Cascata lands two fund admins for automated waterfall solution

Cascata Solutions, a provider of software that automates the calculation of waterfall processes, has struck deals with fund administrators ZEDRA and Socium Fund Services to license its software, Private Funds CFO has learned.

The multi-year agreements are part of Cascata’s aim to provide faster and more accurate carry calculations.

ZEDRA and Socium will, in turn, gain access to Cascata’s software to enhance their own services.

The industry’s talent market is still tight, and turnover of staff responsible for waterfall data and calculations – at both managers and their fund administrators – is a persistent threat, but one that Cascata’s software is meant to solve, Maarten Robberts, managing director at ZEDRA, told Private Funds CFO.

“It’s solving a real operational problem. It also will make our process more efficient,” he said.

Indeed, CFOs are navigating increasingly complicated means of providing some form of carry to more employees, as pressure mounts to attract and retain talent well outside of the deal team.

To that end, Cascata co-founder Charles Dooley told Private Funds CFO that the provider plans to offer details on GPs’ internal allocations of carry to their employees, including their amounts and vesting, by early next year. And he said Cascata is looking to enhance its scenario analysis by the end of this year.

“Minimally, GPs want a portal where their employees can have direct access and can track their carried interest allocation and valuation,” Dooley said.

He also called Cascata’s upcoming feature “a high priority in our product roadmap,” adding that its customers are interested in shaping the upcoming feature.

Establishing a standard

Socium co-founder Michael Von Bevern said that Cascata is the third waterfall technology provider that it has worked with since his firm’s 2016 founding. Suntera Global, Socium’s parent company, this week gave Socium approval to roll out Cascata’s software across its global jurisdictions. Von Bevern touted Cascata’s product due to its easy set up and user friendliness.

“It [offers] lot of transparency, including full auditable calculations that allows us to just hand that to the client and say, ‘here, let me know if you disagree with this, either in the way we set it up or the way it’s calculating,’” he said.

Manual processes performed largely in Excel are still the industry standard for carry calculation, said Dooley. The inserted data is then exported to accounting software.

Robberts explained that ongoing manual movements of data between Excel and accounting software invites room for error, as people make copies and start second guessing how formulas should be set up.

“Somebody starts to think about formulas and says, ‘well, maybe they should be different,’” he said.

Errors may arise from someone trying to interpret waterfall terms in Excel. Misunderstanding terms can lead to sizable numerical errors, Dooley explained.

And fund accountants typically use their own calculation methods for various relevant metrics, such as rate of return, and build their own waterfalls.

“There’s no standard across the fund administrator’s organization,” Dooley said.

A third challenge for fund administrators is in handling data from numerous funds, LPs and GPs in Excel. Dooley pointed to issues arising from American-style waterfalls, where carried interest is calculated on a deal-by-deal basis, greatly increasing complexity.

Automated waterfalls

Clients of Cascata’s automated solution will be able to use either open APIs or file utilities to operate it. The latter is more common, Dooley said.

The file utility serves as “the integration point” between a client’s software for accounting and general ledger activity, he explained, naming examples such as Allvue and FIS Investran.

To get data, Cascata works with customers to identify the accounts needed for calculating carried interest, such as capital calls and distributions. Management fees require less work to identify and calculate, requiring only a dashboard on Cascata’s end to obtain, Dooley said.

The next step is for a client to use their accounting software to make a standardized query output, which is then uploaded to Cascata’s file utility.

Once uploaded, the output is converted and is available in Cascata’s system to perform calculations for carried interest, Dooley added.

There is no Excel file used during any step of this process, he pointed out. But customers can export carry calculations from Cascata as new Excel files, which they can produce for auditing and compliance reasons.

“The waterfall calculations are done literally by a click,” Dooley said.

This approach gives administrators standardized calculation methodologies, he explained, which eliminates the variation risk among fund accountants.

The open API option functions like the file utility one but entails tighter integration between Cascata and customers’ accounting software, Dooley explained, as the former’s API is “directly mapped” to the latter’s API.

Dooley contrasted Cascata’s waterfall offering to other solutions, noting that alternatives leave their clients with the responsibility of keeping independent Excel spreadsheets for checking calculations.

And clients can also use Cascata’s software to run different scenarios for realizing carry based on the timing of GPs’ exits.

Cascata’s two fund administration customers are at different adoption points, Dooley explained. The goal is to finish ZEDRA’s adoption by the end of this year, while Socium has been working with Cascata since April.