The numerous market headwinds, including inflation, rising interest rates and a looming recession can result in profitable investment opportunities. But private equity managers need to close deals quickly to take full advantage of these prospects, and access to the right technology can give them an edge in a highly competitive environment.
The numerous market headwinds, including inflation, rising interest rates and a looming recession can result in profitable investment opportunities. But private equity managers need to close deals quickly to take full advantage of these prospects, and access to the right technology can give them an edge in a highly competitive environment.
The PE industry typically relies on spreadsheets to store investor standing data, and to make subsequent capital calculations. This data is then fed into a mail merge word processing document and reviewed and passed back and forth between administrator and manager to agree. Further time is spent waiting for investors to wire in the funds, with the manual process of tracking who and who hasn’t paid being completed manually on spreadsheets. This process can take weeks, and as with any manual process, is subject to risk of error.
Jonathan Chapman (pictured), CIO of Opus Fund Services outlines the challenges many technology solutions present: “Existing technology to service closed-end funds seek to solve single specific tasks – waterfall calculations, investor portals, capital call and distribution notices, accounting engines. The user must attempt to stitch a patchwork of products together but always end up facing the same problem – moving data back and forth between different applications is inherently inefficient and risky. Ensuring data integrity is challenging and ultimately requires humans to push buttons and import/export data.”
Further, Chapman says that although many service providers boast extremely slick manager and investor dashboards, giving the impression that everything is automated, the reality is that these are almost entirely backfilled manually by people. “This opens a plethora of issues such as calculation errors, data integrity and timing, and cyber security concerns,” Chapman adds.
Tracking the receipt of funds is also manual. Chapman notes: “While the data may eventually show up on a flashy front-end portal, it is ultimately coming from an accountant who is manually extracting data from a bank website, typing in a spreadsheet, before importing it for a manager to view.”
The resulting risk is considerable – missing the closing date on an investment opportunity due to operational inefficiencies can lead to reputational harm for funds competing in a closely-knit community. This can lead to late interest charges, or the worst-case scenario, missing out on the deal altogether.
Chapman says: “Added to this complexity is that multiple opportunities can be available back-to-back or even concurrently, making tracking and accounting in a single system even more important. According to a report by Bain & Company, there is an estimated $3.6 trillion globally in “dry powder”, which means once the opportunities arise, there will be increased competition to deploy that capital as quickly and efficiently as possible.”
When investment opportunities are identified, speed is often of the essence. Being able to close on a deal quickly can make the difference between participating in the recovery or sitting on the sidelines. In BDO’s Fall 2021 Private Capital Pulse Survey, 48% of fund managers report increased competition from other buyers as one of their top challenges to closing deals.
Once a manager identifies a target, a cascade of important steps must take place. Investor registers are verified to ensure adequate unfunded capital can be called, calculations must be made to ensure the correct amount of capital is called from each investor, notices must be generated and delivered, and cash must be received and accounted for. All this must be done before any investment can be made.
As detailed earlier, many of the technology solutions currently catering to the closed-end fund market do not fully meet needs of PE managers nor do they reduce risk of human error.
An automated solution
In its endeavours to support the continued growth in closed-end funds, particularly those investing in private equity assets, Opus has developed a fully automated capital call solution which offers managers investor capital processing technology which is 100% online.
“Managers are faced with a perfect storm. Challenging markets, increased investor expectations, and less time to complete operational tasks. Rather than setting aside weeks to manage the capital call notices, managers can complete the entire capital call process, securely, online, and in seconds,” says Chapman.
This solution allows managers to generate their entire investor list, set the parameters for the call including amount, deadlines, and even request additional expenses, with just a few clicks. The system will instantly generate the capital call calculations live, and with a final click, notices are posted to the Opus Investor Portal.
“This all happens automatically and instantaneously, without any back and forth or waiting to reach a person to assist,” explains Chapman, “Because all data is sourced and calculated within a single system, it means that the relevant details of the capital call are automatically posted to all other accounting and operational areas, from the G/L, to the investor capital summary. Incoming wires are automatically matched, allowing managers to see how much capital has been received to date for any given call.”
In addition, investor notices are housed within the same application that they were generated in, never leaving the secure Opus portal. Chapman concludes: “This is important as cyber criminals are becoming increasingly sophisticated and have impersonated administrators and fund managers, emailing fake capital call notices to investors with illicit wire instructions. By only allowing investors to view the requests on the Opus secure portal, everyone can be confident the request is legitimate.”
Jonathan Chapman, CIO, Opus Fund Services – Chapman joined Opus Fund Services in 2010 and currently serves as Chief Integration Officer as a member of the senior management team. He has held a variety of roles during his tenure at Opus, building teams in Portfolio Accounting, Client Solutions, Implementation, and most recently a dedicated Closed End Fund and Private Equity group. Prior to joining Opus, Chapman worked at Bank of America Merrill Lynch in the Global Middle Office, as well as various fund administrators. He is a Certified Public Accountant and lives in the suburbs of Chicago, IL.
