As unique as each private equity shop may be, most are dealing with a very similar problem: data integration. After having purchased different systems from different vendors throughout the years, many are finding they now have disparate information spread across many platforms, and the quest to find and compile data is often a time-consuming one.
The result is less than ideal. A GP could be seen using an investor portal from one vendor, portfolio management software from another, and perhaps outsourcing fund administration on top of it all. Each solution has its own identity and structure, making it nearly impossible to be able to have an interchange or transfer of information from one system to another. What GPs really need is one master repository for information, which means creating a standardized data format across all systems and, for firms on the larger end of the spectrum, a proprietary data warehouse.
“If data is stuck in a spreadsheet or at a fund administrator, those investments are out of sight, out of mind,” says Ray Haarstick, the founder of Relevant Equity Systems, a provider of software tools systems, or finance and fundraising “apps” for GPs. “People can be flying blind because they don’t have fresh numbers in front of them.”
Indeed, the biggest technology concern facing CFOs today is that their systems do not interface, according to EY and PEI’s 2014 Global Private Equity Survey. One survey respondent noted that most of their firm’s key functions are handled by off-the-shelf vendor technology and outsourced to external firms, but that “this combination presents too great a risk of error.”
Despite acknowledging this problem, many firms are not making technology a priority. In this year’s Global Private Equity Survey, released last month, firms named technology and “data collection and safety” as their least important areas of focus for the next two years. Three-quarters of the survey respondents still collect and analyze portfolio company data through spreadsheets rather than using proprietary or third-party solutions.
“The idea is to get away from islands of data. Spreadsheets are not very shareable. If the company’s going to grow, it needs to share information,” comments Haarstick.
While this narrative is not news for most small and mid-sized fund managers, many do not have the resources to purchase expensive and sophisticated software such as eFront, says Ankur Agarwal, an independent private equity consultant who specializes in enterprise technology. While an entire data architecture overhaul from eFront – or similar software providers like iLevel and Burgiss Group – may be a bit out of reach for smaller managers, buying multiple solutions for different target areas from the same provider is one way to allow for greater communication between departments.
Many of Relevant’s clients take this approach. Phased implementations, says Haarstick, not only reduce the initial cost, but also give time-pressed professionals the time they need to master an app before raising the bar with more functionality.
With increasing compliance burdens and requests from LPs demanding greater transparency, software vendors are offering many solutions for the overburdened GP, like tools solely for FATCA or Form PF. Bill Murphy, senior managing director and chief technology officer at Blackstone, warns against buying products just to solve individual issues, however. Firms end up with more portals that do not integrate, and their technology infrastructure is still a problem. “It’s equivalent to bringing a water cooler to a house that has no plumbing,” says Murphy. “What you really need to do is fix the pipes.”
No time like the present
Technology has routinely taken a backseat to more urgent items like talent retention, but with regulators and investors asking for more information at a moment’s notice, more firms are beginning to see the value in investing in a system overhaul.
While it’s taken some time, Agarwal notes that the industry is starting to see technology as a core function and initiatives to standardize data terms like the AltExchange Alliance prove that more are realizing its importance. “Private equity firms are getting more confident about the use of technology and they’re not so apprehensive,” says Agarwal. “They’re coming out of their mental blocks, I would say.”
Haarstick has been a firsthand witness to the increased attention that private equity firms are giving to technology. He attributes the shift to the convergence of two factors. First, firms are reaching “points of pain” with their current systems when dealing with reporting demands from auditors, LPs and regulators alike. And second, many GPs are coming off their biggest fundraises yet – meaning they have more disposable income with which to address long-ignored tech issues.
Growth and increased complexity within firms are driving forces behind increased interest in technology investment, notes Murphy. “The mindset continues to evolve. If the business was the same as it was 15 years ago, technology could be helpful but wouldn’t move the needle,” he says. “Firms are getting bigger and more complex and along with that is a growing appreciation for the value of technology.”
Case study: Follow the leader
Bill Murphy and his team joined Blackstone in 2011. The first major task at hand: overhauling the buyout giant’s data management system. Although a data infrastructure reboot of that scale may seem far out of reach for the average middle-market CFO, Murphy argues that this is not the case.
“It’s very doable for smaller firms,” says Murphy. There is the factor of time and upfront cost to ensure that all data is mastered in one central place, but he notes that “it’s really not that difficult, it’s just a lot of work and a commitment to not cutting corners.”
First, the firm would need to hire an in-house data management leader or appoint someone within the current staff to focus on data quality and process, and have that function remain a significant part of their role. Murphy notes that most small firms could probably execute the overhaul with one person: “They just need a well-defined goal and to have the corporation buy into the goal instead of looking for work-arounds and trying to bypass the rules of data governance,” he adds.
With one master data management system, there is one version of the truth across all of Blackstone’s systems, be it internally or externally. However, that does not mean firms have to operate on proprietary systems for every function. Blackstone uses Salesforce for its CRM software and Investran for fund accounting, for example. But their data management system is the master of those entities. “We replaced all the systems surrounding that master data and did it with that basic tenet. Every piece of data is mastered in one place and one place only,” notes Murphy.
All in all, at a small firm the data overhaul would take about three to six months, he estimates. The Blackstone tech team is aware of the tasks at hand for a firm of a different scale than its own, partly because they also implemented the system for Patria Investimentos, the Brazilian private equity firm in which Blackstone owns a minority interest.
The benefits CFOs will experience from undergoing the data transformation will be measurable, says Murphy. For those still doing manual work, spending is linear. With twice as many transactions, they pay for twice as many accountants, for example. By employing integrated technology, firms can flatten that top curve. “We’ve grown our finance organization costs well below the growth rate of Blackstone and well below the growth rate of Blackstone transaction levels, all because technology has been used effectively,” he says.