In the olden days of private equity (roughly five or six years ago) the administrative staff of a private equity firm would feed capital call letters into the fax machine or stuff quarterly reports in envelopes for mailing. Some firms still rely on these methods, much like how some people still listen to music on cassette tapes.
Neither practice is frowned on, though it's common knowledge that times have changed. Plenty of firms have already begun using web-based systems to report performance data, and more LPs are coming to expect access to investment electronically.
Implementing a web-based reporting system involves three steps. One, the GP has to set priorities for the system. Is it to simply upload current investor materials to the web so LPs can view them easily on their computer screen? Or should the system offer true interactivity, so LPs can download data to manipulate themselves? Two, the firm should explore several vendors to discern which one best accomplishes that task. That involves testing a system's userfriendliness for GPs and LPs, its compatibility with current IT solutions and its security measures for maintaining the confidentiality of the data. Finally, the firm should gauge LP feedback upon the system's launch and respond accordingly to ensure the system is serving investors well.
?Most LP reporting systems fall into two categories,? says Justin Nuccio, senior manager in the capital markets group of Deloitte & Touche in Chicago. ?Those are ?document management? and ?data repository.??
Document management systems are the simplest to implement as they essentially upload digital versions of existing materials to a password-protected web page. Documents such as co-investment letters are scanned and presented as PDF files that LPs can download to view on their computer screens. Even with such a straightforward function, there are variables to consider.
How much material is the firm looking to make available through the site? Ken Pierce, managing director at DMLT, the vendor of the Investment Café product, offers some guidelines. ?Most clients look to upload capital call letters, distribution notices, financial statements and tax information such as K-1s,? says Pierce.
But in uploading documents, the system doesn't necessarily offer investors the ability to search the documents by keywords, such as the name of a particular portfolio company. If several current investors have been with the firm since the first fund, the ability to easily search through years' worth of quarterly reports may be appreciated. However, including vast historical data on these sites does come at a price.
?Older firms with multiple funds shouldn't underestimate the work involved in gathering data and documentation for the system. They need to organize this information well before loading it on to a platform,? says Nuccio.
One provider explained that in some cases even the largest firms use the most rudimentary document systems. This is because these firms tend to be able to afford staff members to personally respond to investor inquiries. The functionality of the IR web site, therefore, is often viewed as a parallel distribution system, but LPs in many cases prefer the ability to place a phone call over user-friendliness on the web.
A question of interactivity
For firms not so generously staffed, data repository systems might lighten a GPs workload along with offering investors some interactivity with the site. Data-focused IR systems offer more than the means to view scanned documents online. They grant access to the data used to generate investor materials. LPs, specifically funds of funds, appreciate the ability to download data into a more generic application like MS Excel, so they can use the points in producing their own reports.
Certain products, like InvestorDynamo, help the GP produce the formal quarterly reports as well. The ability for LPs to download data points doesn't replace the documents, but simply allows LPs to use that information in their own fashion. The systems help automate the production process, thereby tempering the frenzy that often erupts as staffs scrounge for details across the portfolio. If quarterly reports are produced in a fire-alarm atmosphere, a system that can streamline the process may be worth the expense.
The real value of these data-based systems, though, is that they tailor the reporting procedures to the LP. ?Many GPs will allow LPs to set their own preferences concerning alerts and reports, and provide the ability for them to edit their own contact data,? says Shannon Dolan, vice president of sales at SunGard Investran. One provider explains the IR solutions industry as a whole is moving in the direction of greater interactivity with investors, granting them real control over what they see. This goal is driven by the time crunch on today's LPs. Investors fueling the current fundraising boom face stiff competition for entry into top-tier funds, and a crowded field of first-time firms. Tailoring the data to individual specifications speeds the monitoring of current investments as the LPs pursue new ones.
One limited partner listed among his priorities the ability to view capital accounts at his leisure, download a history of commitments and distributions, and track the schedule of a firm's portfolio investments. All of this amounts to a demand for the equivalent of a private equity TiVo. LPs want to view data when and how they see fit.
