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Ron KashdenNov, 16 20162 min read

Private Equity Becomes More Systematized As Market Climbs Aboard

With the continuation of historically low interest rates, investors comb every nook and cranny searching for additional returns. Equity markets around the world have not been the salvation, with their values continuing to move sideways. And CNBC recently reported that hedge funds, as an investment category, were experiencing their worst quarter in six years.

One of the few shining stars have been private equity (“PE”) funds. PE funds that focus on real estate in particular have seen large inflows as investors flock to PE managers in hopes of added returns. As their investor base grows, with institutions as well as first-time investors increasingly coming on board, private equity firms are feeling reporting pressures previously reserved for their hedge fund brethren. Loosey-goosey practices such as running the accounting on a spreadsheet are no longer sufficient for this more demanding investor base.

This year we've seen a sea change in our private equity clients. Firms that never used to report investor information in the past or at most communicated in an informal manner are suddenly finding themselves with an investor base insisting upon reporting in a fashion more typical of registered funds. I'm not just referring to more verbose call and distribution letters. Lately we've seen administrators begin to issue monthly statements that include both investor balances as well as their current position on the waterfall.

Waterfalls in general, are a common challenge of fund accountants and beasts unique to private equity. A waterfall is a distribution method that combines the general partner performance fee calculation with a proceeds distribution schedule for investors. Software aimed at traditional alternative investment funds typically falls down when trying to combine both concepts.

Waterfalls aren't the only complication unique to private equity. Maintaining and reporting committed as well as unfunded balance are also common investor requests. In private equity, investors enter in a binding contract to invest a set monetary amount. A portion of that amount is called by the fund when the managers find an appropriate investment. Investors, who are juggling cash flow, desire consistent reporting of both their overall commitment as well as the remaining portion that has yet to be invested in the fund (also known as their unfunded balance). An additional wrinkle comes in for funds that allow distributions to be recallable.

Fortunately, specialized software can automate the process. While there is not nearly the breadth of software that exist for the hedge fund community, there are several packages targeted towards private equity. Eze Investor Accounting (formerly known as Penny) focuses on providing a comprehensive private equity investor accounting, reporting, and distribution package on top of a complete partnership accounting system. Used by both PE funds as well as their administrators, Eze can handle a multitude of real-world complexities, automating investor reporting. Whether it's committed, unfunded, or even total potential funding (unfunded plus recallable distributions not yet called back), Eze can generate and email investor statements containing a wealth of private equity information. Additionally, relying on specialized software like this can help dive deeper into calculating nuances, such as liquidation scenario waterfalls, deal-by-deal waterfalls, liquidation only tiers, and preferred return tiers based upon the investor's IRR. As the world markets go through uncharted territory, investors are increasingly turning to private equity funds for higher returns. As the fund's investor base grows, so do their reporting demands. By lessening the administrative burden on the firm, PE funds can leverage this high performance software to satisfy the investor needs and free their staff to concentrate on their investments.


Ron Kashden

Ron is a Managing Director focusing on development of Eze Investor Accounting. He joined SS&C Eze in 2015 after it acquired TKS Solutions, the fund accounting company he founded. He has 20 years of experience in financial services technology and accounting, and has served as CFO of Tiedemann Investment Group (TIG) and headed software development at SAC Capital and HedgeWare.