Fund Administration Special
Meet the panel
Ludovic Legrand is the head of the asset servicing market for the EMEA region at eFront, a leading software solutions provider for the alternative investment industry.
Wayne Filin-Matthews is head of software strategy at Crosslake Technologies. He has over three decades experience in the IT industry and a proven track record in maturing architecture practices across the IT lifecycle.
Fleur Hicks is managing director with OneFourZero, a leading digital global diligence agency, and has spent more than 17 years working with private equity firms and blue-chip brands in the B2C and B2B sectors.
What’s the best way to optimise data exchanges between GPs, LPs and fund administrators?
Ludovic Legrand: Traditionally this has been a significant challenge for the private equity industry, largely due to the lack of formalised market best practice to manage non-homogeneous data in a consistent manner. However, the private equity market has really evolved in recent years to meet investor expectations. One example is the increasing adoption of Institutional Limited Partners Association templates and guidelines, particularly on calls and distributions, capital account statements and fees. This helped push market best practices to a much higher level.
The most advanced fund administrators already offer a client portal such as eFront Investment Café to their clients. Populated by a rich data set, portals allow fund administrators and GPs to provide timely, quality data so that LPs can drill down into their portfolio. Via dashboards that have filtering functions to enable the export of custom data sets, portals provide an excellent way to optimise data exchanges and offer added-value solutions to all stakeholders.
Can technology-driven data ever replace consultants in the diligence process?
Fleur Hicks: The rapid evolution of digital technology now allows us to scrape data in real time. AI provides machine learning that can help disseminate and filter vast volumes of information ever more accurately. An application programming interface (API) feed allows us to access all of this ready-filtered and categorised information immediately in formats that can be exported to reports at the touch of a button.
Technology can be brilliant. But it is not infallible. While it can make a consultant’s life a lot easier, and provide robust information, there can be no replacement for the contextualisation of data. Nor the translation of layered data sets into actionable insights.
There is nothing that can take away from expertise, real-life experience, education and knowledge. And data cannot make an informed investment decision with some gut instinct thrown in, no matter how complex the algorithm. So consultants can and will never be replaced, but technology should be embraced as it can make the process a lot easier and provides much more robust data.
What are the most important area to cover in technical due diligence?
Wayne Filin-Matthews: It is critical to understand the capabilities of the architecture and whether it supports the business strategy and investment thesis. Shortcomings can take many years and millions of dollars to resolve, negatively impacting ROI. To reduce this risk the critical questions to ask during diligence are: Does the architecture scale up to support expected growth? Are there integration points (APIs) that allow for easy integration with future acquisitions and third-party products?
The level of customisation and effort to upgrade customers to newer versions is another crucial issue, as is the cost to maintain the product and whether you can effectively add new functionality: how up to date are the technologies used and how easy is the platform to replicate? You’ll also want to consider the risk of disruption from new technologies and business models and, of course, issues related to cybersecurity and data protection.
The ultimate issue is whether the business can grow effectively without significant infrastructure investments and how reliable the overall system is: how does it rate in terms of resilience, security, performance, capacity and scalability, and how is it monitored?
Is digitisation changing the way diligence is performed and how portfolios are managed?
Fleur Hicks: Yes, absolutely. Not only are our clients using technology-driven data for diligence and strategy, but the digitisation of business is being discussed company-wide. Whether it is related to operational efficiencies or e-commerce, or for acquisition processes or to improve management processes, technology consultants are being employed to tackle a vast array of issues.
Take the example of retail operations. This has implications on a portfolio company level when a network of stores integrates its in-store shopping experiences with app-based shopping, which requires a robust digital technology solution to manage stock, tills, fulfilment and live marketing.
But it also starts to impact at a fund level as the systems are integrated with finance and commercial management. Technology can add to efficiencies and improve the customer experience, and thus must form a key consideration in all the diligence processes as a growth opportunity.
How can LPs conduct value-added risk and performance analysis?
Ludovic Legrand: We find many LPs want to conduct proper risk and performance analysis, but this usually remains wishful thinking. In their defence, historically, a number of elements prevented LPs from conducting in-depth analysis that really added value. The accessibility to quality raw data was one of them.
In fact many GPs continue to periodically send their investor reporting in PDF format, thereby still making it difficult and labour intensive to access the raw data. The granularity and consistency of data that LPs can get varies significantly from one GP to another.
In response, GPs have considerably increased their investment in technology in recent years. Today, the vast majority of GPs offer access to their PDF reporting through an investor portal, and the most advanced GPs understand that LPs are also expecting to interrogate this reporting dynamically by allowing LPs to drill down into their portfolio data through dashboarding and custom reporting functionalities. Furthermore, LPs are also looking to export this data to feed their own centralised reporting systems, to conduct in-depth analysis such as cashflow forecasting, performance contribution and Value at Risk.
What’s the best approach to modernising legacy systems?
Wayne Filin-Matthews: There really is no ‘silver bullet’ here. Technology leaders involved in modernising technologies and applications need first to evaluate legacy systems, looking at both the business and IT drivers behind the upgrade. Choose an approach with the highest effect and value while also considering the cost and risk.
On the demand side, the main drivers are business fit, where new requirements cannot be met by the current application, and business value, where the current system lags in terms of data and the support it offers. There is also the question of agility, where the system is unable to keep up with the pace of external changes and therefore has both costs and associated risks.
Supply side drivers include cost and complexity. Is the cost of operating and changing the current application simply too high in relation to its value? Is the sheer complexity an issue for users? Risk is also a key consideration and can be a compelling reason for upgrading the architecture.
How does a GP decide if a new tax tool is worth the cost? Crowe Horwath’s Rebecca Jordan and Will Ault look at the possibilities
Given the sheer wealth of technology dedicated to the tax process these days, what are some of the most promising tools out there?
Will Ault: For private equity firms, especially larger GPs required to report to multiple jurisdictions with a wide variety of investors, there’s a big opportunity with the tax compliance and filing packages, and most of these firms use some type of filing software.
But there are new areas where providers have made real advances. For one, they’ve become quite good at tracking the depreciation of assets, which is a thankless task that still needs to be done. Many software packages will have this option as part of their offering. Then there’s technology to track and identify R&D credits for those companies with research and development divisions which can yield substantial rewards.
We still find plenty of companies using Excel spreadsheets to calculate their quarterly tax provisions, when the reality is that the technology out there can make a real difference. And lastly, some of the biggest improvements have been in automating tax processes.
Even if a GP is keen to employ some of these new tools, what are some common mis-steps they may make in implementing them?
Rebecca Jordan: In my experience, it’s easy to lose track of the pain point that prompted a client to invest in that technology in the first place. These are powerful systems that can do a lot of different things, but it’s key to remember the pain points this new system was meant to address, and see if that new offering has improved them.
WA: Too many GPs are willing to let vendors off the hook when it comes to post-implementation testing of these new offerings. There should be tests by experts after the implementation to ensure that the system delivers on its promise before they agree to that three-year licence.
What are the tax issues that technology still can’t address?
RJ: By its nature, tax compliance can involve a lot of repetitive work and automation can do a lot to relieve that burden. But when there’s a need to interpret data, for instance analysing the terms of a partnership agreement, it’s time for an actual expert to step in and make that judgment call.
WA: GPs should not expect the technology to replace human review of new transactions and new situations that the technology can help identify. In an ideal world, that new technology is set up with expert tax counsel, so that the tool reflects the unique priorities and preferences of that firm. These are sophisticated tools, but they also need to be tailored to a firm’s given situation. No matter how automated a process gets, there will still be anomalies and those are when that expert steps in and counsels on how best to handle it.