Koger: Can Private Equity Firms Afford The Risk of Spreadsheets?
28 April 2011
Private equity firms continue to rely heavily on Excel spreadsheets when it comes to data calculation management, but a recent review paper by the UK’s financial services watchdog has prompted a rethink of this business practice.
The paper by the Financial Services Authority (FSA) recently highlighted that data management was a key area in where firms could do better to achieve lower levels of operational risk.
In a bid to strengthen their business models with better data management, private equity firms have reached a point where they must decide whether to continue relying on Excel spreadsheets or consider the use of an expert system for private equity administration.
In making a balanced decision, private equity firms may ask what the risks are of spreadsheets and what added benefits a software provider could add.
Some of the drawbacks with spreadsheets include significant reliability problems, high human error risks, complexity, capacity limits, lack of transparency, security, and lack of auditing and revision controls.
Key man risk is also key - with the average life of a fund being around eight to ten years and the average tenure of a CFO averaging around three to four years, it could take a significant amount of time for someone else to figure out all the spreadsheet calculations – assuming they can, that is.
Ras Sipko, chief operating officer at Koger, which provides administration software to private equity firms, explains: “Spreadsheet risk is a real concern, and one that GP's are growing more serious about tackling. While Excel offers a short term solution around calculations, it just doesn't offer long term reliability and audit trail that’s required.”
“Currently there are systems on the market that provide alternatives to Excel, but go much further to satisfy transparency requirements,” he adds.
Koger’s private equity software for example– PENTAS – manages all the investor data from initial commitments, transactions, drawdown’s, to complex fee calculations like waterfall distributions alongside reporting, compliance and auditing services.
PENTAS provides users with greater flexibility and automation of specific processes, ensuring efficiency and accuracy – and those working in private equity know too well the importance of accuracy and timely maintenance when it comes to making importance business decisions.
In addition, with better transparency, auditing control, control over user access and being able to track user changes, private equity firms could significantly cut the risk of errors and be better equipped to meet the data management recommendations of the FSA.
So, as private equity players reach cross roads, it seems there is only one real route to success for reliable data management and risk control.