There are two distinct approaches to scaling a private equity business in order to support a global reach. Both are dependent on a firm’s back-office capability, technology systems and operations, and both require careful consideration to ensure that the tools and processes needed to support the proposed expansion are in place.
The first approach is to establish deal teams in the regions where investments will occur. Since the primary role of these teams is to source local deals, it is a relatively straightforward move that allows back-office operations to remain centralised at the firm’s principal site.
GPs adopting this operational structure should ensure that individuals in regional offices retain easy access to the central systems supported at the firm’s headquarters. Conversely, firms should also ensure that a reliable means of transferring data from regional teams to the central team is in place. A sensible option is to leverage web-based applications since they can be accessed when individuals are not connected to the corporate network or infrastructure and typically do not require installations, maintenance or any other local support.
The accounting considerations associated with supporting local deal teams are not onerous. Back-office systems need to be able to handle foreign exchange and multiple fund denominations, but since these functions are already fairly commonplace in current solutions, it is unlikely that this will be a significant hurdle. On a related issue, the firm should ensure that its systems offer multi-currency support in order that both the amounts and spot rates of various instruments or investment vehicles within a fund can be tracked and valued. As an example, firms may need to convert amortisation expenses across an investment throughout its lifecycle.
Finally, firms should have the ability to accommodate different valuation methodologies. Local teams will analyse investments under whichever local accounting structures apply. These will need to be normalised into a format that fits the firm's regular accounting standard.
The second approach to international expansion is to establish a truly global infrastructure that supports the operations of independent offices managing their own independent funds, while being able to centrally collect and report on investment activity across all of a firm’s worldwide operations. For example, a fund that has historically operated in Europe but wishes to raise and manage a separate fund targeting the US market can choose to establish the new fund as a separate entity with the means to manage all aspects of its business. The considerations for this approach are more complex than those related to supporting local deal teams.
First, the technology, support and back-office operations will require more significant adjustments. For this business model to succeed, the GP will need to be able to report in local GAAP. Because the accounting standards followed at headquarters will no longer be the guideline for a regional office, strong local teams will be necessary to implement and manage the solutions. However, the time and effort needed to establish local teams can be reduced by leveraging the operational processes, such as workflows, alerts and analysis, already in place at the head office.
Both the format and content of reports need to meet the requirements of the local offices, but they must also be compatible with reporting structures at the central office
The ability to model and support various fund and investment structures is also critical. If debt-to-equity is employed at different ratios in the new region, the firm’s back office system will need to be able to accommodate these differences.
Reporting is also a key factor. The ultimate goal is to maintain and recognise ‘one version of the truth’ across a firm’s disparate systems. Both the format and content of reports need to meet the requirements of the local offices, but they must also be compatible with reporting structures at the central office to ensure accurate, firm-wide consolidation and to be able to compare performance across the different locales. Reconciling reports in various formats generated by regional offices can prove to be a significant challenge for the main office.
Defining and enforcing standardised processes is critical when multiple back-office systems are already in use within a firm. In this case, a top priority must be to establish technical interfaces, which may need to be custom-built, to ensure that regionally-sourced reporting can be automatically reconciled.
Technical support is also an important consideration. Regional offices with their own systems will require local support both internally and from their chosen vendor, which is likely to be available only during business hours. On the other hand, a truly centralised approach can typically be supported by a home office’s IT function, helping to lower regional costs. Additionally, a system that can be managed by business users has additional cost advantages compared to one requiring in-depth technical knowledge.
End-to-end solutions that are centrally-deployed, web-based and offer the required amount of flexibility and functionality will prove to be the most attractive option for supporting the needs of a truly global private equity organisation. In addition to reducing support overheads, this approach can minimise hardware costs while aiding the centralisation of the firm’s administrative and operational tasks.
David Miller is chief marketing officer of eFront, a software and services provider to the private equity industry.