Excel Increases Operational Risk for GPs

By: Kimberly Kale

Head of Product - Equity
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The COVID-19 pandemic is forcing the private equity and credit markets to rethink their processes. The new work-from-home paradigm is shining a light on the strengths and weaknesses in many GPs’ back-offices and related processes – especially those reliant on Excel.

The strong fundraising environment of recent years has seen many fund managers significantly grow their assets and investor base. However, the resulting increased workflow means many spreadsheet-based back-office teams are questioning the ability of their current systems to accommodate new information complexities.

Excel has hit a brick wall. It is no longer fit for purpose and unable to keep up with the complex entity relationships, tax reporting, and LP communication requirements many managers are now facing. Remote working is highlighting the collaboration and security deficiencies of the Excel-based operating model. The fact is, 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.

Collaboration

Taking the issue of collaboration first, using Excel leaves back-office teams unable to:

A frequently used workaround is version control (waterfall-v1.xls, waterfall-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.

Data Control

Quality control and data integrity is another major issue that’s inherent in any spreadsheet-based accounting and reporting process, especially as the amount of data grows. The lack of a ‘single source of truth’ amongst data sets inevitably results in errors that are difficult to identify and rectify.

Perhaps nowhere are these challenges more apparent than with the abundant information requests LPs are now lobbing into their managers requesting updates on potential cashflows, lines of credit, portfolio company statuses and the like. With the current volatility on the public market side, liquidity concerns are running high. Institutions are looking for as much clarity as possible from their private capital managers. Not an easy task when data is held in disparate spreadsheets or systems.

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

Security

Security is another important consideration when looking at operational risks in the current working environment. The more email is used as a vehicle to share information, the more exposure there is to bad actors looking for vulnerabilities, and private capital is no exception. Sensitive data, such as tax IDs, bank account information, portfolio company financials, etc., shared over unsecure “networks” such as email, exposes both GPs and LPs to immeasurable risks should such information fall into the wrong hands.

For GPs that use an administrator, there can be an enormous amount of information passed back and forth from GP to admin, affecting both collaboration challenges as well as security exposures. A potential workaround to the traditional GP/admin model is what’s called a ‘reverse out-sourcing’ or ‘co-sourcing’ model. In this scenario, the GP owns or hosts the fund accounting and reporting technology (including the data) and the admin securely logs into the GP’s software to support whatever accounting responsibilities they are assigned. This model has two primary benefits:

Looking to the future

While work-from-home and its challenges around collaboration, security, and processes will be mostly temporary, now is the perfect time for GPs to reassess their current systems and operating infrastructure.

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

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. Across accounting, management, reporting and more, Allvue offers an adaptable investment software system that frees you to define your future. Find out more at www.allvuesystems.com.