PARTNER CONTENT
By Dinesh Shashtri
OpEff Technologies
Investment managers today expect more from their service providers, driven by the need to keep operations lean. To meet these demands, many are achieving success by: using technology to automate back office and portfolio reporting functions; and leveraging outsourced services to fill gaps where technology is cost-prohibitive or inadequate.
This report examines the state of technology in the private equity industry, focusing on software applications, automation, and outsourced services that help managers improve operational efficiency and meet investor demands. Twenty years ago, it became almost essential to outsource fund administration to serve as a gatekeeper for investors. Later, managers often set up in-house accounting teams to run shadow accounting alongside their fund administrator. This setup raised costs and made it harder for new managers to enter the space. However, the advent of new technologies has made fund management more cost-effective, allowing emerging managers to focus on proving their track record and raising funds. Despite these advancements, one major gap remains: the lack of technology to fully harness the power of investment and investor data.
1. Deal flow tracking, investment accounting, portfolio monitoring, and liquidity management
Increasingly, managers rely on fund administrators to handle back-office accounting and reporting. This has freed up back-office staff to support the investment teams. Portfolio monitoring tools are used to track investments, covenants, and overall performance. Financial Planning and Analysis (FP&A) systems allow managers to estimate performance and track actual returns against projections, enabling better liquidity management.
There is still a need for managers to “shadow” their fund administrator, particularly to meet investor expectations. While smaller managers may not require it, larger firms—especially those attracting institutional investors—are often questioned about their shadow processes. The Investment Book of Records (IBOR) system is considered sufficient for many allocators, but running an Accounting Book of Records (ABOR) with a detailed general ledger may still be needed for more complex instruments. OpEff’s Perfona offers comprehensive portfolio management and fund accounting systems that simplify shadow accounting, with IBOR and ABOR models.
2. Investor allocations, distribution waterfalls, and investor reporting
Investor allocations and distributions are typically handled by fund administrators, or in some cases, by using spreadsheets. As funds grow more sophisticated, systems are required to track investor capital, calculate returns, fees, and allocations, and compare them with the administrator’s data. Spreadsheets, while functional initially, become unsustainable as the firm scales. Waterfall models can also become complex as new investor classes or co-investment vehicles are introduced.
To address these challenges, firms need systems that centralize investor information, including commitments, capital calls, distributions, and liquidity forecasts. OpEff’s Perfona is an all-in-one web-based solution that consolidates these investor functions, eliminating the need for multiple systems or in-house infrastructure. Visit www.opeff.com to learn about how to automate investor management functions.
3. Year-end audits and tax accounting
Tax accounting remains a significant concern for private equity managers. Without a dedicated system, firms rely on tax preparers for quarterly estimates and year-end tax filings. However, the future of private equity fund operations demands real-time tax reporting, including estimating tax liabilities and managing tax implications of trading activity.
In private equity, this involves converting book accounting records into tax accounting, recalculating waterfalls on a tax basis, and allocating fund income to limited partners (LPs) and general partners (GPs). Perfona’s tax accounting module allows managers to track tax liabilities throughout the year, eliminating the need for last-minute tax season scrambling.
4. Third-party data and artificial intelligence
Third-party data, including feeds from fund administrators, prime brokers, and other service providers, is often underutilized due to its complexity and volume of data. Managers typically struggle to integrate these data sources into their operations, unless they are tech-savvy enough to pull the data manually.
AI is changing the landscape by helping firms collect, analyze, and act on data from multiple sources. Advanced AI models can identify patterns, detect anomalies, and derive insights from both internal and external data. Firms with larger budgets can now leverage these technologies to optimize their investment strategies and operations. OpEff’s Perfona integrates data feeds with ease and has AI-driven tools for portfolio monitoring and administration in development.
5. Other back-office areas
Automation in other back-office functions is also critical for private equity firms. This includes generating daily portfolio snapshots, monthly performance reports, liquidity forecasts, and ad-hoc investor reports. Manual reporting is time-consuming and error-prone, especially as firms grow.
Automated solutions for GP accounting, incentive allocations, and preparation of unaudited financial statements for year-end audits can free up significant resources. OpEff’s Perfona includes a suite of built-in automation features that streamline these tasks.
A leaner approach to operating a fund
Achieving high operational efficiency while maintaining a solid back office and investor satisfaction requires a lean approach. In our opinion, here’s what you’ll need:
- All-in-one portfolio management system: A system that can manage investors, deal flow, and portfolio FP&A.
- Fund administrator: Admins can handle trade, position, and cash reconciliations, as well as year-end financial statements.
- Outsourced back-office service provider: Outsource repetitive tasks like NAV and investor reconciliations, monthly and quarterly reports, and year-end financials.
- Auditor: An external auditor who handles audits, K-1 filings, and tax withholding estimates.
- CFO or senior role: A dedicated CFO or senior partner to oversee back-office operations and daily communications with allocators.
With the right technology and outsourcing model, private equity firms can reduce overhead costs and focus on investment decisions and client relationships, improving operational efficiency.
About OpEff Technologies – Founded in 2012, OpEff Technologies has developed a revolutionary portfolio accounting and investor waterfall system that also contains several operations automation tools including automated report delivery, reconciliations, data warehouse, and AI driven controls processes. The entire technology platform is available to private equity firms, hedge funds, venture capital firms, other institutional investors, and is used by OpEff’s separately managed fund administration division.
