Private Equity Firms Face the Glare of Dodd-Frank

Private equity firms facing scrutiny under the Dodd-Frank financial reforms are looking at front-office systems to provide data to regulators as well as investors.

I met with Eric Bernstein, COO, North America for eFrontat the SIFMA event, who discussed some of the trends in the private equity space.

With more scrutiny from investors and regulators, private equity firms are moving off of internal spreadsheets and older technologies. The likes of TIAA-CREF and GE Asset Management are investing in private equity within the alternative space. Since the private equity market is growing, the general partners also want to use the web-based platform from the road and show it to prospects, says Bernstein. Three types of players can use the system— general partners, limited partners (investment advisors and asset managers) and fund administrators, he says.

Earlier this week, GTCR, leading private equity firm announced that is has chosen the FrontInvest Alternatives platform from e-Front to support all operations including general ledger/accounting, investor reporting and portfolio management. GTCR started implementing the Web-based system in April after signing the contract in March.

GTCR chose Frontinvest, after conducting an RFP with Ernst & Young. “They selected us to do CRM (customer relationship management) and deal flows all the way back to accounting,” says Bernstein. Also, when general partners go out and look for new deals, they call the limited partners (LPs which are the investors) to commit to the fund. Once the companies are bought, they have capital calls. “We generate the capital calls and distribute the cash. Once the companies are sold, there are cash returns, too," explains Bernstein.

The system handles anything deemed as alternatives– which includes private equity, fund of hedge funds, and real-estate. Real estate funds are also coming back as investors are making direct investments in properties and using the system to capture all the cash flows associated with the property and rolling it up to the funds. A key feature of the system is the analytics, which can be used for benchmarking the performance and comparing it to historical returns, says Bernstein.

Investors in hedge funds, which are also subject to audits, are also asking the general partners (GPs) to pull the data from a system, says Bernstein. With stricter regulations coming from Dodd Frank requiring hedges funds to register, a lot of the general partners are registered (or are registering) as investment advisers, notes Bernstein. The demand for private equity systems is bound to grow. Banks may need to spin out their private equity funds under the Volcker Rule, and these new players will then need systems.