Moving large sums of money around: it is part and parcel of a private equity firm’s operations. It is also a process that can be vulnerable to error and fraud.
Riverside, a firm whose international private equity and structured capital portfolios include more than 100 companies and which operates from 16 offices, knows this as well as anyone. At the time of writing, the company is averaging nearly four new transactions a month in 2019. With investment professionals spread across most time zones, there came a point last year when the request for, and sign-off, for wiring funds was deemed no longer suitable to be handled by email.
“We were concerned about not having easily identifiable and documented records of appropriate approvals for investing in portfolio companies,” chief financial officer Béla Schwartz tells Private Funds CFO.
The old transfer protocol involved an email chain requesting sign off from relevant parties, and the information included in each email would often differ, Schwartz says. “Each fund family sent an email their own way with their own comments.”
The system left Schwartz and others unsure as to who had been involved in the approval process. “It was not necessarily clear who began the wire process,” Schwartz says. “It could have been a very junior person. It wasn’t clear whether the fund manager had signed off on it, or whether it was just the senior folks. Sometimes the fund admin team would get involved. It was hazardous.”
The system’s shortcomings led to a lot of time expended on verification, and while there were no known instances where Riverside made an errant transfer, one of the firm’s CEOs saw the need to improve the system to avoid a potential mistake being made. “There was a request made by one of our CEOs saying, ‘This email thing is a little shoddy; we really don’t know if the money being asked for has been approved.’”
Riverside was already using an external software platform with the capability to manage an internal wire transfer approval tool. The system has an email delivery process that could be pre-populated with required approvers for each fund, time-stamped for each approval and tracking for the amounts that had been approved for investment.
Riverside’s director of project management, Russell Leupold, explains how the new sign-off works: “Each time we need to kick off a new workflow, a member of the deal team goes into the platform to fill out a simple form. They enter a description of the transaction, the amount to be approved at this funding, along with other supporting details.
“When they then click save, a number of notifications are sent. Initial alerts go out to the fund administration team, to the CFO, to the deal team and to the partner on the deal related to the approval request. The partner will then log in, click ‘yes’ to confirm. That then routes another notification to our fund manager. When that is confirmed, another notification is sent to the co-CEOs, who then give the final approval. At that point, a ‘funds approval is completed’ notification is sent to the entire audience.”
A group of eight to 10 people were involved in the testing process, including employees who were the approvers and initiators of the wires, a team from fund admin and the IT group.
Testing complete, it was time to train the staff on the new system. “It was hard, because you have potentially 80 people that could be responsible for starting a new approval form under this new system,” says Leupold. “Getting people to pay attention when we rolled this out in January  was a challenge because certain people might not have had to use it for the first time until April or whenever an investment was to occur.”
To get in front of this, Riverside started communicating the change three to four weeks before going live. They sent weekly reminders by email, had training sessions at the go-live time and a few “reboot” sessions four months after launch for people who needed refreshers or new members of the firm.
“Now we have PDF materials and recordings of the training in case we have a new hire or employees want to go back to take a look,” says Leupold.
The training involved coming up with universal terms and definitions for elements of a process that had until then been freeform; people would previously submit transfer requests with whatever phrasing, language, or terminology they wanted.
As is ever the case, buy-in from the top was paramount. “After we went live anyone who tried to sidestep the process would be identified and forced to go through the proper channels,” Leupold says.
Schwartz says it’s hard to quantify exactly how much time the new system saves him, but feels like it is more organized than before. If given the chance to redo the implementation process, Leupold says he would do one thing differently: involve a larger number of end users earlier on in the process, because the more they reached a diverse audience, the more questions they received.
“It goes back to the terms and definitions. People in Europe, North America, and Australia, across our different offices, geographies and funds refer to things differently, and that didn’t become apparent until we had these different environments trying to use the same tool,” says Leupold.