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The Evolution of Portfolio Monitoring Systems in Private Equity

Jim Carr Profile

Jim Carr – Lionpoint Group – Executive Director and Head of the Americas

For well over a decade, the Private Equity (“PE”) industry has seen much volatility and transformation.

Beginning in 2005, with the decrease in interest rates and loosening of lending standards introduced by the Sarbanes-Oaxley act, the industry saw an incredible boom in mega-buyout deals. As money was readily available and fund-raising was at its highest, managers could afford to delay efforts on improving operational efficiencies and the supporting technologies.

Two years later, however, the industry experienced a discernible slow-down as the financial crisis spilled over and fund-raising dried up. Although a total industry shakeout was averted (among the top quartile, at least) the financial crisis served as a catalyst for regulatory reform, an increase in due diligence processes and internal controls, and a shift in investor demand for accurate and timely data. As investor demands in transparency and tighter regulatory demands took center stage, PE firms looked to building more robust IT infrastructures and solutions to ensure accuracy and reliability in reporting.

Faced with the need for these ‘more robust’ systems, functions that are historically performed in Excel spreadsheets (i.e. Deal flow analytics, valuations, waterfall, partner carry calculations, performance analysis, and financial reporting) have become ineffective and more so unacceptable in an increasingly complex environment. In response to the need for more sophisticated operational environments and performance, firms have developed in-house tools or purchased off-the-shelf systems to handle front-to-back operations in a more automated and integrated manner.

The graphic below shows a typical maturity model and system progression for many firms over this time period depicting no systems in place to a integrated solution:

Evolution-PC-Systems-in-PE
One area of great focus is portfolio monitoring, compliance and valuation. This has typically been addressed as subsequent to core portfolio management and accounting however is critical to performance monitoring of underlying portfolio companies or investments as well as for meeting demands of greater transparency and regulatory requirements. Manual data collection, manipulation and analysis is being successfully replaced with automated processes supported by cloud-based portfolio monitoring systems.

These solutions offer greater transparency through streamlined data collection, validation and reporting, real time dashboards, and the ability to slice and dice data on demand. Leveraging portfolio monitoring tools, fund managers, asset managers and investors are empowered by the ability to consume portfolio company operating data in a consistent fashion, identify errors or inconsistencies immediately, and focus their time and attention on data analysis rather than manual collection and manipulation. Gaining actionable insights through validated data in a central repository, managers have reliable data to measure historical performance and run sensitivity analysis. With the ability to upload and edit data directly from Excel, managers can quickly integrate the latest performance data into their analytics and models, enabling more time to analyse and sensitize the data.

The portfolio monitoring products offered in the marketplace have evolved tremendously over the past several years. There is a general consensus that portfolio monitoring and compliance is a separate function to portfolio management and accounting, requiring unique solutions to address the requirements. The products that have become successful focus on a handful of core capabilities including:

  • An easy utility to consume operating partner data
  • Flexible but manageable reporting and querying tools
  • Easy integration capabilities to Excel
  • Export and printing capabilities of dashboards and screens that are formatted and savable to standard Microsoft products
  • Functionality that is specifically focused to a defined client base (fund and asset managers as well as institutional investors)

The number of firms using these products will continue to grow in the coming years. We also anticipate continued consolidation of products in the marketplace via business combinations and acquisitions by larger players in the market including organizations that provide core General Ledger and financial functionality but lack portfolio monitoring capabilities.

Portfolio monitoring systems are now mainstream as opposed to a “nice to have”. With the cost of these systems decreasing via more competition and scalable pricing, PE firms now have more opportunity to select and on board these solutions.


Article by Jim Carr, Lionpoint Executive Director and Head of the Americas,  published in the Preqin Private Equity Spotlight – Aug 2016. Lionpoint Group is a global advisory firm with a unique focus on the alternative investments industry and one of the first Baxon Certified Consulting Partners.