Management Company Accounting – What Do GPs Really Need to Get the Job Done?

By: Manuel Villavicencio

Consulting Director

Management Company Accounting – What Do GPs Really Need to Get the Job Done?

Note: Director of Consulting Services, Manny Villavicenio, leads the team responsible for Allvue’s Management Company Accounting solution.  His profile can be found at:

There are three things in life that will never go away: taxes, information demands from investors and the need for GPs to manage their own firms’ financials.  While there have certainly been advancements on the fund accounting side, many GPs are still reliant on generic accounting solutions to manage their own books.  The general experience is that it’s sort of like trying to put a square peg into a round hole – it might fit eventually, but it’s going to take a lot of smashing (and frustration) to get it in there.

The fact is, programs like QuickBooks, Sage, SAP, etc are just not made for the private equity, venture and real estate industries.  Investment management in general, is a world with very specific idiosyncrasies with structures, reporting and data flows that are very different from other types of business service industries. For GPs, though, generic solutions like those mentioned have been the only option for their management company.  That has now changed with Allvue’s Management Company Accounting solution.  Built specifically for private capital fund managers, there are a number of important attributes that distinguish a PE-specific corporate accounting solution from a general, multi-industry accounting product:

Expense allocations and reimbursements (recharge)

Unlike other types of businesses, the treatment of expenses needs to be reported down to investors, including how are they are being allocated to the correct fund, investor and portfolio company.  The challenge becomes how to do this efficiently, given  that different GPs have different allocation methods.  Furthermore, once allocated, the numbers need to make their way onto the funds’ accounts, allocated down to the investor level for capital account reporting.  Setting the timing of reimbursement is another consideration.  With Allvue’s Corporate Accounting solution, the process is fully automated, the expense allocations are calculated, posted and generate intercompany entries on both management company and fund books.

Consolidations and intercompany processing

With fundraising hitting a new high watermark this year, many fund managers have clearly expanded their businesses – often attracting new investors from beyond their own domiciles.  While certainly a positive, there are clear implications with new currencies, taxation, and reporting requirements.  As GPs set up more entities to address these needs, challenges arise in being able to get a holistic view of their operating results while still being able to drill down into key areas of analysis.  Specifically, intercompany payments and tracking receipts made by individual management companies on behalf of other companies is a task generic accounting solution struggle with.  Ideally, a solution that provides functionality to bridge across multiple management companies for consolidated accounting, reporting and eliminations, and facilitates processing of intercompany transactions between one or more management companies is what’s going to be required.

Multicurrency and FX functionality

Having multiple international management companies means having to deal with foreign currency transactions, not to mention reporting requirements that are both local and foreign.  Looking up exchange rates manually for multiple currencies across numerous time periods can be tedious and error prone.  A solution that eliminates manual FX lookup by feeding in historical exchange rates from market data providers can be an enormous time saver.  GPs should have multi-currency accounting and reporting capabilities, with automated FX adjustments for non-local currency balances, as well as full financial statement translations, all supported from a FX data feed.

Multi-dimensional chart of accounts

Have you ever asked yourself: “What were our prior year operating expenses by department and office location?” or “What are the explanations for the variances between my actual and projected monitoring fees by portfolio investment?” Non-PE specific accounting programs can, of course, track expenses in what would be considered traditional corporate categories.  Where they begin to fall short is in the nuances of the private capital markets. Multiple management companies, across multiple funds, portfolio companies and investors is where, as they say, the “rubber hits the road,” and it becomes increasingly imperative – and difficult – to understand the factors that drive results given the layers of complexity involved.   Allvue Corporate Accounting’s multi-dimensional chart of accounts allows PE Managers to set up a streamlined set of GL Accounts with unlimited dimensions to track attributes such as deals, funds, sectors, office locations, departments, and anything else needed to understand and analyze operating results and budgetary variances in depth.

Implementation and support

Perhaps the biggest difference between generic accounting solutions and a PE-specific accounting provider is when the implementation and ongoing support ensues.  The question becomes this: when a GP is looking to implement a management accounting solution, does the solution provider speak “Private Equity?”  Meaning, do they understand the difference between a fund, portfolio company and an LP? Implementing any kind of software solution can pose challenges.  But when the software provider understands your business – and the goals specific to the private equity markets – the process can be made much simpler and less aggravating.