In the past, some private equity firms have been perhaps guilty of neglecting back office duties to concentrate on their core business of raising capital and buying and selling companies.
Particularly in the lead-up to the financial crisis, many were so busy doing deals that they didn’t have much time to devote to back office procedures. As a consequence, the development of many back office functions failed to keep pace with the industry’s rapid expansion.
However, since the 2008 financial crisis, the private equity world is now facing greater competitive pressures and a growing regulatory burden – which has encouraged more GPs to make sure their back offices are up to scratch.
Transparency, in particular, is the big trend in the industry. This is largely LP driven, according to Tom Williams, director of professional services at private equity service provider eFront. “Investors want to have more information on what the portfolio of a fund really looks like,” he tells PE Manager.
Other industry sources agree that LP demand and the regulatory landscape are putting increasing demands on a firm’s back office, driving operational costs up. So how do firms deal with the challenge of effectively managing their back office functions while retaining their global ambitions? The answer, at least in part, comes down to technology.
AGGREGATION FOR TRANSPARENCY
“It definitely starts with technology,” says Jim Cass, managing director at private equity service provider SEI. “If you don’t have the robust technologies that are available to handle the uniqueness of the investments, you are dead in the water.”
There are many different solutions out there. But Cass and Williams both argue that web-based portals – online sites where investors can log-in to a system to retrieve information – are essential to running a global back office.
If you don’t have the robust technologies that are available to handle the uniqueness of the investments you are dead in the water
“The key is it being a web-based product. This means there is no real overhead when it comes to expanding,” said Williams. “As long as you have internet connection in that territory you can use the product, and that is what I see as being one of the core things in building a truly global infrastructure.”
Previously, portals like these have been static environments where GPs input call notices, financials and other documents. However, GPs are now looking to differentiate themselves by giving their investors a much more real-time and interactive interface.
“What I can’t emphasise enough is having technology that provides transparency to investors – so they can see information quicker and don’t have to rely solely on receiving quarterly reports from the GP,” says Cass. “Investors and GPs want to get their tax reporting, history of capital calls and distribution notices all in one place. The technology tool we built aggregates this data across multiple products they invest in.” It also helps investors track performance of different products over different time periods, he adds.
Using portals also makes the auditing process easier, since many of the web-based investor portals can permit auditors temporary access to certain areas. This creates an audit trail whereby the system can track which users accessed which documents, and when.
This aggregated data on these portals will also ensure a better quality of reporting. Many smaller GPs using non-specialised software such as Excel spreadsheets were struggling to be efficient, and accuracy was compromised as a result.
“Many of the smaller GPs are moving away from Excel and systems like that,” says Dominique Robyns, chief executive of fund administrator Alter Domus. He believes an integrated system that involves combining investor relations and work flows is the way forward.
According to Cass, firms that have bought different technology for lots of small jobs are spending too much time and money synchronising them with their own systems. “If you have too many disconnects you get errors. You need a technology that can handle linking the processing engine with the allocation systems.”
Williams says he expects much more of an “ecosystem” in the future, whereby GPs become a hub – so they receive information from portfolio companies and their back office and add data from their deal teams before distributing the information to investors.
NO ROOM FOR ERROR
There are a couple of important caveats, however, as Cass points out. For a start, the delivery mechanism is only as good as the accuracy of what you are reporting. “If you talk to any investor, what they want is accurate and reliable information.”
Another important issue is the growing need for GPs to pick up this data remotely. “Mobility and the use of iPads are definitely the future,” he adds. “There has been a notable uptake in that side of things.”
Geography can also be a challenge. Truly global private equity houses tend to have their back offices in one centralised location; for a growing firm, this presents the challenge of foreign denominated funds, and how to account and report in different regions.
And there’s very little room for error: in a competitive fundraising market, where existing LPs are vital to success, flawless reporting is a must for any firm looking to expand its footprint. “You need to make sure all your reports and communications with your LPs are seamless because they are your best chance of raising another fund,” says Alexandre Prost-Gargoz, head of private equity at Alter Domus.
This is another area where technology can make a firm’s back office more efficient. Alter Domus, for example, has developed a reporting technology that allows for automated call notices and distributions for LPs. The system sends emails with links to a secure website that allows the investor access to the requisite information – and also tracks the emails, enabling Alter Domus to see who has opened them and when. So if an investor hasn’t seen a particular message, the fund administrator can follow up with a call to check there’s not a problem. This general move to automated email systems is making it possible to send reports to investors more quickly – and also more accurately, since it removes the risk of manually attaching incorrect documents to an email.
The other big challenge facing the industry, of course, is compliance – the ever-increasing regulatory burden courtesy of governments the globe (Cass uses the Form PF reporting requirement as a prime example). Here again, good back office technology is vital in order to provide the correct reporting in a timely fashion – but it’s undoubtedly a challenge for any portal to tick all the right boxes.
But one thing is clear: in a world when the demands on GPs are getting ever greater – from regulators, from investors, from management teams and from other interested stakeholders – technology clearly has a huge role to play if they are to have any hope of staying ahead of the game.