Partnership Accounting Systems: Evaluating the Landscape

Over the last few years, the US marketplace for partnership accounting software has undergone significant change. In a market once dominated by a limited number of key players (i.e. SunGard Investran, The Next Round (TNR), Equitrak) the emergence of new competitors such as 3i Infotech – Framework and eFront has resulted in increased competition as the newer entrants have earned a solid reputation and can now effectively compete with the existing market leaders. Software providers are constantly pressed to deliver new and increased functionality in an effort to distinguish themselves from one another. Therefore, the net result of the competition has been a positive development for investment management firms.

Hedge Fund vs. Private Equity Partnership Accounting

Partnership accounting for hedge funds is similar in concept but not identical to private equity funds. From an allocation perspective the key differences between the two fund types is the notion of ‘closed’ vs. ‘open ended’. In a private equity ‘closed end’ fund, capital commitments and subsequent allocations are set and often locked down once the final closing occurs. In contrast the allocations for open-ended hedge funds are constantly changing each time a Limited Partner (LP) contributes or redeems capital. This key difference results in different allocation methodologies and processes between private equity and hedge funds. This article covers applications that are typically (but not exclusively) used by private equity (PE) firms. We will continue to develop the topic of partnership accounting; and will provide an overview of the software applications for hedge funds in future issues of IntegriNEWS.

Selecting a software application for PE partnership accounting is certainly a complex project, which often takes months of arduous research and evaluation. The consequences of choosing the wrong solution for your firm are significant. Implementing a product that does not meet the specific needs of your accounting group will likely lead to a painful production process with frustrated users and an inevitable high employee turnover rate. Below are some of the key factors that can be used to differentiate one vendor from another.

Increasingly Complex Allocation Methodologies

The primary function of a partnership accounting application is the process of allocating the fund level amounts to each LP. All applications provide for this basic functionality in addition to other basic core items such as:

• Consolidated database
• Basic set of pre-configured allocation methodologies e.g. pro-rata allocation by LP commitment

In following with the theme of improved functionality and the ability to differentiate between applications is the ability to address the increased complexities associated with the partnership accounting process. Today, as funds tend to move away from the traditional ‘pro-rata’ allocation and into more complex methodologies, the need to provide for a flexible and easy to use allocations process is a key differentiator.

From an allocations perspective, some of the key changes in PE funds relate to the following items:

• Investments in non-traditional assets such as liquid investments
• Growing complexities associated with master feeder structures
• Increased presence of complex management fee waiver programs
• More frequent Investor opt-outs
• Increased complexities associated with waterfall calculations

More often than not, the functionality to fully address allocations associated with these processes is not available out of the box. Vendors that are able to develop automation to address these challenges without the need to develop significant customization present a much more enticing offering.

Ease of Use

Another key differentiator is the ability to provide users with an easy to use and flexible front-end application. In addition to competing with one another, the vendors are also competing with Excel. PE accountants have become extremely comfortable with the flexibility and ease of use that Excel provides. Keeping in mind that most users are migrating from an Excel environment where the flexibility to change formulas, links and other updates is very easy (not always a benefit), the applications must be able to provide a somewhat similar flexible environment within a more controlled single database / general ledger. Here too, a partnership accounting system stands a greater chance of being adopted if it provides users with some resemblance to an environment they are familiar with.

Customer Support

While it seems obvious to most of us that customer support is a key aspect of the success of an application, the ability to deliver dedicated and knowledgeable support in a timely and efficient manner has become a significant challenge for many vendors. As the allocation processes has become more complex and users require more personalized support and training, the importance of a customer support resource who is easily accessible and sufficiently knowledgeable cannot be underestimated. There is nothing more frustrating than being unable to move forward with a production process due to an issue with the application and then not having a vendor resource available for support. It is also important to differentiate between vendors who actually provide a full user support offering at little or no cost in contrast to those vendors who substitute the helpdesk function with costly consulting personnel.

Additionally, as the marketplace has expanded into Asia and the Middle-East, many firms are challenged to provide dedicated 24 hour support that is required in a global arena. Those vendors that are able to provide a more personal and supportive customer service experience stand a better chance of gaining a positive reputation within the industry.

User Acceptance

As is the case with any software application, the true test of success is measured by the user’s acceptance and ultimate adaptation of the application. More often than not the applications that are able to deliver on the differentiators noted above stand a greater chance of being accepted by the users.

When selecting a software application for PE partnership accounting it is important to keep these factors in mind in order to determine how well suited they are to the unique requirements of your firm.

IntegriDATA offers deep expertise in the field of fund and partnership accounting including system selection and implementation, and application development services. We also provide expert support for Investran and TNR including system maintenance, automation of manual processes, report development and system interfaces. Additionally, we provide assistance in the analysis, documentation and automation of complex investor allocations including waterfalls/incentive fees. Over the past 6 years we’ve completed a number of successful implementations of third party partnership accounting systems for both private equity and hybrid hedge funds.