Hazeltree: Why it’s time to say ‘so long, spreadsheets’

While many GPs still manage their treasury with Excel, Hazeltree’s Don Jefferis cautions that there are real risks to this ‘classic’ approach, and real benefits to a modern approach.

Spreadsheets data

This article was sponsored by Hazeltree

No fund manager wants to admit they rely on old-school spreadsheets out of bureaucratic inertia; but private capital firms all start small and run lean, which can make tech upgrades a luxury rather than a necessity. So long as returns are there and reporting is swift and comprehensive, LPs will have no reason for concern over funds’ internal processes.

But private capital CFOs understand that outdated processes and systems will eventually cost the firm one way or another: in efficiencies, errors, theft or reputational damage. Although there seems to be a brand-new, latest-and-greatest LP reporting system every few months, the market is not brimming with options to better manage a firm’s cash, investor capital and debt activities. But that does not mean there are not real upsides to finding ways to streamline business processes and upgrade the tech for that discipline.
Private Funds CFO spoke with Don Jefferis, managing director of strategic accounts at Hazeltree, which offers a cutting-edge treasury management system (TMS), about the dangers of sticking with first-generation, banking portal and spreadsheet-driven solutions, and the upsides – including IRR bps – of upgrading.

How should GPs be thinking about treasury management today?

The preponderance of fund managers are still in the first generation of business processes and supporting technologies, which tends to be focused on spreadsheets and office tools supplemented by very competent staff. For the most part, managers have leveraged the tech provided by banks historically, and that works to a certain extent.

If a firm is managing a single fund, a single bank, and with very few cashflows, that works pretty well. But as firms add more funds, more investors, more banks and have increased needs to forecast cashflows and manage them from a central cockpit, no bank’s technology can adequately support a manager in that journey.

What’s wrong with those first-generation tools if the manager doesn’t have any issues?

Typically, GPs rely on what I call “spreadsheets and swivel chairs.” They pull data in daily from bank portals, internal accounting systems and other data sources on investor and investment cashflows, and then use a series of spreadsheets to build up a cash and liquidity view by legal entity and bank account. That can work at a small scale, but the challenge with spreadsheets is that they’re generally designed as a personal productivity tool, and the data-processing integrity is always suspect.

Think about how often we’ve all skipped a row, missed inputting a formula or fat-fingered a number in a spreadsheet – even the most careful among us certainly has personal examples. And spreadsheets are very labor -intensive. Daily spreadsheet management simply cannot offer the data-processing integrity, audit trails and time-series data views that allow GP staff to be accurate and efficient while concurrently spotting trends and doing deep data mining and analysis of capital management activity.

Furthermore, the risks and limitations of spreadsheets have only multiplied in the wake of covid. People are by-and-large all working from home, which creates new challenges to workplace efficiencies and internal controls. No longer can one just walk down the hall to clear up a discrepancy. Even before the pandemic, how often did staff members need to double check which version of a spreadsheet they’re looking at?

Or think about something as simple as the audit trail on a cashflow, and what that looks like when relying on spreadsheets, emails and portals. I know one CFO who spends three weeks chasing down the audit trails before external auditors show up each year. The audit firm identifies 90-some cashflows out of that fund manager’s structure and requests the entire documentation trail on each – source documentation, proof of who entered the transaction, proof of anyone that edited the transaction, proof of each approver of the transaction, routing instructions sent to the bank, and wire confirmation and completion details.

A single cashflow may start with a capital call to support a new investment, where it is captured in an investment system, then split across fund structures. Credit line availability by fund is considered/drawn, direction letters are prepared and distributed if credit line capacity is insufficient, anticipated cash inflows are tracked on a spreadsheet and then banking portals are manually queried for incoming cashflows. It does not take too much thinking to appreciate how error-prone and laborious this process can become.

With the Hazeltree system, on the other hand, every cashflow is controlled, time stamped and available in a clean chain.

We acquire, aggregate, suggest capital movements and execute movements all in a unified system – across the entire capital lifecycle. Right now, every CFO should be considering if they are at the right point of their evolution to consider enterprise technology for their treasury function.

But how can a CFO determine if they’re at that right point?

Technology benefits firms regardless of AUM or size, because of the analytic power it gives CFOs. That said, a common theme that brings clients to us is headcount growth pressure or operational pressure on existing staff. As a firm is successful and adds funds and banks and attempts to scale without adding people, while still maintaining rigor and security, CFOs start looking for new technology to help.

When speaking with one fairly large potential client, they admitted that a single person runs all the cashflow and liquidity for their firm. While they’ve been able to stitch together a process with spreadsheets, if something were to happen to them personally, there would be no way for anyone to step in and understand their spreadsheet and email ‘system.’ That kind of ‘key person’ risk is more common than a lot of CFOs acknowledge.

But I should clarify that the need for treasury technology isn’t necessarily linked to AUM. It’s far more a matter of operational complexity: multiple funds, multiple banks, multiple currencies, cascading legal entity structures, dozens and dozens of cashflows. That’s when the stitched-together spreadsheets can start to falter. So this technology isn’t just for mega-funds.

What should CFOs be looking for in treasury tech? Is it simply a more robust and efficient version of Excel?

Sure, it can reduce errors and increase productivity, but today’s technology doesn’t merely replicate spreadsheets, it provides real analytical power. It can follow every dollar through every point in its life cycle, from the time the LP wires in money for the first capital call, all the way until final fund distributions are made. Tech can leverage robotic processing to automate mundane tasks, presenting recommended actions to a treasury analyst/manager around cash positioning, credit facility drawdowns/repayments and allocating expenses across funds.

And with ‘big data’ analytics, the CFO can get answers to important economic and operational questions, such as for distributions to a fund, how have those monies been utilized over a period of time – distributed back to LPs, recycled into further fund investments, sitting in idle cash, etc? How efficiently and completely is the fund leveraging the credit facilities available? What is the IRR impact? It can also help in identifying processing bottlenecks in the ecosystem of LPs, GPs, banks, admins and funds.

From our standpoint, the idea that treasury management is a back-office concept needs to be reframed so it’s seen as part of the entire investment process – one that can even be alpha generating. Put another way, those spreadsheets might be letting the GP leave money on the table, and that’s never been cutting-edge.