Accounting in a small PE/VC firm is usually more about convenience and accuracy than about complexity. In a nutshell, every fund has the following types of transactions it wants to track:
- Drawdowns and distributions(how much money LPs have put in the fund and how much have they received back)
- Investment transactions, dividends and exit proceeds (how much the fund has invested in portfolio companies, via equity or debt instruments)
- Management fees and expenses (how much money the fund has spent along the road, either on his own team or on third-party services)
When using accounting platform terminology, this means that we need to have accounts and counterparties set up in the way which would allow us to trace the above transactions and map them to funds, LPs, portfolio companies (incl. investment rounds) and service providers. As a result, we can get all the necessary drilldowns and allocations automatically.
Here we have 2 common issues arising:
- Need for consolidation / deconsolidation. A PE/VC firm might have several funds, each of which might include several companies in different jurisdictions. Or vice versa, a single legal entity might serve multiple purposes in the group, which shall be clearly separated in the final reporting. Different jurisdictions often mean different accounting systems and charts of accounts, even for management accounting purposes. All this is gathered together, sliced and diced to form consolidated reporting for LPs and GP itself.
- Master data management. This is a typical problem familiar to anyone who dealt with any kind of BI/ETL. The source systems can have data in different languages. In one of them “ABC Ltd” may be named “Abc Ltd”. There might be duplicates, different formats and mistakes. So, before the data is exported to its final destination it should be cleaned and mapped properly.
So, how does AIRR + Xero solve this in PE/VC management accounting? Let’s look at it through the process of the technical setup of this integration.
- Basic access setup and Xero Companies
First, you need to enable Xero integration in the Apps section, which will make all the necessary buttons/tabs visible:
As a next step, you enable Xero Tenants that you would like to have access to. In Xero there is a concept of Tenant, which means an organisation that has its separate chart of accounts, base currency, financial year, reporting, bank accounts and user base. In the case of management accounting there might be several legal entities within the scope of a single Tenant, and the accounts are needed only at a consolidated level.
Once the tenants are enabled, it is time to map them to Xero Companies at the level of AIRR. This separate step is required not to lose any information at the level of the AIRR portal mappings (see below), in case a Xero Tenant changes later.
2. Mapping Charts of Accounts
The next step in the setup process is probably the most tedious one, but it’s an inevitable part of any consolidation system: we have to join & link the charts of accounts. In the case of AIRR this means that we go through the names of accounts of every Xero Company and mark down what kind of information is there. For instance, is it a distribution or a drawdown account? Which investment vehicle, investment and round does it relate to? If it’s an expense, who is the counterparty we paid etc.?
After the mappings are created (again, it has to be done only once, if the charts of accounts don’t change), we start to observe the benefits of this data granularity. Now we can calculate virtually any metric for LP, company or services provider, as all the transactions are now imported automatically and mapped to them. There is just one more extra step connected with Master Data Management mentioned above.
3. Contacts mapping
We need to create mappings between Contact Names in the source system and Investor & Service Provider Names in AIRR to tell who is who. If the names match, it is done automatically, but if they don’t we have to check and link them carefully one by one.
4. Automated metrics based on accounting data
Now we’re all set. The transaction data is being pulled into AIRR, once it appears in Xero, and all the LP reporting is updated automatically in the investor portal thereafter.