The SEC recently issued a Risk Alert for Private Fund Managers, highlighting the severity of existing conflict of interest, inaccurate allocations of fees and expenses as well as deficiencies in code of ethics related to insider trading on MNPI (Material Non-Public Information).   SEC urges private fund managers to review their practices, and written policies and procedures, including implementation of those policies and procedures, to address the issues discussed in this Risk Alert.
 
This amplifies the increasing investor and regulatory scrutiny on fee and expense disclosure and misallocation of profits that often are a result of today’s back office fund administration operating models that are heavily dependent on manual processes, Excel and ‘key-man’ personnel.  AcordIQ helps Fund Administrators and Fund Managers streamline the complex fund administration tasks in their back office through AcordIQ’s automated and integrated Waterfall Management Software, reducing operational and reputational risks as well as delivering higher accuracy and assurance.

Higher Assurance of Investor Carried Interest and Fee Disclosure with Reduced Operational Risk

NEW YORK (PRWEB) JUNE 24, 2020

AcordIQ, the leader in automated Waterfall administration software and services for private equity fund managers and administrators, has announced a new cloud-based Waterfall verification shadow service.

Waterfall calculations and associated fund administration tasks are one of the most important yet complex areas in private equity fund administration. Having an independent verification from a trusted source is a vital step for managers as they are all trying to keep pace through these extraordinary times with increased investor concern of their investments and regulatory scrutiny. Errors are quite common with the use of Excel and as a result, can often lead to operational risk, and even worse, reputational risk.

“With our ongoing commitment to innovation and helping our fund manager clients tackle the many complex tasks of fund administration and waterfall calculations, our new cloud-based Waterfall Administration Service provides a ‘plug & play’, independent and trusted verification of manager’s profit allocation (carry), fees and expense disclosure to their investors for higher accuracy, assurance and compliance,” said Patrick Brunner, Director of Product & Strategy.

AIQ’s cloud-based platform solution is easy to integrate into your current workflow and will reduce your dependency on Excel and ‘key-person’ risks, aiding in audits and succession planning. Additionally, this will increase the transparency around carried interest, both from an internal allocation and investor perspective, providing clean, consistent record-keeping and higher-quality data processes. Furthermore, with our sophisticated carried interest models that handles all the nuances and complexities of waterfall arrangements, it allows you to optimize your carried interest, without over simplification that is often the case with Excel-based approaches, that can lead to the difference between a firm’s partners receiving carry or perhaps not at all.

For more information on AIQ’s Shadow Waterfall Administration Service, visit our solution web page.

About AcordIQ
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AcordIQ is a global solutions provider of advanced technology and services to the private capital industry. AcordIQ was founded by financial industry insiders who understand the full spectrum of private equity fund accounting, distribution waterfall and all the complexity and nuances that come with investment cost management. AcordIQ is a privately held and funded company, headquartered in New York City, with offices in Europe and Asia. Visit us.

Read full article on Cision PR Web.

The current COVID-19 pandemic has both private capital investors and fund managers out of ‘rhythm’ with the way they operate and communicate amid increased investor concerns and scrutiny.   This has cascaded into unparalleled number of inquiries and ad-hoc requests to fund managers asking for greater transparency and more timely financial information, such as valuations, exposures and impact to profit allocation a.k.a. carried interest. This also has potential systemic impact to the longer-term private capital industry integrity and trust.
   
For most fund managers, this has put a huge strain on their finance and operation staff, systems and operating model. The Waterfall calculation and the associated administration tasks are well recognized as crucially important in the private capital industry, as it dictates investor profit allocation and rewards the manager for a job well-done. 
 
To free up your team’s precious operations and financial resources, we offer a digital, automated Waterfall solution to calculate and administer your carried interest on a fund, investor and deal level.  This solution is offered as a primary, integrated waterfall fund administration platform or as a Shadow Service to validate your waterfall calculations administered by your staff or outsourced service provider.  Our cloud platform solution is easy to integrate into your current workflow and will reduce your dependency on Excel and ‘key-person’ risks, aiding in audits and succession planning. While Excel is familiar and relatively simple, it is error prone e.g. small mistakes in entering data, formulas or formatting cells can lead to disastrous results in financial disclosure and perhaps, even a firm’s reputation.  Additionally, this will increase the transparency around carried interest, both from an internal allocation and investor perspective, providing clean, consistent record-keeping and higher-quality data processes.  Furthermore, with our sophisticated carried interest models that handles all the nuances and complexities of waterfall arrangements, it allows you to optimize your carried interest, without over simplification that is often the case with Excel-based approaches, that can lead to the difference between a firm’s partners receiving carry or perhaps not at all. With the automated systems higher detail and accuracy, partners are positioned to be paid earlier, avoid time-value loss and minimize investor claw back provisions.
 
