Technology is playing a pivotal role in how fund administrators support the growing reporting needs of private equity (PE) groups. Those who have both the internal experience to handle PE funds and the technological capability to deliver effective services and reporting, are likely to be the best positioned; especially as more PE groups appoint trusted third party service providers.
The push toward using third party administrators is largely institutional-driven. As investors look to diversify their portfolios, they expect reporting from PE groups to be similar to the reports received from hedge fund managers.
“Increasingly, PE managers are choosing to not do their own accounting in-house and are outsourcing to a third party administrator,” confirms Chad Allen (pictured), Managing Director at UMB Fund Services “As an asset class, PE has been our biggest growth area in 2017.”
Such is the level of investor interest in PE – Preqin earlier this year estimated there was USD846 billion in dry powder – that we are fast approaching the high watermark of 2007, in terms of capital raised this year. Cambridge Associates estimates that if one includes co-investment activity, which is a non-reported figure, new capital flows for PE this year could approach USD240 billion to USD250 billion; just off the USD270 billion in capital raised in 2007.
As more institutional capital flows into the PE space, the level of expectation rises, from a reporting perspective.
“We service quite a number of PE fund-of-funds (FoFs) and general partners like to see which portfolio companies the underlying investments hold. We can perform a full look-through to each portfolio company to provide transparency for the FoF. In addition, we have started to implement ILPA templates for reporting to limited partners. We can produce capital call, distribution and capital statements that are ILPA compliant,” explains Allen.
The ILPA template is a standardised reporting template developed by the Institutional Limited Partners Association. As a tool, the template is proving effective at helping general partners better communicate with their limited partners.
Ultimately, says Allen, it comes down to investors wanting to feel comfortable with their investments, with the general partner, and wanting to have transparency relative to the fund’s performance.
“The general partners need investors to help fund deals so they want to please the large limited partners. The institutional money, coming from the larger asset allocators, demands more transparency (than smaller investors),” suggests Allen.
Typically PE funds are only valued quarterly; however there can be a lot of activity during the quarter, such as calling capital and closing on deals.
UMB Fund Services has built its systems to track all of a fund’s cash flows on a daily basis. The benefit to this is that general partners can perform accurate forecasting, have a clear insight into what money is coming in and going out of the fund and know where they stand at all times.
“We are not only striking quarterly net asset values, we help managers throughout the quarter by giving them the timely information they need to make informed decisions.
“We have a proprietary accounting and reporting system called FastPro, which we believe gives us an advantage. PE is still somewhat of a burgeoning asset class, as far as fund administrators are concerned. As such, it is difficult to find software that can do exactly what general partner needs. We are servicing a variety of PE funds such as real estate, venture capital, buyout funds and each requires different information from the system. A proprietary system allows us to develop the software in a meaningful way to support our PE clients, so they can timely deliver funds to the market place,” explains Allen.
In terms of new technologies, he says UMB is looking at web crawlers, email listeners, OCR tools, data scraping tools, “in order to help us retrieve the underlying investment information, normalise it and have it interfaced into our system. It is something we have been looking at for quite some time and it is nice to see technology continue to improve to provide us with more real-life application capabilities.”
Regulation has also become an important factor as to why general partners face increased reporting requirements. Regulations now include FATCA, Common Reporting Standards, and Annex IV reporting under AIFMD in Europe, which PE managers have not had to deal with before. This is pushing PE managers to outsource administration as they seek out assistance in these complex reporting matters, mindful that they do not wish to become overly burdened in operational tasks that bring no value to their investors.
When asked what PE managers should look for before appointing a fund administrator, Allen refers to two points:
“First, you want to find an administrator that has experience and a good reputation. Even though an administrator might have great technology, if it does not have the experience (in servicing PE funds) it is not going to count for much. Second, if an administrator has great experience but lacks the technology capability to deliver a suite of services, the same logic holds true. You need a combination of the two.
“We try to strike that balance. We have been servicing funds since 1991. We have also built a dynamic web portal where we can deliver information to our general partners and their investors. The portal is not just a way for us to push data, it is also a way for clients to interact with us.
“For example, they can upload files to reduce risk associated with email communication and to manage the sharing of large files; they can submit demographic changes pertaining to their LPs; they can generate reports on an ad hoc basis. Our clients have access to the raw data and they are able to make modifications as to how fund information is presented and reported. They have a lot of tools at their fingertips.”
These are propitious times for PE managers and fund administrators as they both look to address increased reporting obligations as effortlessly as possible. One could argue that it is pushing what was once a very manual, in-house role into a more automated, external one, as PE groups become more comfortable having independent oversight of their accounting and other services.
“By having a third-party administrator, the LP is reassured that there is an independent entity overseeing cash controls in the fund. We are involved in all cash disbursements. We cannot act unilaterally; the general partner cannot act unilaterally. It has to be a joint effort and that reduces the amount of risk associated with fraud,” concludes Allen.