Private capital managers are expanding the scope of asset classes for their investment strategies. This trend comes with more complex accounting needs and demands enhanced technology solutions.
“Private debt has changed. As we continue to look forward, there’s going to be more growth in the areas of bank loans, distressed debt and debt instruments,” Aani Nerlekar, senior director, solutions management and consulting at SS&C Advent, outlines. “This is a complex arena and managers need technology with the ability to account for these investments on various dimensions. This technology needs to give them end-toend look-through, from the investment to the end investor, and the ability to account for it accurately.”
Historically, PE managers did not always adopt end-to-end solutions incorporating accounting related to portfolios, funds, and investors. “That look-through capability has become crucial for investors, especially as we see our clients move into hybrid assets,” Nerlekar notes.
Further, the fee terms investors demand are evolving and becoming more complex. Investors are looking for special or beneficial terms rather than the standard structure.
So, these features add complexity and are becoming more commonplace, creating a need for a more holistic, digital approach to accounting.
Managers are no longer simply looking for technology solutions in isolation. The rising appeal of co-sourcing and full outsourcing results in a more pronounced need for technology to cover all functions revolving around reconciliation, processing investment activity, capital calls, and distributions.
Nerlekar says: “Managers are seeing the value in outsourcing those specific tasks or fully outsourcing to a fund administrator like SS&C while still maintaining complete control of the technology and their data.”
Working with third parties also reduces key man risk, particularly relevant in the current competitive talent market. “Hiring and retaining someone to carry out backoffice tasks is much tougher now than pre-
pandemic. So outsourcing also lowers that burden and the cost of ownership,” says Nerlekar.
Sustainability concerns remain high on investors’ agendas; PE managers have begun to explore ESG investing. Managers hoping to succeed in this space are expanding their expertise, focusing on building their frontoffice team and finding traders and portfolio managers who can support this investment philosophy.
Nerlekar explains how technology and services can help support a manager’s backoffice functions, thus freeing up budget and time to focus on the investment expertise on both the buy-side and the sell-side of their business.
“You need a system to do all the work accurately and save costs. This will allow managers to go and hire higher caliber front-office professionals to source better deals and investment opportunities,” he says.
Data also plays a key role in this expansion. “Managers need a technology solution with easily available data, especially ESG. Investors can then make intelligent decisions about what they want to invest in,” says Nerklekar. Managers can access ad hoc reporting, graphing, charting, and historical trend analysis.
“Not having data immediately available can be a key risk for PE managers,” Nerlekar notes. “Managers can miss out on winning some investors if they don’t have the
technology to provide that look-through reporting to their clients.”
Making the best use of these technology solutions helps managers meet their fiduciary responsibilities, leading to greater take up of managed services.
“Managers are pivoting the way they think about technology vendors and are now considering them as more of a managed service vendor to get data to investors,” Nerlekar says.
Managed services can also support managers in their foray into different asset classes. For example, traditional hedge funds moving into private capital can receive guidance from third-party partners who have experience in the area.
Nerlekar comments: “Managers might not have the knowledge to move into certain asset classes, from an operational perspective, and therefore having a vendor with robust expertise in these assets can help them build out their internal knowledge and understanding.”
He also notes the growing drive to regulate the private capital industry. “Historically, private markets have not been as regulated as the hedge fund space. However, as more regulation is expected, having a technology platform that can scale and modernise as the industry evolves is critical.
“To support these regulatory requirements, managers will need a lot of technology and managed services to allow them to scale without taking on higher cost of ownership.”
Aani Nerlekar Senior Director Solutions Management & Solutions Consulting SS&C AdventAani joined SS&C Advent in 2011 and is based in San Francisco. He brings a wealth of hands-on experience to the team, working closely with prospects in understanding their business needs, as well as functional and technical requirements around the front, middle, and back office. Aani is part of the Solutions Management team, working with Product Development on prioritizing the roadmap, and assisting with the design of new features.
The numerous market headwinds, including inflation, rising interest rates and a looming recession can result in profitable investment opportunities. But private equity managers need to close deals quickly to take full advantage of these prospects, and access to the right technology can give them an edge in a highly competitive environment.
The PE industry typically relies on spreadsheets to store investor standing data, and to make subsequent capital calculations. This data is then fed into a mail merge word processing document and reviewed and passed back and forth between
administrator and manager to agree. Further time is spent waiting for investors to wire in the funds, with the manual process of tracking who and who hasn’t paid being completed manually on spreadsheets. This process can take weeks, and as with any manual process, is subject to risk of error.
Jonathan Chapman, CIO of Opus outlines the challenges many technology solutions present: “Existing technology to service closed-end funds seek to solve single specific tasks – waterfall calculations, investor portals, capital call and distribution notices, accounting engines. The user must attempt to stitch a patchwork of products together
but always ends up facing the same problem – moving data back and forth between different applications is inherently inefficient and risky. Ensuring data integrity is challenging and ultimately requires humans to push buttons and import/export data.”
