The new age of information

Why smart data management is essential for general partners, portfolio companies, investors and regulators. By iLevel Solutions

In today’s increasingly dynamic business climate, private equity professionals and limited partners alike require rapid access to high quality investment metrics, performance information and actionable analysis. From a confluence of economic factors and the psychological shift in investor perceptions over the last 18 months, clarity, transparency and consistency are now the new buzzwords in private equity.

Smart data management – from sourcing to analysis to flexible reporting – is fast becoming top of mind for financial, operational and information technology professionals as they seek to achieve greater visibility into their own investments while providing greater transparency and frequency of reporting to their investors.

For general partners managing complex portfolios across a diversified global and industrial footprint, the ability to see what is going on at a very granular level in an accurate, timely manner is imperative. Rapid access to high quality data enables greater proactivity in managing portfolio companies – reducing risks and highlighting opportunities.

For limited partners in private equity funds, transparency, timeliness of communication, and integrity of data are increasingly important. Investors require a consistent dialogue with general partners and are looking to them for insight into how they are managing portfolios and protecting their investments.

Expediting the requirement for shared business intelligence is the increasingly stringent regulatory environment, including FAS 157 compliance, which is forming a framework and level of expectation for transparency and timeliness that surpasses anything general partners have dealt with previously.

Regardless of the size of the private equity firm, the process of gathering and analyzing information is highly manual and requires significant resources to collect, review, and perform data edits in order to ensure correctness, completeness, and consistency.

With very little shared business logic – and until very recently, the lack of a standard technology platform or precision analytical tools – information gathering, analysis and reporting are onerous tasks for all involved. While the information requirements among investors and portfolio companies are convergent, for most private equity firms the ability to access quality data, and quickly analyze and create flexible reports systematically is not yet a reality.

• The “spreadsheet shuffle” between investment firms and portfolio companies is costly, inefficient and error prone
• Analysts and deal team members must perform manual updates and quality assurance tasks, taking them away from true business analysis and decision-making
• Trends and data anomalies are often missed since reports are static and inflexible
• It is difficult to provide limited partners with timely, accurate and consistent reporting

Whether viewed from the perspective of a financial, operational or technology professional, we find there exists a core set of problems, requirements and opportunities. Among all constituencies, there is agreement that a consistent, disciplined information management framework and robust data warehouse are integral to the effective management of the key information and business metrics that drive decision making and facilitate investor communication. In order to share a 360º perspective, we sought to understand the biggest hurdles each faces and gain insight into the challenges, best practices and solutions they are exploring to effectively manage portfolio information.

The challenges
Gathering information from portfolio companies is an arduous process for private equity firms of any size, but for larger firms the complexity is magnified. Analysts typically interact with portfolio companies through template- based Excel spreadsheets, e-mail and other manual methods for gathering, analysing and reporting on data. Data sets need to be checked individually for completeness, accuracy and quality prior to any actual business analysis.

One of the biggest challenges arises from each portfolio company having their own financial system and business management and reporting processes, resulting in huge roadblocks in gathering consistent, quality information across the range of companies among various industry sectors. While information received by general partners on individual investments is generally timely and accurate, it becomes difficult to aggregate data across portfolios and funds as each deal team has a distinct process for gathering monthly KPIs and reports on actual, budget and forecast numbers. It is difficult to compare data and be confident of consistency on a monthly or quarterly basis when so much of the process is manual.

Many large private equity firms have investments in both public and private entities, which report differently. Private companies often report more quickly than public companies, yet private company marks and data updates may be updated less frequently. This creates a challenging environment to accurately perform industry comparisons and trend analysis.

The impact of FAS 157
FAS 157 is a key driver for private equity firms to develop a disciplined, auditable information management process, requiring more robust and faster marking to market. In addition, increased investor demand for transparency and more frequent reporting adds pressure to general partners to manage information with greater efficiency.

According to Peter Nachtwey, Chief Financial Officer, The Carlyle Group, “Investors are looking for faster information and valuations (15-30 days) and more in-depth communication from general partners. Why? Primarily FAS 157 – where marks move faster and accounting drives the process. Secondly, limited partners want more transparency, proactive communication and to understand projections and how they are being developed. Also, as to portfolio company debt, many LPs want to be aware if there are covenant violations or concerns over the next 1-2 years. That said, there is a clear and present need for greater consistency and a disciplined process for data collection and management – driven largely by FAS 157 and increasingly by investor (LP) demand.”

Why the pressure?
Since early 2008, other asset values have gone down dramatically, resulting in apparently larger percentage allocations to private equity. Over time, capital commitments have grown disproportionately to other assets while older investment distributions were simultaneously decreasing.

