3 Private Equity Data Risks Faced by General Partners

By: Kimberly Kale

Head of Product - Back Office
March 22, 2022

The Covid-19 pandemic forced the private equity and private debt markets to rethink their processes. The new work-from-home paradigm – hurriedly adopted but now a more prominent trend – exposed strengths and weaknesses in the back offices of many private equity operations, especially offices reliant on Excel.

The strong fundraising environment of recent years has seen general partners of all sectors significantly grow their assets and investor base. However, the resulting increased workflow means back-office teams previously reliant on spreadsheets are questioning the ability of their current systems to accommodate new data complexities.

READ MORE: 6 Private Equity Trends to Watch in 2022

For many private equity operations teams, Excel has hit a brick wall. It’s no longer able to keep up with the complex entity relationships, tax reporting, and LP communication requirements many fund managers are now facing.

In addition, the remote work environment highlights the collaboration and security deficiencies of an Excel-based operating model. For all the flexibility spreadsheets offer, their use as a data repository and reporting mechanism is challenging in the best of times. Remote collaboration only compounds the difficulty.

Spreadsheets are no match for the complexities a growing investor base brings to a GP’s accounting and reporting requirements

Limited functionality challenges collaboration

Back-office teammates that are solely or primarily reliant on Excel and wish to work in separate locations may run into some roadblocks trying to work on shared files with the online version. While convenient, Excel for the web is a slimmed-down version lacking some key features for back-office operations.

Specifically, teams will likely be unable to:

A frequently used workaround for these Excel for the web shortcomings is implementing version control with the desktop app (JanuryReport_v1.xls, JanuaryReport_v2.xls, etc.) and emailing back and forth between users. However, this inevitably leads to data management chaos because it’s easy to lose track of who updated what, when, and where.

Disparate data storage means reporting deficiencies

Quality control and data integrity are also major issues inherent in any spreadsheet-based accounting and reporting process, especially as the amount of data grows. The lack of a “single source of truth” across data sets inevitably results in errors that are difficult to identify and rectify.

These challenges are readily apparent amid the abundant information requests limited partners have of their managers, requesting updates on potential cashflows, lines of credit, portfolio company statuses, and more. Institutions and individuals alike are looking for as much clarity as possible from their private capital managers, and providing it isn’t an easy task when data is stored in disparate spreadsheets or systems.

Email and spreadsheets heighten security risks

Private equity data security is another important consideration when looking at operational risks in the current environment. The more email is used to share information, the greater the odds of exposure to bad actors looking for vulnerabilities, and the private capital industry is certainly not immune.

Sharing sensitive data – tax ID numbers, bank account information, and portfolio company financials – over unsecured “networks” such as email, exposes both GPs and LPs to immeasurable risks, should such information fall into the wrong hands.

For GPs that use a fund administrator, there can be an enormous amount of information passed back and forth from GP to admin, generating both collaboration and security challenges.

A potential workaround to the traditional GP/admin model is what’s called a “reverse outsourcing” or “co-sourcing” model. Under this model, the GP owns or hosts the fund accounting and reporting technology (including the data), and the admin securely logs into the GP’s software system to support their assigned accounting responsibilities.

Co-sourcing has two primary benefits:

DOWNLOAD WHITEPAPER: How Co-Sourcing Is Shifting Views on Fund Administration

Changes for a more collaborative and secure future

The pandemic-related necessity of remote work brought challenges around collaboration, security, and processes to the forefront. Even as some teammates return to a traditional office setting, now is still an opportune time for GPs to reassess their current systems and operating infrastructure.

Moving to a cloud-based operating platform provides innumerable benefits to fund managers who are struggling to keep pace while using spreadsheets to support their back office.

READ MORE: 5 Reasons Why Private Capital Firms Are Moving to the Cloud

As one Allvue client stated in a recent webinar: “I couldn’t imagine how we could have worked through the current situation with the 8 to 10 spreadsheets we were using a few years ago.”

Allvue’s robust and flexible set of investment software solutions breaks down barriers, informs key stakeholders, and arms you with unparalleled investment intelligence. Supporting functions including fund accounting, management and monitoring, reporting, and more, Allvue offers an adaptable investment software system that frees you to define your future. Get started now.

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