have solutions that cover fund administration as well as regulatory, legal and tax support. They can be used to trigger processes and provide data for reports and other documents.

While each has its own points of difference, what they have in common is being digitally native. They centralize data to offer a single source of truth. They’re highly efficient at lower cost. And they are set to comprehensively disrupt the industry – something we talked about at the Aperture event on January 16.

At Tenity, we use Fundcraft. With Fundcraft’s platform we can reduce our manual work in the investment process to the minimum, such as sending a digital form to a start-up for information, which is then automatically fed into the platform. Everything is managed digitally from there onward.

This is crucial for us. We had the initial closing of the Tenity Incubation Fund II just over a year ago, domiciled in Luxembourg. We’re continuously raising, with our target a fund of about €100 million and a large, diversified portfolio of 300 start-ups across the EU and APAC. How to manage such a large portfolio? We approached fund administrators and couldn’t believe the costs – around €2,000 per investment per year. Far too high for a fund of our size.

On top of that, we had concerns about whether such administrators could handle the amount of data generated by 300 investments. It seemed our strategy might just be unmanageable. Then we found Julien De Mayer and the Fundcraft team. It was such an eye-opener. They basically said: “300 companies? That’s not a problem.”

Fundcraft can handle all the administration because nothing is manual. The fee structure is based on deployed capital. Traditionally, admin fees are based on total assets committed. The Fundcraft structure means its fees and our costs rise as we invest, not according to our initial fund size. This is a totally different approach and business model and it is going to be really disruptive.
On the reporting side, everything is digital, too. I don’t get any Excel reports. We can see and manage the portfolio through a dashboard on the Fundcraft platform. I have continuous access and can immediately see the complete status of any one of our companies, in real time. It’s an end-to-end digital investment process.

These digital platforms currently have low market penetration. But that’s changing and will accelerate as more players emerge and develop their offer.

One thing that has been holding asset managers like VCs back is the challenge of switching from one fund administrator to another. That didn’t apply in our case as we were setting up everything from scratch. However, for older funds, switching is a challenge — legacy funds with their historic investment data are bound to previous asset managers and very manually intensive to transfer. Yet it’s not impossible, and the more we speak with peers, the more we encounter willingness to switch providers, as the pain is just too high.

The effect will be similar to traditional banking when Revolut came along, offering online and mobile banking as well as instant payments. The incumbent banks had to up their game. It changed everything.

For fund administration and the whole ecosystem – from administrators, venture capitalists and other investors to the start-ups and even regulators – digitalization offers exciting new operating models. We can manage our large portfolio with a small team – and manage it better – thanks to the transparency and low cost digitalization brings. We can reduce risk and do more. To put this in context, previously a fund our size would typically manage between 25 and 30 portfolio companies. We’re now able to invest in 12 times that number, which is great news for growth and productivity.

Looking further ahead, more gains will come as these platforms incorporate artificial intelligence. 2023 saw a big jump in generative AI and I think its application will continue to spread. Currently, in fund administration we’re limited in the use of AI by the lack of digital data. While there are some AI use cases for sourcing and evaluating deals, they’re still not available for making the deal, for portfolio management or the exit. Having said that, we may well see some proofs of concept using AI for some of these later stages in 2024 as the use of digital administrative platforms spreads.

Maximilian Derpa is managing partner and chief investment officer at Tenity, a start-up incubator and early-stage investor focused on fintech and insurtech

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