K-1 Reporting for GPs – From Paper to Portal

As our daily work (and personal) lives are turned upside down from the effects of the Coronavirus, fund managers and administrators still soldier on.  Meetings still need to happen (albeit virtually!), LP’s questions must be answered and investor reporting still needs to be completed.  With CFOs getting pulled in so many directions right now, it’s worth taking a look at how K-1 reporting, always a challenge regardless of circumstances, can be made easier with an integrated technology platform.

There are three main processes to deliver K-1 statements to investors:

  1. a system to calculate and generate the document
  2. a way to keep track of investors and contacts
  3. a mechanism to securely deliver the statements.

There are numerous ways GPs and fund administrators have configured this process over the years using various pieces of technology.

Generation

For many years, MS Excel has been used as a defacto fund accounting tool and subsequent data storage and calculation engine to generate cap calls, distribution notices and K-1s (sometimes in conjunction with the mail merge capabilities of MS Word for better formatting and output).  And it worked – for a while.  When GPs grow their assets and double and triple their investor base though, Excel begins to breakdown as a fund accounting and reporting tool as errors and time to completion begins to increase (Allvue has many clients that can attest to this).  The next progression for this part of the process was to install industry-agnostic accounting packages like QuickBooks or Sage.  This was a marginally better process as data was now in a structured format, but given that these accounting packages are not designed for the private capital industry, bespoke configurations were necessary, while still not being able to capture all the specific processes to generate K-1s and the like.  The advent of specific PE fund accounting platforms have gone a long way to alleviate these issues, particularly when they have integration capabilities with other parts of the K-1 document delivery process.

Investor Management

Producing K-1s is only half the battle for GPs.  The other half is how to actually get said document to the right LP, which can become a particular challenge when there are hundreds of investors across numerous funds and vehicles.  What once entailed stuffing envelopes with a trip to the local post office (and yes, some investors still prefer to receive their statements this way), GPs moved onto email and other tools like MS Outlook to manage investor communications.  Again, certainly progress, but still not quite optimal.  Next came full-fledged CRMs, which have more features around customization and workflows, but not all CRMs are equal, particularly in how they integrate with the other processes and solutions, most notably in the use of an investor portal.

Delivery

Before GPs realized the full benefits an investor portal can bring to both GPs and LPs, Virtual Data Rooms (VDRs) were used as a portal-substitute in delivering documents to investors.  Having their genesis in the M&A world, VDRs were re-purposed for fund managers to send cap calls, distribution notices and, yes, tax statements to their LPs.  VDRs, however, lack many important features a dedicated investor portal has, perhaps most importantly the lack of integration capabilities between the Generation (fund accounting) and Investor management (CRM) processes.  (For more about why VDRs are sub-optimal for investor communication processes, see our other piece: Why VDRs are a poor choice for LP reporting.)

Why is integrating the three processes described here so important for tax and other types of reporting?  Because the data sharing ability between various applications (and processes) is the key that drives efficiency in both the back office and IR.  Without those data touch points, Excel inevitably becomes a data transport mechanism (think export/mapping/import) between systems, which usually leads to broken links, errors and lateness.  With more investors, entities and funds, comes more complexity and reporting volume.  A “siloed” application infrastructure, where data cannot be passed easily from one system to another, will certainly struggle to keep pace.

With the amount of responsibilities the back office has, particularly these days, fund managers are looking to automate as much of their reporting as possible.  K-1 and investor reporting are no exception.