Investment Partnership Accounting
As the economy tightens and it becomes harder to raise funds, co-investment capital has become a popular way for funds and sponsors to finance transactions. However, investors need to be careful because mistakes in investment partnership accounting documentation can cause problems, even if the investments themselves are successful.
There are three main ways co-investments can be structured. First, minority equity investors invest directly in a portfolio company alongside a lead equity investor. Second, a private equity fund sponsor controls the voting power of co-investors by having them invest through a co-investment partnership. In the third, voting decisions are passed through the partnership to the limited partners, allowing each partner to exercise their rights in the underlying portfolio company. There are also some partnership accounting software issues to consider.
Overreliance on Spreadsheets in Investment Partnership Accounting Leads to Extra Work and Increased Risk of Error
Compliance is just as important as accounting for a successful investment partnership business. Failing to have efficient and dynamic accounting processes and tools can result in huge costs, especially during market volatility. This can even put the family office’s main goal of protecting and growing its clients’ wealth at risk.
However, many family offices still rely on spreadsheets or manual operations. Our recent research found that these processes take up about 42% of a 40-hour work week in a family office. Collecting, reconciling, and integrating data can take weeks or even months.
More family offices are starting to realize the flaws in traditional accounting methods. They’re looking for innovative solutions that allow them to focus on their core strengths while reducing costs and risks.
But there seems to be a lack of satisfactory reporting technology in the family office space. The biggest weakness cited for critical systems is the inability to handle all investments in one system. This is closely followed by difficulties in producing customized or ad hoc reports. It’s no surprise that bolt-on solutions and spreadsheet use are still common.
Investment partnership accounting is complex with its web of investments, fees, entity structures, and distributions. A comprehensive solution can help eliminate spreadsheets and manage the accounting and reporting requirements of single- and multi-class partnerships with ease. It can calculate net asset value (NAV) by partners or funds, track waterfall structures, contributions, capital calls, commitments, and distributions across multiple layers, record allocation details, and even handle series of shares and equalization accounting.
With Today’s Technology, there is no Need to Rely on Manual Processes
William Trout, Director of Wealth Management at Javelin Strategy & Research, explained that many firms lack the necessary robotic process automation (RPA) functionality. They need to be able to use RPA or other types of automation to accurately extract data from PDFs and spreadsheets. These documents are the building blocks of deal flow for illiquid investments.
The CEO of a U.S.-based MFO remarked that tracking several hundred partnerships is “really hard.” Despite automation efforts, “a lot of the time you’re still reading off a PDF to book it to an accounting system.” They explained that partnerships can have many different types of transactions, such as contributions, distributions, and recallable distributions. To book these correctly, a human eye is usually needed to review the statement. Otherwise, the unfunded commitment and other details about the capital call or distribution are unlikely to be correct.
We are living in a revolutionary time for automation. With the evolution of AI and RPA, work that was once dreaded can now be handled quickly and accurately by computers. Today’s digital workforce can free you and your staff from these tasks with more accuracy and no human error. If you run a hedge fund or family office, today’s automation tools can help your organization run more efficiently and pleasantly than ever before.
Recent advances in automation have brought new life into back offices. A virtual team of robotic workers can take over work formerly done by dedicated staff. This frees team members to work on more valuable tasks and offers the potential to reduce costs. EY estimates that using AI and RPA to automate back-office work can save organizations 20% to 60% in baseline full-time employee costs.
A comprehensive solution can help eliminate spreadsheets and manage the accounting and reporting requirements of single- and multi-class partnerships with ease
Additional Ways an Accounting Software Partner Saves Time and Money
Upgrading your investment partnership accounting software can provide many benefits. It can offer both investment accounting and reporting for various asset types, as well as partnership accounting within one system. An integrated real-time general ledger is something that can bring all financial activity and reporting together for a consolidated view of investments.
When exploring your options, focus on systems that offer flexible self-service reporting. This will enable you to deliver accurate and visually appealing client statements without delay. You can quickly provide clients with capital statements, performance, contribution and withdrawal information, and contract notes. You can also produce on-demand reports to meet various reporting requirements.
Overall, upgrading your investment partnership accounting software can help you manage your investments more efficiently and effectively. It can provide a holistic view of your investments, streamline tax accounting, and offer flexible reporting options to meet the needs of your clients.