Further, Chapman says that although many service providers boast extremely slick manager and investor dashboards, giving the impression that everything is automated, the reality is that these are almost entirely backfilled manually by people. “This opens a plethora of issues such as calculation errors, data integrity and timing, and cyber security concerns,” Chapman adds.
Tracking the receipt of funds is also manual. Chapman notes: “While the data may eventually show up on a flashy front-end portal, it is ultimately coming from an accountant who is manually extracting data from a bank website, typing in a spreadsheet, before importing it for a manager to view.”
The resulting risk is considerable – missing the closing date on an investment opportunity due to operational inefficiencies can lead to reputational harm for funds competing in a closely-knit community. This can lead to late interest charges, or the worst-case scenario, missing out on the deal altogether.
Chapman says: “Added to this complexity is that multiple opportunities can be available back-to-back or even concurrently, making tracking and accounting in a single system even more important. According to a report by Bain & Company, there is an estimated $3.6 trillion globally in “dry powder”, which means once the opportunities arise, there will be increased competition to deploy that capital as quickly and efficiently as possible.”
When investment opportunities are identified, speed is often of the essence. Being able to close on a deal quickly can make the difference between participating in the recovery or sitting on the sidelines. In BDO’s Fall 2021 Private Capital Pulse Survey, 48% of fund managers report increased competition from other buyers as one of their top challenges to closing deals.
Once a manager identifies a target, a cascade of important steps must take place.
Investor registers are verified to ensure adequate unfunded capital can be called, calculations must be made to ensure the correct amount of capital is called from each investor, notices must be generated and delivered, and cash must be received and accounted for. All this must be done before any investment can be made.
As detailed earlier, many of the technology solutions currently catering to the closedend fund market do not fully meet needs of PE managers nor do they reduce risk of human error.
In its endeavours to support the continued growth in closed-end funds, particularly those investing in private equity assets, Opus has developed a fully automated capital call solution which offers managers investor capital processing technology which is 100% online.
“Managers are faced with a perfect storm. Challenging markets, increased investor expectations, and less time to complete operational tasks. Rather than setting aside weeks to manage the capital call notices, managers can complete the entire capital call process, securely, online, and in seconds,” says Chapman.
This solution allows managers to generate their entire investor list, set the parameters for the call including amount, deadlines, and even request additional expenses, with just a few clicks. The system will instantly generate the capital call calculations live, and with a final click, notices are posted to the Opus Investor Portal.
“This all happens automatically and instantaneously, without any back and forth or waiting to reach a person to assist,” explains Chapman, “Because all data is sourced and calculated within a single system, it means that the relevant details of the capital call are automatically posted to all other accounting and operational areas, from the G/L, to the investor capital summary. Incoming wires are automatically matched, allowing managers to see how much capital has been received to date for any given call.”
In addition, investor notices are housed within the same application that they were generated in, never leaving the secure Opus portal. Chapman concludes: “This is important as cyber criminals are becoming increasingly sophisticated and have impersonated administrators and fund managers, emailing fake capital call notices to investors with illicit wire instructions. By only allowing investors to view the requests on the Opus secure portal, everyone can be confident the request is legitimate.”
Jonathan joined Opus Fund Services in 2010 and currently serves as Chief Integration Officer as a member of the senior management team. He has held a variety of roles during his tenure at Opus, building teams in Portfolio Accounting, Client Solutions, Implementation, and most recently a dedicated Closed End Fund and Private Equity group. Prior to joining Opus, Jon worked at Bank of America Merrill Lynch in the Global Middle Office, as well as various fund administrators. Jon is a Certified Public Accountant and lives in the suburbs of Chicago, IL.
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Private equity managers face a number of challenges relating to data – namely issues around aggregation, analysis, security and delivery. Smart deployment of technology solutions can help alleviate these pressures.
“Having access to time-saving and riskreducing technology will continue to play an important role in the success of PE managers,” says Jill Calton, executive director of Alternative Investments at UMB Fund Services, Inc., “The most relevant services and solutions include onboarding investors, clearing regulatory hurdles related to AML efficiently and effectively, maintaining data in a secure and standardised format, and the ability to utilise that data for analytics and reporting.”
PE firms have various options when it comes to applying such technology to their business. Larger firms have the ability to buy or build their own solutions, given larger budgets and more capital to invest. Whether a fund builds, buys or outsources, these can have an impact on the investor, investment and overall fund life cycle.
Smaller firms may opt for service providers that can provide access to technology platforms they could otherwise not afford.
Calton points out: “Cost is not the only consideration PE managers should consider. They should prioritise their own data needs as well as those of their limited partners (LPs), along with how that the information needs to be secured.”