Now, more than ever, is the opportunity to embrace digitalization and in particular, waterfall automation, to build higher investor confidence and trust, and position your firm for success through and post COVID-19.
 
For more information, please visit our web page www.acordiq.com.  If you interested in augmenting your finance / operations staff and taking advantage of our private capital waterfall subject-matter experts, please contact us at info@acordiq.com.

For years, state pension funds have invested money earned by teachers, firefighters and other government employees with private equity firms without having a full picture of how much they were earning and what they were paying in expenses.

On Tuesday, the California Public Employees’ Retirement System disclosed for the first time that it had paid $3.4 billion since 1990 to the biggest private equity managers on Wall Street, including like firms like Carlyle, Blackstone and Apollo. Calpers also said it had made $24.2 billion in profits from private equity firms over the same period, according to its new data-collecting program, called Private Equity Accounting and Reporting.

The move by Calpers, the country’s biggest state pension fund, to disclose the details of its investment profit — called carried interest — could help to pave the way to more transparency in the private equity industry, historically one of the most secretive corners of the financial world.
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“Private equity is a complicated asset class and the board and investment office staff will now have even more insight into our program,” Henry Jones, Calpers’s board vice president and the chairman of its investment committee, said in a statement on Tuesday.
Read the full story here.

To find out how new technology is enabling LPs to verify GP-reported carry, read AcordIQ’s chapter in The Definitive Guide to Carried Interest, published in October 2017 by PEI. The book is full of guidance and best practice approaches to demystify carry, aid understanding, and help practitioners peel back the layers of the calculation. The book is available to buy from the PEI Bookstore. Make sure you quote AUT_CI to get a 15% discount.

​Here is an excerpt from the chapter...

Investors entrust fund managers with billions to invest in private equity on the promise of high returns. As a reward, GPs typically retain 20 percent of the LPs’ profits (and cash) in the form of carry.
Carried interest is paramount to GPs. It is their reward for a job well done. Yet the calculation of carry (the waterfall), as other chapters in this book have already demonstrated, is extremely complex. A major point of concern among LPs is the lack of accurate information available on carry and other fees.
Few LPs have the requisite data, systems, resources and carry expertise to independently verify carry and fee charges as reported by GPs. Even fewer can do it in scale against their total private equity portfolio and the number of funds that ideally need to be verified. For that reason, most LPs simply accept the information reported to them by their GPs.
LPs that attempt verification are typically limited in terms of the scope of what they can do themselves: for example, an ad hoc, sample fee audit that is part of an end-of-year financial audit performed by an accountant and/or lawyer, focusing on a small number of funds in the portfolio, which have simple arrangements and using one to two years of data rather than from inception to date. Such limitations can have significant implications for the accuracy of the cost and performance information LPs provide to their key stakeholders (such as boards, trustees, the public), and it carries potential reputational and compliance risk if errors emerge.
The good news is that new advancements in technology, best practices and industry standardization, together with a growing market demand for greater intelligence, transparency and governance, can empower LPs with improved operational efficiency, comprehensive data collection and analytics, enhanced reporting capabilities, the ability to satisfy highly specialised business needs within their operating models, such as the capacity to unravel private equity fees and carry. Fees and carry are examples of a highly specialised business area.

In Part I of this publication, we have discussed the impact of subscription lines of credit on the Net IRR and the potential distortion of the ‘Fee Drag’ (resulting in a negative ‘Fee Drag’) rendering the Gross IRR/Net IRR analysis in certain situations quasi-useless due to the fact that the Net IRR may turn out to be higher than the Gross IRR, in addition to the time mismatch between Gross and Net IRRs.
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Click here to read part II where we discuss the impact of subscription lines of credit on carried interest.