EWM Global has been interacting with finance and operational professionals across the private equity industry for almost 20 years. During this time, we have met with a great number of CFOs ranging from small one- or two-fund shops to those with hundreds of funds in their portfolios. However, even with the advances in technology over the past five to 10 years, we still come across very few private equity firms that have embraced digital transformation.
Interestingly, we find that the majority of private equity firms still manage critical in-house administration processes manually. For the most part, these sophisticated investment professionals spend hundreds of millions investing in portfolio companies to reshape them to increase their value; in many cases by digitally transforming their internal processes. When it comes to managing their own key administrative processes, it is all the more surprising that these same GP firms have ignored automation for such a long time.
Now, finally, the tide seems to be turning. We see more private equity firms seeking help to find and implement technology that helps them to digitally transform and manage their carried interest, co-investment programs and waterfall calculations. These processes can be fully automated and digitally linked with internal or external data sources resulting in easy-to-manage, seamless and robust dataflow.
However, we do understand that automating processes is not an inconsequential decision. Knowing the pain of implementation as well as we do, it is not surprising to us that CFOs and their administration managers are concerned about digital transformation being too time and labor intensive.
In this supplement, we endeavor to answer the many questions we receive when we talk to these firms about their plans to automate and digitize their processes. We talk about how GPs can break free from the limitations of spreadsheets and highlight, from our experience, the primary business risks which result from manual processing. Digitization through a platform approach does not have to result in a black-box, which is of particular importance for processes such as waterfall calculations. The following pages look at the headwinds facing the sector, how current admin systems are faring and the challenges they are bringing as GPs scale-up.
In the article featuring our mathematical analysis, we show how firms can optimize their waterfall through an automated system. We compare two commonly used European waterfall models and look at their impact on a hypothetical fund. The findings are stark.
We are delighted to have the perspectives of multiple CFOs and industry experts in this publication. In their interviews, it came as no surprise that there were commonalities around the vital importance of carried interest and co-investment programs, and the role they play for firms. Opinions from some of the experts featured in these pages seem to agree that carried interest isn’t going anywhere despite political discussions on this topic. And, overall, there seems to be a common consensus that in-house admin processes will, eventually, have to be entirely digitized.
Digitization hasn’t run its course yet. GPs now have an opportunity to embrace the potential of new technologies for their own organization.