According to Calton, the use of blockchain in the subscription process could significantly improve this security element, particularly as it pertains to client onboarding. It would also speed up the process by eliminating the steps necessary to confirm the parties involved are who they say they are and by reducing the risk of breaches and cyberattacks. “While we have not seen the technology widely adopted, it is emerging and could have a meaningful impact on the industry,” Calton says.
Meanwhile, investor demand for timely and transparent data continues to grow. Calton
considers how GPs interact with LPs pre- and post-investment and the role technology plays in this: “Data is king. LPs and GPs want the ability to maintain and access data that can be used in a variety of ways from analysing holdings and returns, supporting the information needs of LPs and other related parties, and supporting their tax and regulatory requirements.
“Many funds have multiple products with investor allocations. Without the aid of technology, providing relevant information would be a manual, time-consuming and error-prone process. Therefore, technology needs to help parties on all sides of the transaction have transparency about the current stage of investment, subscription document status, and when the subscription is accepted and effective.”
Many PE managers also struggle with “data sprawl”. Commonly a result of using multiple service providers at one time or changing service providers over the life of a fund, this practice can lead to data being housed in many different locations with
different formatting and strategies for said data. Bringing a level of consistency to this aspect of a PE business can improve the utility of the data as well as enhance the PE managers’ relationship with their clients through better reporting and transparency. In dealing with challenges around data aggregation, analysis, security, and delivery, having a service provider’s support can help PE firms overcome them, especially when there are difficulties related to internal resources. “At UMB we’ve demonstrated
how state-of-the-art technology makes a big difference — especially when that technology is agile and can be updated and enhanced quickly to keep up with evolving needs,” Calton notes.
Automation is a function which technology can help deliver. Within the PE world, many have historically lamented the difficulty in automating certain processes. Calton echoes these struggles: “The big challenge is standardisation. A lot of information that
PE managers want to maintain can be found in quarterly reporting documents. These documents are extremely complex and detailed, and the layout of the reports vary from fund to fund. Optical character recognition only works if the information can be templated and consistently applied.”
The focus in applying automation to PE has been the way information about their investments is delivered to LPs. This conversation has now moved far beyond an ending capital balance reported to them days, weeks or months after a period end.
Calton underscores: “LPs want pertinent information, and they want that information delivered faster. Service providers are typically the best source for providing that information and to meet the demands are turning to bots and to automate the data aggregation process.”
Calton also points out that, like many industries, the world of PE is is struggling to recruit and retain top talent, even in operational or technology-related fields. This can prove challenging if managers are trying to implement new digital solutions, further highlighting the benefits third party support can provide.
Jill leads the alternative investment servicing business of UMB Fund Services, which offers a full range of back-office services for alternative investment funds. Her responsibilities include organizational leadership, strategic development and fiscal management. This includes overseeing the teams that provide fund accounting, administration, investor reporting, tax and audit services for the company’s alternative investment clients. She is a certified public accountant and a member of the Utah Association of CPAs. She also serves on the Hedge Fund Association’s board of directors.
Opus Fund Services is an award-winning independent and privately-owned full-service global fund administrator providing automated, integrated middle and back-office administration services to the asset management industry. Opus has been at the forefront of technological development since its inception in 2006, providing an unparalleled technology-based service offering delivered via the proprietary Symphony platform and supported by a dedicated team of industry veterans from offices across North America, Europe, Africa, and Asia. Opus services both emerging and established asset manager clients across a broad range of asset classes and global fund domiciles. Opus Fund Services (IRE-Admin) Ltd. is regulated by the Central Bank of Ireland. Opus Fund Services (Bermuda) Ltd. is regulated by the Bermuda Monetary Authority under the Investment Funds Act 2006. For further information see www.opusfundservices.com
SS&C Advent helps more than 4,300 investment firms around the world—from established global institutions to small start-up practices—to grow their business, minimize risk, and thrive. SS&C Geneva® is the leading portfolio management and investor accounting solution for the alternative investment industry. It’s a highly scalable, true multicurrency and multi-asset class platform. Designed to support complex investment strategies across international markets, with the ability to manage fund, entity and legal structures, as well as fully support all transaction types and instruments, including syndicated loans and private debt. Today, Geneva is available in the cloud through SS&C Advent Managed Services, along with a customizable menu of operational services for clients to leverage. Learn more at www.advent.com/geneva
UMB Fund Services provides a customizable, proprietary technology platform for accounting, recordkeeping and reporting for private equity, hedge funds, funds of funds, opportunity zone funds, private debt, real estate and venture capital. Our full-service lineup includes fund administration and accounting, investor servicing, tax preparation and reporting, and custody. UMB’s flexible solutions, high-touch service and product expertise are backed by the stability of a highly capitalized parent that has been around for 100+ years. Visit us at umb.com/fundservices
