Management and Governance Considerations in PE Fund Reporting

By John Bova - MD in the Financial Services and Private Equity Practices at Wipfli LLP.

A case for Back Office meeting Front Office

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The back office of Private Equity firms (data, reporting and compliance for the Fund) and the front office (deal management and post close value creation management and measurement) have been the core operating functions in PE firms. The challenge has been that the reporting requirement or uses are different. The solution providers have tended to be different for the compliance areas (heavy on back office) and managerial accounting uses and efficiencies (front office and operating partner needs). Funds have watched an evolution within a PE firm of two tiers of solution providers, two stakeholder classes within a firm and resulting in two data sets and data governance structures that may be served by a single data set.

It may be cliché to say that the GPs, CFO and CCO of Private Capital funds are the ones who really need data for compliance accounting and LP reporting in a fund structure.?Well, the truth is they are the ones most connected to the valuation, quarterly reporting cadence and ultimate decision makers on fund management, fee classification and disbursements.?Disbursements in a private fund structure are simply different than any other parts of a PE Firm. This is part due to the stringent and complex classification of fees, expenses and the vital waterfall calculations and their impacts. Ever advancing governance and compliance requirements have required greater transparency and clarity in reporting. This will continue to drive the direction of a PE Funds operating strategy and data management.

For the past decade plus the private equity world has been messaged to and sold to for every possible outsourced service they could ever require, desire, and need for a future unknown. The focus of most of the solutions have been software to organize, disseminate and report on disparate and complex data sets.?Those sets evolve into reports or stages of reports to solve changing governance and transparency requirements.?While still needing more data and reporting for the front office. Unfortunately for PE firms the silo effect is more damaging than most enterprises. The lack of integrating into the other fund functional area evolutions do not occur.

For PE funds (an allocation that has gone through 20-30 years of maturation) had different evolutions and pressures and responses that create (mostly unknowingly) an unaddressed pile of unincorporated and integrated data into thinking. Would it be unreasonable to ask a vendor to unify a data lake and create reporting that suits both back and front office requirements? The cost and technology to unify data is here and many reporting models and BI tools can take templated date through API to pull in data to a reporting structure that considers portfolio company cash position, valuation, EBITDA growth, ROI on CAPex, Operating model of portfolio company and any and all needed ratios to serve in reporting needs. PE Funds have added in-house technology teams to serve fund requirements but rarely are asked to create scale solutions for operating excellence or combined portfolio company month end reporting clarity. Why?

For best practice sharing between the core stakeholders at the PE Fund; try bringing Fund CFO and Investment Committee Leader and Operating Partner together to define the art of the possible and where there is common need and sharing requirements. Large data silos will result in missed opportunities and compliance shortfalls.

The needs represent some of the most intriguing conversations in funds as to how we got here, what needs to be done and who will own the execution to create the data structure/reporting internally that will be needed for go forward. What are the possible benefit to this? Reduced impact on costs and fees, speed, alignment and united ideas to drive the art of the possible to reclaim more IRR.

Also, there is some deeper consideration in how the portfolio companies can benefit.?In addition to benefit the further conversation of scale and reporting that?roles up to the fund can take place. Decision ownership and decision making is improved with more integrated thoughtful data ad business intelligence outputs. This is a big step considering the business model has been one where consensus in leadership versus best idea has been the method and model.

Private Equity firms have always had the benefit of being a complete outsourced model in the many area of reporting, IT, data governance and management. The challenge or debate has clearly been a battle of; do we own the capability vs building a stronger management via best-in-class 3rd party solution specialists? The consideration and investment has to be done.?Is this the solution route or transformation path addressing the “what is our data problem and how do we unify”?

A lack of growth and value creation over time will occur and become a clearer root cause area of lack of transformation.?Data develops, accumulates, and requires much more gathering, organizing, understand of what a fund receives from portfolios month after month, and valuations for quarterly LP reporting does not slow as portfolio companies are added and the deal markets drive investments. There needs to be data ownership in the fund for the purpose of organizing its value as an asset and charting a course that crosses over silos that could impact on the other side of the fund.

A potential root problem that comes out through the transformation and consideration on data comes via the aggregation of month end reporting packages from portfolio companies.?Could the core data and information nuggets come from an integrated data set for portfolio operational transformation and GP suites together??The root cause and the needs of the data come together here.?Then choosing the build versus outsource solution is one of economic imperative and efficiency.

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John Bova is a Transformation, Commercial Excellence and RevOps Leader in Private Equity Firms and Portfolio Companies. John has played many roles in the private capital space over 30 years Including senior executive to fast growing middle market companies, Independent Sponsor, PE and Family Office Advisor and Consulting Practice Leader driving value creation through technology and transformation. John is an MD in the Financial Services and Private Equity Practices at Wipfli LLP.

https://www.dhirubhai.net/in/johnabova/