Why Managers shouldn’t run Private Equity portfolios on Excel

Private Equity investing has been immensely popular over the last few years and AUM growth rates have been spectacular. In 2020, Deloitte forecast AUM to reach US$5.8 trillion by 2025 and this still seems like a reasonable base-case. About 5 years ago, one commentator estimated that 90% of PE was run on spreadsheets – there’s not much evidence in 2022 that the situation has changed much.

So, shouldn’t all investment managers that are currently using spreadsheets for PE be concerned about the ‘fragile’ nature of those records? What if an incorrect allocation is inadvertently made to their Limited Partners (“LP”)? What if that spreadsheet calculation error has persisted through multiple years and multiple investment contribution/distributions? How about their fiduciary obligation to those Partners? While some Investment Managers have already recognized the benefit of moving to a comprehensive portfolio record-keeping solution, there are still many other Managers that continue to rely on spreadsheets despite the obvious weakness and drawbacks of such a record-keeping solution. In fact, how many Managers are limited in the complexity of the PE products that they can offer their investors, due to concerns about the robustness of using spreadsheets?

The most obvious issue with a spreadsheet is its lack of auditable history. It’s all too easy to make a change to a spreadsheet without any trace of either who, or why, the change was made. If care is not taken to increment version numbers and keep comprehensive backups, then disaster can easily ensue, requiring a substantial amount of manual rebuilding from base records. Tracing spreadsheet errors can be difficult and time consuming as there are few built-in tools to assist, and so multiple check-points have to be built in the spreadsheet to double-down on ‘checks and balances’, which further complicates the problem.

Local spreadsheets are also difficult to maintain with multiple users trying to access them simultaneously reducing any semblance of auditable control. Who has the current version? Are multiple copies residing on different drives and being updated by different staff? Cloud-based spreadsheets are inherently easier to share but then the risk of security issues increases and local copies can still propagate around the firm. How is user access control maintained? Many of the LPs share confidential data with their Managers – a locally installed spreadsheet is hard to maintain with rigorous user-access control; the challenge and danger can be immense.

Even if the PE spreadsheet is well maintained with full backups and incremental versioning, maintenance of the sheet often depends on the individual ‘author’. Lose a key member of staff and how easily will it be for remaining staff to pick up the pieces? Many functions in Excel can be engineered to arrive at the same calculation, but formulae, macros and clever cross-tabulations and pivots, tend to be built according to personal experience/preference and without full and clear documentation that can be shared and used as a back-up. The inner-workings of the spreadsheet that is supposed control and record items such as LP commitments, waterfalls, allocations, distributions, hurdle rates, performance fees and general fees can be hard to code effectively in a spreadsheet, let alone pick-up and maintain. And then there is the question of where the ownership of the sheet belongs: Front-office? Back-office? Back-office staff may not have the training or experience to deal with the byzantine complexities of a PE spreadsheet prepared by the Manager or their front-office analyst.

Another issue with using spreadsheets to run a PE portfolio is ‘scalability’. A spreadsheet by its nature can handle a very small number of investors (a handful you can surely do with a paper and calculator), but as soon as you are dealing with more than that, including the specific difficulty of ‘additional tranche LPs’, the growth in complexity can feel exponential. A spreadsheet won’t scale properly vs. using a system that has all of the calculations and capabilities built-in, and the Manager’s staff can be easily overwhelmed.

For all of those Managers that are still relying on spreadsheets to run their PE investment portfolios, there is no reason to put your hard-won business at risk! Excel and Sheets etc. are neither scalable, sufficiently auditable nor suitable to be used in a confidential back-office record-keeping environment – especially given the Manager’s fiduciary responsibility to keep accurate records for their LPs.

Good technology providers to the Investment management community have invested a lot of effort in to Private Equity record-keeping capabilities. These capabilities should be integrated with general portfolio capabilities for wealth and fund Managers. Good solutiona will enable the clear separation and reporting of items such as fees, which substantially improves reporting transparency.

If you are a Manager running PE on a spreadsheet, contact us so we can show you how to find a secure and robust solution, so you can sleep better at night!