The love affair between private equity and Excel is no secret. From forecasting to financial modelling, there is nothing the finance director of a buyout house likes more than delving into a complex spreadsheet.
But Byzantine regulation, escalating LP demands, security concerns and competitive pressures all mean that Excel no longer suffices. The industry has had to abandon its fondness for formulae in favour of new technology, and nowhere is this more apparent than in fund administration.
“Technology permeates all aspects of modern fund administration,” says James Duffield of Aztec Group. “Ranging from day-to-day accounting and financial reporting to the organisation and co-ordination of board meetings and correspondence with investors, not to mention the multitude of task management, file transfer, banking and other systems in play too.”
The use of technology in fund administration broadly falls into two camps. First, technology is being used to automate operations that have historically been performed manually.
Fund administrators are developing or buying automated carry waterfall calculations. They are automating SWIFT banking transactions from banks into fund administration software and are streamlining book-keeping by adopting transaction-based accounting flows that move away from double-entry journal accounting. “These may not sound like the most exciting developments,” says Justin Partington of IQ-EQ. “But they are genuinely transformative.”
Automation is driven by the need for efficiency. The demands placed on the industry are proliferating and pricing pressure means these cannot be met by manpower alone. “You can’t just throw bodies at the additional demands being placed on fund administration,” says Iain Robertson of eFront.
Meanwhile, Neil MacDougall of Silverfleet Capital adds that in many key fund administration jurisdictions, human resources are, in any case, in short supply.
“I would characterise progress so far as gentle,” says Partington. “People are just dipping their toes in the water. But we are seeing new entrants being disruptive with nimble ideas. I think the pace of change and automation will only accelerate.”
As the heavy lifting subsides, the fund administration industry is having to reposition itself to reimagine the value-add it can bring. And it is here that the second technology push comes into play: data analytics.
LPs are demanding ever-more complex and detailed information about private equity performance and the deals that underly it. “This desire for more granular data is partly driven by regulation – MiFID Key Information Documents, for example, or greater transparency required out of the [Financial Conduct Authority’s] institutional disclosure working group,” says Michael Robertson of Aberdeen Standard Investments. “It also reflects the wider evolution of the industry – for example, a growing emphasis on ESG.”
“The biggest demands of technology that we see are around availability of data itself, as opposed to simple reporting,” adds Vistra’s Scott Kraemer. “It is about transparency and the ability to delve into different kinds of information on your own terms.”
Not only are investors demanding an ever-wider range of data points, but the timeliness and manner in which they demand to receive them are changing too. In the early days, quarterly financial statements used to simply be distributed as a PDF by email.
Gradually, providers started to offer clients dashboards and charts to enrich their reporting, but the information nonetheless remained static. Now investors are demanding real-time access through interactive online portals. They want to be able to interrogate the raw data.
“Investors in private equity funds are becoming more sophisticated,” says Melanie Cohen of Apex Fund Services. “They want to drill down, they want detail, they want more look-through reporting. We need to provide that without hiring an army of people, and technology is responding.”
“Even today, most players in the industry are still working with PDFs,” adds eFront’s Ludovic Legrand. “Investors have to take that data and manually input it. It’s completely inefficient. The next step is to dynamically connect data from underlying portfolio companies to GPs and ultimately LPs. A few fund administrators have started to do that over the last six months. I think that will be the big trend of 2019.” There is no doubt that the level of technology now in play is radically altering the dynamics of the sector. There is an ever-dwindling number of managers prepared to invest the time and money required to maintain cutting-edge in-house functions. Indeed, even smaller third-party fund administrators are struggling to keep pace, which has been a significant driver of recent M&A.
An army of agile platform vendors and app developers has also grown up around the industry. The growth in cloud-based systems in particular is making implementation and integration easier and cheaper, meaning there is less cost to taking on new technology and less risk of failure.
“More modern development tools mean that it is also much quicker for developers to build for niche markets,” says Sam Metland of Citco Fund Services. “That means more systems become available for our industry where it was not considered a big enough market in the past.”
Indeed, fund administrators have lapped up the plethora of technology solutions on offer and Excel is fast becoming a relic. The next stage is to consolidate platforms. In recent years, many administrators have accumulated myriad systems focused on different parts of the data lifecycle, as well as on different alternative asset classes. Furthermore, rampant M&A means individual firms have inherited disparate technology bases.
“A handful of players are moving away from silos to a vertically integrated system,” says Legrand. “It is where they need to be.”
Of course, technology will never entirely replace people in the fund administration space, particularly in private equity, where service levels remain the most significant selling point. Firms are, in fact, placing greater emphasis on the level and breadth of skill they employ in order to support the tech being put in place.
But, nonetheless, the use of technology is increasingly becoming a critical differentiator, and firms are digging deep to fund a wholesale digital transformation. A fund administration technology arms race is well underway.
Staying in control
As fund administration systems shift to the cloud and more and more data is shared, questions of access, ownership, security and control are being thrown into the spotlight
“It is difficult to define best practice,” says Aztec’s James Duffield. “But in our view, intensive education and awareness of phishing and other threats is imperative, as is having the right processes in place, particularly around identity verification and investment in secure technology, such as portals, as well as specialist resources.”
IQ-EQ’s Justin Partington adds: “We have worked with one of the Big Four to analyse all of our integrations. We have seen what’s happened with the Panama Papers, Paradise Papers and Lux Leaks. There are 30 to 40 different parameters that we look at, from physical security to data breaches. Alongside keeping on top of regulatory licences and permissions, it is the critical area that keeps your business.”