Three Ways Cloud ERP Solves Private Equity Firms’ Biggest Operational Challenges
Most private equity (PE) firms share a common goal of managing due diligence, fundraising and investing in companies that will subsequently be sold or taken public. Typically firms work on those activities offline in spreadsheets and use an entry level accounting software such as QuickBooks to handle their allocations and related tasks.
As a NetSuite implementation partner, Bridgepoint brings hands-on experience with NetSuite’s PE Management module, and has further enhanced the PE solution with add-on capabilities to improve controls and deliver the custom invoicing often required by PE firms. Additionally, Bridgepoint’s resource pool of experienced accounting professionals provides a one-stop-shop for a PE firm.
3 Key Problems…Solved!
Maintaining a record of allocation amounts and limits on portfolio companies without some level of automation and standardization makes the PE firm’s monthly accounting activities more challenging. NetSuite’s PE-specific features and Bridgepoint’s additional configurable solutions automate many of these functions and produce major efficiencies for organizations.
Here are three key accounting challenges that NetSuite and Bridgepoint solve for PE firms:
Tracking pass-through costs.
PE firms tediously track direct and indirect expenses against deals and portfolio companies to eventually bill back costs. Expenses may be billed back to one or many funds, portfolio companies and/or deals depending on deal status and deal type. In many cases, it’s unknown who will be billed for the expenses as it will differ depending on whether or not the deal is consummated, the type of deal and legal terms surrounding the fund(s). NetSuite PE Management (PEM) features allow PE firms to track expenses by deal throughout the deal lifecycle. Deals are set up as a segment, which creates a bridge between the accounts payable and accounts receivable transactions.
Precisely managing expenses.
In most cases, legal agreements require PE firms to maintain expense tracking at a meticulous level of detail. Using dynamic metrics, these firms use processes to allocate those expenses (i.e. overhead, employee payroll and vendor bills like legal and consulting services). This can be a burdensome, error-prone and time-intensive activity. With NetSuite, PE firms can automate these allocations, eliminating or significantly reducing manual intervention. They can use data like employee time entry to allocate actual monthly employee payroll to deals, consolidate overhead expenses and allocate to portfolio companies using dynamically calculated percentages.
Categorizing management and performance fees.
During the normal course of business, PE firms also charge management and/or performance fees to portfolio companies. Performance fees are paid to investment managers for generating positive returns, whereas management fees are annual payments made by the limited partners in the fund to the fund’s manager (and charged without regard to the actual returns). Using NetSuite’s configurable invoice templates, PE firms can categorize these expense types and present them in the desired format. NetSuite also provides the ability to attach supporting schedules detailing the rolled-up charges on the face of invoices.
These are just some of the ways NetSuite addresses key challenges that are unique to PE firms’ operational models.
When paired with the right ERP software and implementation provider, PE firms operate more efficiently, reduce the time it takes to close their books and obtain an accurate picture of their active deals and funds at any given point.
The name of the game for a PE firm is creating shareholder value. By freeing up time from running their own business operations, PE firms are able to focus on value creation, making better decisions on potential deals, assessing their portfolios and acting more quickly to close new or exit existing deals.