In Conversation with Allvue: The Future of Fund Accounting

As GPs emerge from the Covid-19 crisis and begin to take stock of how best to move forward, Travis Broad, Manager, and James McNicholl, Senior Consultant at Lionpoint, were interviewed by Allvue about technology’s ability to automate and improve a firm’s accounting processes. From the power of an end-to-end integrated system to the challenge of removing that last manual step of an automated workflow and the essential need to standardize data, here are their insights on what the future of accounting could look like.

Q: LPs are increasingly becoming more sophisticated and demanding quick, data-driven answers to complex questions. How can GPs meet these needs?

Travis Broad: For years and years this has happened without there really being any single solution for it. GPs have always had this pain point of LPs wanting more and more information and wanting it faster and faster. I think every investor conference I’ve been to over the last few years has had a panel on this – talking about GP/LP relationships and investor demands. This is something that’s always been there, but technology is finally catching up to it.

The ability to handle these inquiries with data that’s already been collected is what’s key. There’s been a massive trend towards investor portals. For these portals to be effective, they need to be linked to data that’s already been gathered – providing the ability to slice and dice data that’s already available.

To do that, you have to have the right technology and properly align it. That sort of straight-through-processing ability, to usher data from deal creation to monitoring to execution to accounting to reporting, is an essential part of being able to handle these sort of investor queries. Having a system where the data is available throughout the process, having the system set up so LPs can log in, see their data, manipulate it, take what they need, assess their own risk – that sort of analysis is something that’s coming to the forefront when we’re hearing what LPs want to see.

Q: How is that kind of technology changing fund and investment accounting? What does the future look like for these processes?

TB: We’re expecting to see more automation, especially more automated responses through to equity allocation and waterfalls to investors. Right now there isn’t a lot in the industry that naturally handles that, especially that can sit on top of accounting systems. Whenever there are exit events, for example, the ability to allocate that value up the waterfall chain to investors is going to be quite important. It takes away dependencies on Excel, where people are trying to do carried interest calculations. And as GPs have more and more complicated investor structures, more complicated regulatory requirements, the ability to have that facility in place where your accounting system is able to consider the legal structure of an investor relationship – that will start to be what the future looks like.

Another key is going to be linking accounting systems with treasury systems. We see a trend towards treasury adoption in private equity going forward. Up until now people have handled payment distributions on their own, but we’ve been seeing bigger organizations looking at treasury systems to complement what they have in house, and to link those in with their accounting systems. In an instance where you’ve got a waterfall model and you’ve automated what an exit scenario would produce for these investors, that would then feed into a treasury system which would handle the payments. That integration will likely be a transitional one over the next five years, but it will be an important one.

Taking out that last human step, that last manual piece of the process, is going to be an essential part of automating processes going forward.

James McNicholl: Another real opportunity is workflow management – where workflow automation requires one step to happen before the next can. Investment managers want to be able to easily understand what stage processes are at. With a capital call that’s been triggered, for example, they want to be able to see the key indicators of the process through a portal or workflow management tool.

TB: Agreed, I think that workflow management part is very important. When you have multiple integrated systems, you’re still going to need something to kick off tasks and trigger responsibilities around an organization. There’s obviously a shift towards a lot of workflow management software; another advantage of having an integrated system is that you can control those business processes internally. Workflows can be continued and maintained inside that singular system.

Q: As GPs look to “future-proof” their accounting processes, what steps should they consider?

TB: You hear this at every conference too, but you can’t underestimate the importance of investing in technology and the impact that has in this day and age. The investment in technology can facility the standardization of data, the normalization of data, the equalization of data – all of which will play a big role in GPs ability to future-proof their activities in coming years.

Everyone talks about wanting to scale. What people don’t realize is that if you scale with anything that’s not standardized, you’re not going to be able to handle the increasing amounts of data. There’s a definite need for people to not only bring data into a technology, but to be able to standardize it and key in the operations as well. Once that data standardization has occurred, once people have brought it online and have everything in line, a lot of activity will shift from being operational to analytical. We can expect a shift in focus from simply checking results to analyzing performance data, etc. There will be a shift towards more analytical-minded considerations once people have this freedom to not worry about data inputs.

JM: If you take something simple like a capital call, for people that don’t have an automated process or integrated reporting tool, they spend a significant amount of time right now just creating notices or running that whole end-to-end process. Whereas if you have a more automated workflow, that ability to just to cut that time down to such a repeatable process that can be automated will definitely be key.

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