Unfortunately, for the world’s middle- and back-office fund operations, the music has stopped. The consequences for deferring, or mishandling investments in long talked about operational efficiencies are coming due.
The inability to make meaningful technology-driven progress is now being exposed at the outset of this crash. Nearly all asset managers’ middle- and back-office are struggling to keep up with COVID-19. Recognising the problem, the SEC and other government agencies have started to back-off, giving funds more breathing room.
Financial industry recruiter Eric Stutzke of OneWire has said front-office hiring is on hold, but hiring continues through the crash for fund accountants and technology specialists. Why?
Allocators and asset managers have been enveloped in the fog-of-war and are asking their accountants to clear it up. At a time when working capital management is everything, expensive talent is being brought in to work through portfolios to sort out the damage and any bright spots. How much is illiquid, or not as liquid as previous models suggested?
GPs are updating LPs and working to communicate consistently. They are trying to figure out how to handle rapid asynchronous update requests, while avoiding selective disclosures. However, not only is there a sudden high volume of work to be done, but it has to be done more precisely. As PwC points out, accelerating the timeline of normal processes counter-intuitively requires more crosschecks and quality reviews.
An error in an Excel sheet copied and pasted across many spreadsheets is its own kind of epidemic. Just like COVID-19, it can lead to a shutdown. That means getting to faster and less expense paradoxically equals more time and expense for quality checks, like drag on an airplane not designed to go at these speeds.
Finding enough experienced bodies scattered across living rooms, bedrooms and kitchens across the world and getting them on the same page is gruelling.
Calculating management fees, distribution waterfalls and claw-backs adds to the pressure on people and the technology that worked well enough until now. Statements are proving especially challenging given fund-level financials lean on the ability of portfolio companies to report their status in the middle of a fire fight.
Too many asset managers and their lawyers are pouring over fund documents. They’re looking for room to go beyond standard statement deadlines. Meanwhile LPs are pounding on the door.
Fund administrators were already straining with lower margins, and difficult decisions on headcount. In response, it was reported before this year’s start that some funds and fund administrators looked ahead to a potential recession. They doubled down on investments in faster and more transparent reporting on fund data, and set new LP expectations.
Counterintuitively, these funds and administrators seemed to employ fewer accountants, yet turned reporting and closes faster, and had greater data certainty. There was discussion of streamlined data operations turning in about 20% savings in the first year of deployment. Reporting timelines could be reduced by more than 85%.
But it was hard to tell who was doing it best, and who was just talking about it, but having difficulty backing the talk with reality. As Verdad Capital’s Dan Rasmussen recently repeated, a downturn makes it clear quickly where the quality is.
The reality; investors are left unprotected by firms lacking the technological capability to overcome human error, due to unnatural rapid scaling requirements.