Private equity is thriving. After an initial slowdown in fundraising, the sector showed exceptional resilience, with a rebound in deal-making and $320 billion invested worldwide in just the second half of 2020.1 The global health crisis underscored PE’s growing structural importance to the economy, as fund managers helped their portfolio companies weather the storm with infusions of capital and management expertise.
With the private markets attracting larger amounts of capital and gaining greater influence in the global financial system, regulators have taken notice. Private equity firms have had to adapt to a changing environment and elevate their operational standards, particularly with its complex fee terms and return calculations that present substantial operational issues.
Accurately allocating profits, losses, expenses, and tax impacts among every investor over the lifetime of a fund entails specialized mix of expertise and technology from deal management to portfolio and investor accounting and reporting. Demand for greater transparency and standardized reporting simply compounds these challenges. Changing investor expectations raise three major issues that PE managers need to address:
- Look-through to underlying investments: Limited partners expect greater flexibility on the part of general partner, as a result, managers now offer options for investors to opt-out of specific fund investments. To make that possible, firms need the capability to provide investors with detailed look-through to the underlying assets, enhancing transparency into portfolio composition and the different companies’ contributions to performance. This requires the ability to seamlessly integrate investment and investor accounting within the technology infrastructure.
- Managing multiple closes: The life of a private equity fund involves multiple rounds of investments. Whenever new investors come in, the fund must rebalance all its profit and loss since inception, as well as capital calls and distributions to investors. Without the right system functionality, calculating those rebalances can be a tedious, manual process with a high risk of error.
- Reporting: Investors today demand more detailed and more frequent reporting that offers greater transparency into a fund’s strategy, holdings and returns. Many investors may also have specific requirements they want included in their reports.
A private equity firms management, accounting, and reporting on its funds is essential to client satisfaction and regulatory compliance. It’s also increasingly important to their ability to compete and grow. Resilience and efficiency through automation may well determine how well a firm can manage risks and drive profitability.
To learn if your firm has the right system functionality in place, read our whitepaper, or request a demo.
Sources:
1. Skornas, E.; Suarez, E. S&P Global Market Intelligence. 2021 Global Private Equity Outlook, S&P Global. (2021, March 2). Retrieved from:
https://www.spglobal.com/marketintelligence/en/news-insights/research/2021-global-private-equity-outlook
