The quality of investor reporting is essential for every PE/VC firm, and there are multiple layers of it.
First and foremost, every investor wants to know how much money he has spent and how much money he has received. This is the simplest question any GP can answer. All investment management platforms provide this functionality called capital accounts and allow fund managers to track their distributions and drawdowns for every investor. However, it is not always perfectly straightforward; some complications exist. Dependent on the specific LPA terms, adjustments might need to be made to correct cost allocation and late entrance fees. The commitments also tend to change over time because of secondary deals or changes in investors’ appetite, which adds an extra layer of complexity. Nevertheless, this is the type of LP reporting that fund accounting software systems tend to do very well and that is the most automated.
Second, LPs want to know how much money they will receive in the future. This is more about fair value measurement in a world where there is no such thing as fair value. Here, the opinion of the GP on the value of the assets in the portfolio should be translated somehow into meaningful LP reports. These reports (usually prepared as nicely formatted PDFs) contain a detailed disclosure of underlying reasons: why do we think that this particular company is worth this much and not 3x more or less.
This type of LP reporting is more time consuming for analysts to prepare compared to the previous one. If we’re talking about reliance on CompCo/CompTrans, then the software used for this exercise is Bloomberg/Pitchbook/Reuters etc that provide stock market data and financials. However, on top of that, an analyst should put his own judgment on the pricing of the asset, and also some kind of carry prediction model for the fund as a whole. Subsequently, the result should be allocated by investor, as every LP is first and foremost interested in his own net cash flows, rather than in gross performance of the fund as a whole.
Third, some LPs go even further and want to know how the portfolio companies are doing. These LPs love to dive deeper into the business of the investments they make and can be either honestly curious or control freaks, which is also fine. This type of LP reporting is the most time consuming for investment analysts, and very few PE/VC firms do it properly. Usually firms tend to provide a brief summary of revenue and EBITDA trends, without any further disclosure. To do it well with a small team in a timely manner, one should introduce some degree of automation in metrics collection and storage, otherwise it is easy to get stuck in a back-and-forth communication frenzy with the management of the portfolio companies and end up with missed deadlines.
At iTech Capital we started 2 years ago, by building the third type of investor reporting system. We’ve chosen one of the cheapest BI platforms available on the market (Klipfolio), as we didn’t have that much data to track and didn’t need advanced ETL and warehousing functionality. We’ve built integrations with our portfolio companies’ back office systems to get the metrics from them directly, without management involvement. The result was a set of dashboards that looked nice and were quite informative for both the team and the investors. In addition to those dashboards, we provided NAV reports in pdf (second type of reporting) and distribution/drawdown notices (first type of reporting). This is a point which, to be honest, most PE/VC firms do not reach. But our LPs definitely demanded more — they wanted all three together, in a single platform/app.
That’s why we launched AIRR, a SaaS platform that provides all three types of LP reporting. We invested in our own integration platform that pulls data from fund accounting systems, adds valuation functionality on top of that and combines it all with portfolio companies metrics. It goes even further by giving users visibility of the fund deal pipeline (integration with CRM) and extended reporting materials (document management).
We made it available for all our LPs as a single web portal and are launching a mobile app this month. The outcome was a significant increase in investor satisfaction and engagement, as well as manageability of the fund as a whole, which is highly important for us as a firm.
We have decided to share our experience and present our software to the market. We are keen to make AIRR available to other funds and make the investment management process easier and more transparent. Let us know what you think, and apply for access to a demo version.