“Over the last several years there has been a marked increase in capital commitments, due in part to ‘over-commitment’ strategies by many LPs, which worked well in a rising market. This caused private equity investments to become a greater percentage of an investor’s overall portfolio and thus much more on the radar of fund managers and limited partners. So much so, that the information demands in terms of speed, granularity and explanation required private equity firms to increasingly allocate resources to gathering, evaluating and analyzing information in order to effectively communicate that information to investors.” – Peter Nachtwey – The Carlyle Group

Following the global crash in asset values, investors want marks faster with greater detail on specific investments. For example, in late 2008 investors voiced valid concerns about which bank the cash portion of a company’s asset base was held – as there were extensive bank solvency issues and counterparty risk. Investors looked to every nuance of the balance sheet during the crisis and were very focused on cash flow and understanding the structure of debt – especially revolving credit, liquidity and the terms of outstanding debt.

The challenges
Typically, firms engage in a ‘quarterly portfolio review process’ where KPIs and other specific business metrics are collected using an array of disparate spreadsheets. Deal teams and finance professionals provide input on business and industry trends, and add additional context and suggested actions in areas of focus. Ultimately, these analyses are put into a presentation book for review by the investment team. Some basic analytics are run vs. prior year vs. plan, individually and as part of the portfolio.

General partners are typically able to manage the flow of information on a quarterly basis, despite the manual, labor intensive data collection process, but often have to ‘reinvent the wheel’ quarter on quarter without a disciplined, systematic approach. Heavily dependent on a range of disparate analysts’ spreadsheets, formulas and report formats, there is significant business risk due to a lack of auditable data and centralised history on any given investment.

When there are major events and significant business impacts at a portfolio company, private equity firms need to be able to fully understand them, presenting the data and information quickly and clearly to their investors. It is particularly difficult to maintain consistency and manage change in terms of people, processes and corporate metrics, especially during mergers, acquisitions and major business changes.

The solution
Managing information is really about managing the process. The optimal solution begins with a better data architecture and a systematic approach for collecting data, performing quality checks and maintaining an audit trail coupled with a flexible analytical toolkit. A comprehensive data warehouse that is well documented and integrates both articulate commentary from analysts and comparable third-party data, would allow for rapid report creation and the ability to describe change so reviewers can readily understand it and take action.

To effectively manage portfolio company information, it is critical to establish specific metrics up-front based on a clear understanding of value-added opportunities for the investment, not just the standard metrics that indicate corporate health. Knowledge of the key business drivers for a successful investment, which may be very distinct industry by industry, is critical to the development of the investment thesis, management planning and understanding of what needs to be accomplished in order to achieve the end-goal with direct positive impact to the bottom line.

According to Dan Lieber, Senior Operating Executive – Welsh, Carson, Anderson & Stowe, “Best practices involve setting the metrics up front – strategically in agreement with the portfolio company – so that data capture, analysis, reporting and management capabilities can be structured from the outset. Define metrics and build the information architecture at the outset so all team members are working from the same playbook.”

“With the right system in place, we would be quickly able to perform ad hoc analysis and reporting – to take our analysts up a notch to be more proactive than reactive in terms of analysis. To be able to generate reports in hours that may take a week today. Reports that contain the ‘right’ market and company information relevant to the portfolio company within the sector.”

According to Harry Moseley, Chief Information Officer at The Blackstone Group, “The major benefits of a comprehensive end-to- end portfolio company reporting system start with allowing analysts to analyze rather than manage data collection and increasing the ability of general partners to identify issues before they become problems. Additionally, a central repository comprised of a broad range of data and commentary pertinent to a company, allows for a holistic view of each portfolio company investment from initial due diligence to execution of the exit strategy, which is of significant benefit to all parties to the transaction.”


The ideal solution is an end-to-end platform that streamlines the data collection process, maintains data integrity and auditability and enables flexible analytics, reporting and ad hoc querying. Centered on a robust data warehouse, individual performance metrics, anecdotal commentary, analysis and relevant thirdparty data would all be sourced and co-located in order to provide a holistic view of an investment – from due diligence to exit. Ideally, the system would integrate industry standard tools such as Excel at all communication points.

While the needs are well-known – and from a 30,000 foot perspective the solutions understood – very few private equity firms have put in place the necessary business logic, processes and systems to accommodate these requirements. For those that have developed solutions, the benefits are many.

The iLevel solution
The impetus for the iLevel platform at The Blackstone Group arose from the lack of a systematic way to look at investments and compare their performance to their peer group. It was determined that through a disciplined, consistent data collection workflow and state-of-the-art data repository, information could be managed and reported on effectively, data quality could be enhanced, and investment history maintained through a high quality audit trail. The development of the initial platform was led by the business to address the needs of internal staff as well as to provide enhanced reporting and improve communication with limited partners.

With smart data management at its core and industry-standard Excel-based collection, analysis and reporting tools, the iLevel Solutions product suite offers a comprehensive portfolio management system linking general partners to their portfolio companies and limited partners. General partners gain instant insight into their investments, the ability to manage risk, seek new opportunities, and provide the highest level of service to their limited partners.