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Back-office technology integration has captured the attention of GPs, driven by increased investment in alternative assets, as well as the demand from investors for more readily available investment and accounting details. Whether it’s to answer ad-hoc questions from investors, or to allow portfolio managers to validate theories and make investment decisions with up-to-date, accurate data, GPs have begun to look for fully-integrated technology solutions to address these needs.
Events such as the pandemic only sharpened their focus, as work from home measures gave GPs pause over their existing technology set up. With teams spread out geographically across multiple time zones, web-based applications could make collaboration easier; it became crucial to unite front- to back-office functions with a cloud-based system that would supply one source of truth. Investor demand for access to more data and transparency – especially during the Covid lockdown – also reached a fever pitch, further highlighting the advantages of all-in-one integration.
Having integrated information from back-office systems would prove critical to meeting these demands from LPs, and the increased scrutiny of private capital from regulators along with compliance issues has given new life to the data accessibility trend.
In terms of technological sophistication, the majority of GPs realize the value of technology to support investor reporting needs, as well as its role in creating operational efficiencies. With many PE funds crossing over into the credit space, they recognize the need to expand their technology to service new asset classes as their portfolios become more and more complex.
For example, as the popularity of Private Debt increases, GPs are no longer able to manage all of the complex tasks associated with this asset class – interest receipts, loan notice issuances, changes to payment structures and many other complicated calculations can require updating on a weekly or even daily basis, putting these tasks beyond the reach of manual data input, while increasing the risk for manual error.
While smaller GPs had been able to rely on Excel to track investments, more recently there’s been added scrutiny around data, with LPs wanting answers quicker than in the past. However, as GPs grow, it simply becomes unmanageable, or impossible, to track investment details in Excel. At a certain point, GPs must house data in a system that can scale to their business, consolidate data, and normalize investments in a consistent format.
For some GPs, however, back-office integration is something they don’t see as urgent, and the playing field may become more unfavorable over time for those who choose to ignore technology upgrades.
Staying on outdated technology or continuing to rely on Excel as the business grows only creates more busy work for the operations team. Their ability to create integrated reporting views of data is more error prone, and highly reliant on individual contributors.
The main challenge GPs will face is that more work and higher headcounts will be required to support integrations, either manually or by building costly integrations with different vendors. For these GP’s, technology’s main value may be its ability to provide everyone with a single source of data, freeing up teams to perform value-added activities, thus saving time and money.
Lastly, the longer a GP waits to integrate, the more complex and costly the implementation is likely to be. As one of our clients put it, “We were very fortunate. We implemented Allvue at the start of our second fund. I recommend the same for any fund – onboard technology as soon as possible. The longer you wait, the more funds you launch, the more difficult it becomes to implement technology.”
In the interim, GPs may face the reputational risks of having outdated systems, being slow to answer questions, or worse yet, providing inaccurate answers.
Managing disparate solutions or multiple spreadsheets can be time consuming and complicated. Instead, GPs are increasingly seeking to create a frictionless back office that can manage the complexity of general ledger and investment accounting activity in an integrated fashion.
For GPs looking for value in upgrading their technology, it comes in many forms and can transform workflows across all teams.
An integrated solution allows GPs to manage all ledger activity on a single system – investment accounting, cash flow, general ledger, sub ledgers, investor relations and other data is entered once before being processed and shared throughout the system. This also eliminates the need to manipulate data to produce consolidated reports. Information is gathered, approved, and distributed using a standardized workflow for utilization across all teams.
Further, upgrading to a scalable technology reduces reliance on headcount as GPs raise more funds. Functional areas that will benefit include investor reporting (for capital calls and quarterly statements) and loan servicing, which is typically reliant on human capital, and where better technology can create more efficiency and data accuracy. Having a cloud-based platform also allows teams to process data and access information from anywhere, which as we have seen, has proven invaluable in the last year.
With ESG investing ascendant in Europe and US investors beginning to catch up, measuring multiple KPIs – across asset classes, industries, company types, etc. – will be no easy task for spreadsheet or single-point technology users.
While most of the KPIs other than profitability/performance measures tracked for ESG investments are likely best placed in the front office, back-office teams will require accurate data on a timely basis to marry non-financial KPIs to actual results in order to precisely evaluate investments. Implementing a portfolio monitoring solution will allow portfolio company data specific to ESG metrics to be captured. Overall, back-office integration creates multiple efficiencies around combining data for reporting to stakeholders and investors.
The main trend that drives GPs’ interest in back-office technology has been and will continue to be a demand on the part of investors for more transparency in reporting, with investors wanting more insight into the reported figures.
Fully integrated systems with superior data management and collaboration capabilities, along with investor/borrower portals that preclude the need to email documents, notices, and invoices will take center stage as GPs seek to optimize their technology to fulfill investor demands.
For these GPs, having superior technology in place will allow more time to be spent on providing thoughtful analysis of data that can be easily consumed by stakeholders.
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