Majority of PE Firms Struggle to Turn Data Into Business Intelligence, Says Report

Data transparency and investment in information systems are becoming essential to maintain a competitive edge and address industry expectations in the private equity industry, according to a research report from SunGard and the TABB Group.
By Janet Du Chenne(59204)
Data transparency and investment in information systems are becoming essential to maintain a competitive edge and address industry expectations in the private equity industry, according to a research report from SunGard and the TABB Group.

The research report says those PE firms who have tackled the key challenges of on-demand performance reporting, greater detail in investment holding data and tight integration between systems, will receive dividends beyond better LP reporting and operational efficiencies. “A virtuous cycle of efficiency and transparency yields greater investor confidence, lower cost-to-income ratios and a stronger competitive environment,” it adds.

The research surveyed 119 senior private equity executives across the U.S., Europe and Asia. Nearly a third of the responding firms had Assets under Management (AuM) of over $5 billion, and covered a wide range of strategies, including Buy Outs (24%), Venture Capital (20%) and Fund of Funds (17%).

While the quantitative and qualitative research TABB Group has conducted indicates that GPs have invested in technology research finds 60% of private equity firms surveyed are struggling with document management and with disseminating data into market intelligence.

Operational inefficiency, the need for enhanced reporting and the need for improved investment performance are challenges identified as standing in the way for private equity firms to transform their data management into investment insight.

Specifically, when surveyed as to what prevents them from managing their business effectively, the top responses from fund managers or GPs were: the time it takes to get a complete view of portfolios (57%); a lack of front-to-back system integration (50%); and a lack of frequent and timely reporting (50%). The survey found that a majority of firms (67%) acknowledged that an investment management platform is either “very important” or “extremely important” to achieving operational efficiency.

The survey found that only 23% of participants currently provide access to interactive investor reporting. However, 70% said it is important to do so, and one-third of the firms said producing on-demand performance reports is challenging. The research also found that the private equity sector faces increased levels of regulation, compounding the burden on data management. Regulatory issues currently challenge nearly all of the survey participants, with 39% finding it “very” or “somewhat” challenging to deal with in present market conditions.

Regardless of firm type, access to timely and accurate information on the portfolio was seen as critical to understanding exposures and risks, as well as measuring performance. The importance of making technology a strategic priority stood out, with more than one in four private equity firms estimating that meeting technology objectives would result in considerable improvement or great improvement on the quality of investment decision-making.

Whether deploying on premises, or leveraging the systems provided by a third-party administrator, the investments in technology will lead to increased levels of operational efficiencies, enabling PE firms to quickly adapt and respond to the reporting challenges imposed by investors and regulators, says the report. “When LPs can more easily compare the performance and performance attribution of various GPs, the competition for assets can become more targeted at specific areas of value and differentiation.”

The report found automation and integration of systems and standardization were crucial in PE firms getting the most out of their data.

It says that while there has been a steady increase in levels of automation, many firms still store large amounts of data in Excel. Further complicating this issue is a lack of seamless integration. 25% say their systems that manage their day-to-day business were tightly integrated via system interfaces, 38% say they were integrated through manual activity and 38% said there was no integration. “As a result of this fragmentation, the main obstacle that firms face to running their business effectively is the time it takes to get a complete view of their data,” says the report.

Standardization is seen as a key milestone toward automation and operational efficiency. More than 250 PE firms now endorse Institutional Limited Partners Association (ILPA) private equity reporting principles, including influential firms such as Carlyle, KKR, The Blackstone Group and TPG Capital. Most agree that increased standardization is necessary and beneficial to the LPs for improved analysis across their private equity holdings, says the report.

When asked about the importance of the investment management platform, 67% of those surveyed say achieving operational efficiency is either very important or extremely important. “PE firms must look to their investment management platforms to help them facilitate enhanced internal and external reporting requirements on a timely basis, manage the additional work associated with regulatory compliance, and improve risk management and overall decision making at the firm,” says the report.

When asked about the importance of each component of an investment management platform, the firms surveyed say that investor reporting is the top priority, followed by accounting and portfolio monitoring. “The reason for this is logical: to automate and fulfill the investor reporting requirements, firms must first address the requirement of accounting and portfolio monitoring. This will help provide the necessary information to fulfill the investor reporting demands,” says the report.

Without a proper system that contains reliable data, the costs to service the investors in a timely and efficient manner with quality responses will be significant,” says the report. “With only 37% of PE firms at least somewhat satisfied with this process, there is a significant need for firms to improve the investment management platforms they are using. If PE firms ever hope to catch up to the increasing demands of the LPs, the calculation of performance is another area that needs to change.

Providing investors with an interactive dashboard with reporting and ad-hoc query capabilities is an ideal approach that PE firms can take to respond to investor demands for transparency. Yet 77% said they do not provide interactive access to investors regarding portfolio and fund accounting. Again, fundamental to this solution is a proper system with reliable data. This approach takes a significant step towards the LPs’ objective to easily consume data from GPs and is a first step in moving beyond the traditional PDF report provided by GPs.

Many firms have already started working on improving functionality to enable LPs to access data on demand, and 24% of participants say it is either extremely important or very important to offer investors interactive access to reports via a communications portal.

Regulation has also resulted in a need to add more staff, with 26% of respondents now saying operational cost pressures, including lack of personnel, is very problematic in terms of adapting to regulatory requirements. 42% of firms said FATCA reports were challenging to complete, followed by AIFMD (39%) and Form PF (33%). Some regulatory filings require certain portfolio company data not historically tracked by their PE investors. To avoid adding more staff to handle tax and regulatory reporting, 16% of participants are working with software vendors on streamlining the Form PF process, while another 30% are outsourcing the filing to a third party.

The increased pressure on operational resources has resulted in firms not only investing in new technology and assessing alternative operating models, such as outsourcing, but also focusing on data governance and standardizing processes, says the report. Some firms surveyed have already made significant technology investments and are now reaping the benefits.



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