Automated Private Equity Fund Administration: Why and How?

insightsoftware -
September 29, 2021

insightsoftware is the global provider of enterprise software solutions for the Office of the CFO to connect to & make sense of data in real time, driving financial intelligence across […]

Looking at a flowchart.

At the close of every month and every quarter, private equity firms face the challenge to develop consolidated reports that bring together information from multiple companies within their portfolios. That means combining financial statements produced by different organizations, often with different ERP systems and mismatched charts of accounts. It’s a tedious process of fitting square pegs into round holes, harmonizing information from multiple companies to fit into a single, unified reporting framework.

This is a heavy lift for staff, requiring countless hours of manual copying and pasting, translating financial statements into a common format, double-checking the numbers, and producing the final reports. It often requires reminders and follow-up questions, working with staff members at the companies within each portfolio to get the information needed to produce definitive financial statements and provide the necessary reports to investors and regulators.

That list of subsequent filings is long, and it includes some complicated reporting tasks. For most PE firms, it requires updating cap tables and providing information for employee stock plans, filing tax remittances, and producing ASC 718/IFRS 2 compliance reports.

Coins And A Pocketwatch

Like most other types of businesses, private equity firms are most successful when they remain focused on the core activities with which they can add the most value. Author Jim Collins called this the “hedgehog principle.” Briefly stated, the hedgehog principle says that companies should focus on the one thing (or perhaps just a few things) that they can do better than anyone else. Everything else should be automated (if possible), outsourced to specialists (if it remains essential), or abandoned altogether (if it turns out to be extraneous).

Focusing on Value Creation

For PE firms, core activities revolve around fundraising and supporting their portfolios of existing investments. Success in private equity is about understanding the factors that drive business value, evaluating strategy, managing executive leaders, and striving for better performance of investments.

What does that mean with respect to administrative functions like reporting and cap table management? These are prime targets for automation and/or outsourcing.

As with many such endeavors, the decision to automate or outsource can lead to better results at lower costs. When limited to in-house development capabilities, for example, many PE firms might opt not to develop shareholder portals that could enable investors to view reports and download statements. With automation or outsourcing, in contrast, PE firms can provide these options as part of a standard, fully integrated offering. Shareholder portals increase value, improve investor relations, and eliminate much of the back-and-forth communication that otherwise needs to occur ad hoc.

Let’s look at some of the specific areas where automation and outsourcing can increase value for PE firms:

Equity and Stock Automation

When companies are just starting up and there are just a few key shareholders, equity management might seem like a simple thing. It can quickly get very complicated, though. Keeping track of multiple rounds of funding, varying classes of shareholders with different rights, equity compensation plans, and other complexities can consume vast amounts of staff time.

To make matters even more challenging, these tasks typically require a highly skilled analyst who understands the intricacies and anomalies of each company’s equity structure and participation. When questions come up, or when investors and participants want information about their shares, there might only be a few people who fully understand the information to provide clear, accurate answers.

By automating these processes, staff is relieved of the burden of managing complex equity information in spreadsheets. Shareholder portals make it possible for investors and equity plan participants to view accurate, up-to-date information about their accounts at any time, without any additional effort.

With a library of pre-built reports, administrators can eliminate spreadsheets with a simplified web-based platform for complete SEC, FASB, and IFRS calculations and support for various award types. This allows managers to streamline equity compensation processes, improve productivity, and tighten compliance across the entire organization. Pre-built reports also reduce the amount of time auditors spend understanding and reconciling reports.

Equity Compensation Plans

Employee Stock Plans can be especially challenging to administer. Small startup companies often begin by managing simple cap tables in Excel for a few key employees. It’s usually not long, though, before complexity creeps into the process. The company onboards new hires, issues stock options, and sees some employees leave the company as it grows. Equity administrators experience the complexity of managing a mix of vested and unvested shares and forfeitures and trying to respond promptly to inquiries from HR about available shares in the option pool.

If the company intends to issue performance awards–that is, options that are contingent on an employee’s achievement of specific pre-determined goals–then things can get even more complicated. Performance awards can be a powerful management tool, but if systems for equity administration are incapable of handling these kinds of complexities, they might not even be put on the table as an option.

Managing equity compensation plans can get more complicated when an organization expands geographically. If one of your portfolio companies is hiring in multiple tax jurisdiction, or is hiring people based in other countries, then the process grows even more complex and requires additional expertise, as well as triggering additional reporting and compliance requirements.

Automated equity management solves all those problems by offering a flexible system designed to handle complex scenarios.

Consolidated Financials

The initial step of producing monthly or quarterly financial statements can require a significant amount of manual effort involving data collection from portfolio companies, consolidating that information into spreadsheets, and harmonizing it to produce accurate and timely financial reports.

Reporting automation can streamline many of those tasks by integrating financial results from any number of group companies, translating them into a common format, and delivering clear, consistent, accurate results in much less time than it takes to produce such reports manually.

As a leader in financial reporting, planning, consolidation, budgeting, and equity management solutions for businesses of all sizes, insightsoftware helps private equity firms automate many of their complex administrative tasks, freeing up staff to spend their time on higher-value activities. Our team of equity administration experts is available to help. If your PE firm is seeking greater efficiencies, contact us today to discuss your needs.

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