USING TECHNOLOGY TO DRIVE PRIVATE EQUITY PERFORMANCE MANAGEMENT

Henri Wajsblat, Head of Financial Services, Anaplan 

Over the last few years, we’ve seen regulatory changes and market volatility impact the business models of financial services firms, particularly private equity funds and investors. For example, private equity funds have had to adjust to new regulatory requirements including the Foreign Account Tax Compliance Act (FATCA), Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) and the Common Reporting Standard (CRS), to name but a few.

There has also been scrutiny from investors around the deal lifecycle, investment returns and valuations and performance fees. In addition, the industry has embarked on a transition towards standardising the data and reporting requirements that different companies use. In this context, which ingredients do private equity firms need to plan for evolving regulatory burdens? 

Get the technology recipe right

In the past, private equity businesses have been quite slow to adapt to change and embrace new technologies. This might seem surprising, since many firms in this industry are small (in terms of workforce) – a characteristic usually associated with being receptive to new ideas. A key reason for this is the software solutions that serve the financial services industry, which tend to focus on one or two core functions and therefore provide no solution at all in other important areas. Furthermore, most are especially weak when it comes to planning and modelling. Therefore, an investment in technology can still fall short of expectations, because its effects aren’t felt across every department of the business. A combination of technology solutions is required to transform business operations for private equity funds.

It’s one thing to use different technologies, but another to integrate them correctly, which can be particularly costly and complex for smaller private equity businesses. To ease this process, cloud technology is reducing the need for complex data warehouses and internally supported IT environments, enabling more efficient and effective reporting and analysis, which is accessible and customisable by individuals within the business. In particular, this accessibility given to multiple parties from the c-suite down to the team level, breeds a culture of transparency. This is a significant factor at the top of the agenda for CFOs today, as investors and regulators demand more granularity around fees, expenses and carry calculations.

Take complexity out of the equation

With such a complex regulatory web entangling private equity, firms are under significant pressure to have access to accurate, up-to-date information at all times, rather than relying on irregular reports. This process has been given a new lease of life by the arrival of cloud software, which gives firms the mobility they need while serving as a tool for receiving information from multiple sources. This could be internal or external (such as administrators and operating partners), to allow private equity funds to model and evaluate cash flow data at the investment and investor level.

Once a firm solves a specific pain point, multiple other areas within the firm often find they can benefit from its use. Some of those include budgeting and cash flow forecasting, sales realisation modelling, carry modelling and compensation planning and approval. For instance, calculating expected returns to the fund and investors — carry or waterfall — based upon a set of agreed criteria is traditionally done in a spreadsheet. But, Excel is too rigid to forecast appropriately and often struggles to cope with complex waterfall scenarios. However, cloud-based modelling has proven flexible enough to cater to any of these set out by a fund. For example, global advisory firm Lionpoint Group is using a theoretical waterfall application on our platform to provide detailed insight for auditors, allowing them to tie calculations back to agreements, forecast effectively, and produce a variety of “what-if” scenarios for their clients.

From fund administrators servicing multiple funds (because it allows their clients to access and model cash flow information), to the private equity firms themselves, that need to manage a range of funds in-house, cloud applications are proving incredibly beneficial to the private equity sector in numerous ways. Firms are now realising that to avoid being hit by the constantly evolving market, they must remove the spreadsheet shackles on their processes and embrace a cloud-based system that will turn rigid, siloed financial forecasting and reporting into a powerful business tool. Those that do so can get a jump on the competition and new opportunities.

Henri Wajsblat, Head of Financial Services, Anaplan 

Over the last few years, we’ve seen regulatory changes and market volatility impact the business models of financial services firms, particularly private equity funds and investors. For example, private equity funds have had to adjust to new regulatory requirements including the Foreign Account Tax Compliance Act (FATCA), Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) and the Common Reporting Standard (CRS), to name but a few.

There has also been scrutiny from investors around the deal lifecycle, investment returns and valuations and performance fees. In addition, the industry has embarked on a transition towards standardising the data and reporting requirements that different companies use. In this context, which ingredients do private equity firms need to plan for evolving regulatory burdens? 

Get the technology recipe right

In the past, private equity businesses have been quite slow to adapt to change and embrace new technologies. This might seem surprising, since many firms in this industry are small (in terms of workforce) – a characteristic usually associated with being receptive to new ideas. A key reason for this is the software solutions that serve the financial services industry, which tend to focus on one or two core functions and therefore provide no solution at all in other important areas. Furthermore, most are especially weak when it comes to planning and modelling. Therefore, an investment in technology can still fall short of expectations, because its effects aren’t felt across every department of the business. A combination of technology solutions is required to transform business operations for private equity funds.

It’s one thing to use different technologies, but another to integrate them correctly, which can be particularly costly and complex for smaller private equity businesses. To ease this process, cloud technology is reducing the need for complex data warehouses and internally supported IT environments, enabling more efficient and effective reporting and analysis, which is accessible and customisable by individuals within the business. In particular, this accessibility given to multiple parties from the c-suite down to the team level, breeds a culture of transparency. This is a significant factor at the top of the agenda for CFOs today, as investors and regulators demand more granularity around fees, expenses and carry calculations.

Take complexity out of the equation

With such a complex regulatory web entangling private equity, firms are under significant pressure to have access to accurate, up-to-date information at all times, rather than relying on irregular reports. This process has been given a new lease of life by the arrival of cloud software, which gives firms the mobility they need while serving as a tool for receiving information from multiple sources. This could be internal or external (such as administrators and operating partners), to allow private equity funds to model and evaluate cash flow data at the investment and investor level.

Once a firm solves a specific pain point, multiple other areas within the firm often find they can benefit from its use. Some of those include budgeting and cash flow forecasting, sales realisation modelling, carry modelling and compensation planning and approval. For instance, calculating expected returns to the fund and investors — carry or waterfall — based upon a set of agreed criteria is traditionally done in a spreadsheet. But, Excel is too rigid to forecast appropriately and often struggles to cope with complex waterfall scenarios. However, cloud-based modelling has proven flexible enough to cater to any of these set out by a fund. For example, global advisory firm Lionpoint Group is using a theoretical waterfall application on our platform to provide detailed insight for auditors, allowing them to tie calculations back to agreements, forecast effectively, and produce a variety of “what-if” scenarios for their clients.

From fund administrators servicing multiple funds (because it allows their clients to access and model cash flow information), to the private equity firms themselves, that need to manage a range of funds in-house, cloud applications are proving incredibly beneficial to the private equity sector in numerous ways. Firms are now realising that to avoid being hit by the constantly evolving market, they must remove the spreadsheet shackles on their processes and embrace a cloud-based system that will turn rigid, siloed financial forecasting and reporting into a powerful business tool. Those that do so can get a jump on the competition and new opportunities.