IR solutions vendors are responding with offerings that accomplish that to an increasing degree. How should a GP decide which system is the best fit? In short, service and compatibility should trump technology. The fact of the matter is that the underlying technology at work in web reporting isn't cutting edge. The ease and effectiveness of a given product is far more dependent on the vendor's level of service and its compatibility with how the firm already reports its data.
Even for the simpler ?document?-style systems, the service contract is a key differentiator among providers. Are the GPs simply buying a product to be administered by the in-house IT staff? Does the service contract only address when things go wrong, or does it detail how the vendor will work alongside the firm? Do GPs have to upload their own documents? Or does someone at the vendor get emailed the PDFs to upload the system on the firm's behalf? In some cases, a firm's IT staff could tackle this, but the vendor should be willing to provide a substantial tutorial before launching the product.
For the more complex ?data?-reporting solutions, the quality of those tutorials is of even greater consequence. The partner or IR staff responsible for reporting needs to feel comfortable, even skilled, with the system, as they are dealing in sensitive raw data. Even for vendors that offer data entry, someone at the GP firm has to prepare the data. If those procedures are cumbersome, there's every chance the product will slow, not streamline the overall IR process.
GPs need to test the ease of use, and also consider the quality controls in place at the providers. The more robust servicing agreements place the delivery of the data in the hands of the vendor. GPs can't tell LPs it was their tech provider that was responsible for errors in the data. How is the vendor verifying the numbers in the window are the same as were given by the firm?
Even if the GPs are comfortable with the system and the safeguards on the data quality, these systems are dedicated to improving investor relations, not eroding goodwill. As the firm pares down the list of IR services vendor candidates, the firm should ask key LPs what upgrade would best serve their needs. If the feedback is that investors aren't ready for downloading raw numbers, it might require reexamining if the ?data? variety makes sense at this point. Having one or two LPs try and use a test version could go a long way to prove the investment is worth making.
The systems not only need to be compatible with staff and investors but the firm's current technology as well. This is of greater concern for the ?data? variety of systems given their reach into accounting information tallied by the back office, but it's an issue to address in either case.
Some back office software will include a reporting function, and that might make sense if a firm has such a product. However, such solutions often don't upgrade themselves as frequently as solutions competing on their reporting capabilities alone. ?Firms should be careful of reporting systems that can't adapt to a variety of back office solutions,? says Dolan. ?They need a solution that can evolve with the firm, either with its own upgrades or by adapting to more robust back office programs.?
Given that many LPs now update their own contact information through reporting systems, the solution should link seamlessly with the GP's database. Some offerings will include alerts that email partners when an LP changes contact details. Integration with current platforms is touted among most providers, but partners should look for examples of these cross-application benefits. As emails are frequently used to alert LPs to new postings in the site, linking the reporting system to both the back office and contact database is set.
There may be debates over just how interactive a system should be, but all parties agree that safeguarding the confidentiality of the data or documents is paramount. Systems limit access with encrypted passwords for all users, GPs and LPs alike. ?The first thing is to insure hefty encryption, ideally a 128-bit encryption,? says Nuccio. Even if the passwords are shared, there are providers that offer ways to trace downloaded documents.
?We're offering more digital rights management these days. This allows for watermarking individual pages of a document. Each page can now be stamped with a date and time,? says Dolan.
The other question for vendors is how they've verified the security of their systems, either through commissioning third-party tests or relying on external security solutions, or ideally both.
Once a firm has decided on a product and collaborated with the provider on its launch, there should be some process to gauge LP reactions to the system. Some providers suggest an emailed web survey while others prefer more informal ways, such as questions over the phone or at the next annual meeting.
Virtually all reporting system have some way to track who's logging in, what they're viewing and how frequently their visiting the site. This data should be tracked quarterly to inform decisions on upgrades and prompt follow up conversations with those using the system frequently, or not at all. LPs avoiding the system or using it extensively will most likely have strong opinions on the system.
Web-based reporting systems may provide a more effective way to deliver information to investors, but like most technological advances, they bring different, not fewer responsibilities. Best practices for these systems are dependent on the audience, the investors. A successful system is one that best serves the LP, even by using the partners' time efficiently. To paraphrase a famous adage, ?Begin with the end user in mind.?