Private equity sponsors could face a “significant negative impact” on their ability to “attract and maintain capital” if they fail to modernize operations by 2025, Citco said in a recent report.
Firms need to automate day-to-day operations if they hope to share in the coming boom in global private markets, the asset servicer and fund administrator said.
Citco, based in Tortola, British Virgin Islands, is one of the world’s largest asset servicers, with $1.5 trillion in assets under administration.
In the report, entitled “The Future of Private Equity Fund Administration 2025,” Citco cited a prediction by London-based Prequin that PE assets will double to $9.1 trillion by 2025. Citco said its own research shows that fund sponsors need to focus especially on building more secure data integration, and on collaborative workflow platforms.
While the covid pandemic and the work-from-home trend has helped speed up the digital transformation, consensus is now emerging about the operating model for the future.
Experts surveyed by Citco see a convergence on digital transformation plans around 2025, a time when the pros believe that most clients will be operating with digital-driven workflows.
Already the change can be observed from benefits to early movers. “Many of the leaders in the private equity industry have spent the last few years putting in place the foundations of these new ways of working,” wrote Nikolaos Perros, head of private equity at Citco Fund Services (USA). “They are now starting to see the rewards from their efforts.”
The report said PE managers can satisfy limited partners’ intensifying expectations by focusing on four major areas of concern: simplifying data collection even as accounting providers grow, using modern communication tools to secure information transfer, installing end-to-end encryption to defeat payment fraud and digitizing know-your-customer platforms to smooth the subscription process.
The key culprits that must be dealt with are email and excel spreadsheets. Email is insecure. Excel remains cumbersome and requires manual handling that prevents the secure transfer of information. Defeating fraud requires securely providing payment details and getting the needed approvals without using email or excel, the report warned. Fund organizations of the future will have a single payment system that tracks in real time.
Structured data exchange will be the norm by 2025, the report said. By then, managers will be providing administrators with secure inputs; administrators will, in turn, provide secure outputs. This will result in more linkages throughout the organization, for example between payments and deals, the report said. Citco refers to the need for an ultimate source — a golden record of data — to be distributed systemwide.
And say goodbye to emails, pdfs and physical signatures — key components of the current accounts payable system. Our modern remote, global, tech-driven world requires automation of the process from invoice to accounting, the report said.
“Currently the private equity industry tends to rely on Excel calculation sheets with many versions and PDF notices being emailed between parties for approval,” wrote Sheilagh Caufield, client services rep, private equity, at Citco Fund Services (USA). A modern collaborative platform allows for the secure sharing of documents for review without the problem of multiple versions and with automated checking.
Carried interest waterfall distributions are particularly difficult when the models are built and handled through Excel spreadsheets, the report said. Automation would allow the construction of nuanced waterfall structures with a standard process while still accounting for variations in limited partnership agreements.
Data can also be used to benchmark vendor performance. Investors can also receive a better experience using an online subscription process, guiding customers through KYC documentation.