In the fast-paced world of alternative investments, front-office activity gets attention. Fundraising and deal-making volume have increased significantly over recent years, and additionally, a single fund family often has multiple legal entities, hundreds of investors and dozens of portfolio companies to manage. While balancing these relationships captures most of the mindshare and sweat equity of investors, without an equal focus on effective back-office operations, the full measure of success will remain out of grasp. From my vantage point in ALTS FinTech, I appreciate how in-sync the front and back-office operations need to be.
There’s an equally complex and demanding environment to navigate for those who toil behind the scenes to execute fund accounting and reporting. A myriad of unique LP agreements, allocation waterfalls, increased reporting demands, and strict deadlines all collide to make the life of fund accountants and administrators increasingly challenging. While Excel remains a favorite tool of financial and accounting professionals, it’s time to augment the beloved software to extend its value dramatically and offer a competitive advantage in the financial world.
Those who want to stay ahead of the curve – and sane at the same time – need their technology to function in five critical ways.
- Front-to-Back Data Flow.
As interest in alternative investments continues to grow, so does the need for a single point of entry system for both front and back- office. If the data doesn’t flow from the back-office system to the front-office system, you will have to think about how to keep data accurate and up-to-date in two different places. Data flow is more important than ever to meeting the rising expectations of LPs in regards to reporting and transparency. In Dynamo’s global survey of LPs around the globe in late 2022, the top tech priorities were around better portfolio management, data automation, and exposure analysis. Data must flow quickly and seamlessly from the back to front to manage investor and investment relationships in an increasingly complex environment.
- Manage Unique LPAs.
Fund accountants live and breathe by limited partner agreements (LPAs), and rarely are any two exactly the same. These unique LPAs have to be modeled within the accounting system from client to client and fund to fund, and without end-user control over different reporting and transaction configurations, you will be relying on a vendor – and its timelines – every time a change is needed. Back-office teams with the ability to configure and customize these calculations in their software can pivot quickly and meet deadlines consistently when time is of the essence. What’s more, they achieve greater cost-efficiency when they don’t accrue ad-hoc vendor expenses with every new configuration.
- Enable Scalable Processes.
Most GPs and fund administrators have plans to grow. As this happens, the need to keep an expanding team working from the same playbook becomes increasingly paramount to success. If you can’t train internal staff and clients to use a single system and work from a single source of data, the inefficiency becomes exponential. Even the “simple” act of logging in and out of multiple databases and systems slows down operations, creates mental fatigue, and greatly increases the likelihood of confusion and mistakes. Quarterly reporting shouldn’t take weeks to accomplish. Smooth scaling often boils down to the implementation of sound, efficient processes that can be replicated without breaking down.
- Handle Complex Transactions.
Maintaining professionalism in the front-office is contingent on a back office that keeps the financial affairs well in order. A consistent process with checks and balances is no small task given the complexity of the specialized transactions that underpin fund accounting in the alternatives space. Managing allocation waterfalls, capital calls, distributions, and IRR analysis are complicated enough in themselves, but are compounded by the myriad of LP agreements that have unique requirements. When a complex transaction happens, it shouldn’t be an “all-nighter” for the back-office team to accomplish the task. When the CFO says, “we are doing a distribution today,” the finance team needs a system in place that doesn’t require everyone to cancel their plans for that evening.
- Slice-and-Dice Data Reports
You can put a lot of good data into your accounting system, but if you don’t have good reporting, it can’t provide real insights, quickly, in the way that’s needed today. Your data, essentially, is stuck, and the more time spent wrangling data, the less time there is to strategically act on it. Private equity, venture capital, and fund of funds back-office teams need more than standard balance sheet, income statement, and cash flow reporting. They need to easily extract insights across the volume of structured and unstructured sources and examine views that illuminate performance, risks, and opportunities. Each user should be empowered to create the custom reports needed to satisfy client requests and better manage their business. Investor family rollups, cross-fund reporting, consolidated and drill-down views, and fundraising package data are just a few examples of reports that should be easy to access and create.
It’s the job of fund accountants and administrators to juggle many balls while remaining balanced, flexible, and strategic in a complex and dynamic environment. Hanging onto outdated approaches simply won’t work anymore, even for the most committed professionals. Fully utilizing new FinTech not only helps to simplify complexity but unleashes invaluable new insights that drive better processes and results.
Hank Boughner is the CEO of Dynamo Software, where he leads its management team and defines the long-term vision and strategy. Engage with Hank on LinkedIn.