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  • Writer's pictureCaroline Brie

Should Private Equity Funds be Managed Automatically?

At the end of every month and every quarter, private equity firms face the challenge to develop consolidated reports that bring together data from multiple companies within their portfolios. This entails merging financial statements from many organizations, which are frequently prepared using different ERP systems and have mismatched charts of accounts. It's a time-consuming process of putting square pegs into round holes, integrating data from several organizations into a single, uniform reporting platform.

This is a major undertaking for personnel, requiring numerous hours of manual copying and pasting, translating financial statements into a standard format, double-checking the data, and preparing the final reports. It frequently necessitates reminders and follow-up questions, as well as collaboration with employees at the companies in each portfolio to obtain the information needed to produce conclusive financial statements and send the required reports to investors and regulators.

The list of the following files is extensive and contains some complex reporting tasks. Most private equity (PE) firms require updating cap tables and supplying information for employee stock plans, as well as making tax remittances and producing ASC 718/IFRS 2 compliance reports for the majority of PE firms.

Private equity firms, like most other types of businesses, are most successful when they stay focused on the core operations in which they can contribute the most value. This is referred to as the "hedgehog principle" by author Jim Collins. In a nutshell, the hedgehog principle states that businesses should concentrate on one (or a few) things that they can do better than everyone else. Everything else should be automated (if possible), outsourced to experts (if necessary), or abandoned entirely (if it turns out to be extraneous).

Emphasizing Value Creation

The fundamental activities of private equity firms are fundraising and supporting their current investment portfolios. Understanding the variables that produce corporate value, analyzing strategy, managing executive leaders, and pushing for superior investment performance are all important aspects of private equity success.

What does this imply in terms of administrative tasks such as reporting and cap table management? These are prime targets for outsourcing and/or automation.

The decision to automate or outsource, as with many other initiatives, might result in greater results at lower costs. When confined to in-house development capabilities, for example, many private equity companies may choose not to construct shareholder portals that allow investors to see reports and download statements. In contrast, with automation or outsourcing, private equity firms can provide these choices as part of a standard, fully integrated service. Shareholder portals add value, strengthen investor relations, and reduce the amount of back-and-forth communication that would otherwise be necessary.

Let's take a look at some of the areas where automation and outsourcing can help private equity firms add value:

Equity & Stock Automation

When a business is just getting started and there are only a few major shareholders, equity management may appear to be an easy task. However, it can rapidly get very complicated. Multiple rounds of funding, different classes of shareholders with different rights, equity compensation plans, and other complexities can take up a lot of time.

To make matters even more complicated, these tasks usually necessitate the assistance of a highly qualified analyst who is familiar with the intricacies and anomalies of each company's share structure and involvement. When issues arise, or when investors and participants want information about their shares, there may be just a few people who have a thorough understanding of the facts and can provide clear accurate responses.

By automating these procedures, employees are relieved of the stress of managing complex equity information in spreadsheets. Shareholder portals allow investors and stock plan participants to access accurate, up-to-date information about their accounts at any time, with no additional effort.

With a library of pre-built reports, administrators can eliminate spreadsheets with a web-based platform that includes complete SEC, FASB, and IFRS computations and support for a variety of award types. Managers can use this to streamline equity compensation processes, increase productivity, and ensure compliance across the board. Pre-built reports also cut down on the time it takes auditors to comprehend and reconcile reports.

Equity Compensation Plans

Employee stock plans can be particularly difficult to manage. Small businesses generally start by using Excel to manage small-cap tables for a few key employees. However, it doesn't take long for the process to become complicated. As the company grows, new employees are hired, stock options are issued, and some employees leave. The complexity of managing a mix of vested and unvested shares, forfeitures, and trying to respond quickly to HR inquiries about available shares in the option pool is a challenge for equity administrators.

Things can get even more convoluted if the organization plans to give out performance awards–that is, options that are contingent on an employee meeting specific predetermined targets. Performance awards can be a powerful management tool, but if equity administration systems are incapable of addressing these kinds of complications, they may not be considered at all.

When a company grows geographically, managing equity compensation plans becomes more difficult. If one of your portfolio companies hires in multiple tax jurisdictions or hires people from other countries, the process becomes even more complicated, necessitating additional expertise as well as additional reporting and compliance obligations.

Automated equity management tackles all of these issues by providing a versatile system that can handle a variety of scenarios.

Consolidated Financials

The initial phase of preparing monthly or quarterly financial statements can necessitate a large amount of human labor involving data collecting from portfolio firms, consolidation of that information into spreadsheets, and harmonization of that information to produce accurate and timely financial reports.

Many of these tasks can be streamlined with reporting automation, which can integrate financial results from a variety of group companies, translate them into a common format, and deliver clear, consistent, and accurate results in a fraction of the time it takes to produce such reports manually.

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