IT Challenge

The Challenge: When it comes to private equity, one of the biggest administrative challenges that venture-capital firms face is keeping their investors informed in a timely manner. Hampered by small staffs, it can be a monumental task to gather and disseminate the relevant information to investors spread out around the world. Technology, however, is helping these firms manage the task. Here's how some are tackling the problem.

When Adam Collins was looking for a way to communicate online with investors in New Mountain Capital's private-equity funds, he thought about using his firm's Web site to exchange documents.

Collins, controller at the firm which manages $770 million and invests in companies worth $100 to $500 million, says, "I was looking for a way to report on the Web."

He had three criteria. "My first priority was security. Two was to make it user friendly and, three, to streamline and bring some efficiencies into my process."

He "toyed" with the idea of using New Mountain's own Web site, but concluded that it would be an "expensive and arduous process because of the security required."

That's because the 18-person firm would have to track and administer passwords for its 60 investors, known as limited partners (LPs), many of which also have "a number of CC contacts that receive the information on their behalf."

Collins explains, "We have great technology and a great tech person, but we're not necessarily versed in setting up a secure Web site with permissioning. It's a tremendous administrative burden and requires an investment to make sure it's hosted correctly."

He then turned his attention to document-management systems, where he discovered a number of products, most of which would "require major technological investments," such as new servers and computer upgrades.

So he decided to outsource the task and settled on a system from Manhattan-based Intralinks, designed originally for loan syndications but adapted to serve the private-equity market.

Now, LPs receive an e-mail when there's a new document to view and, using their browser, they can sign on and access it over the Internet.

Collins says there was "no software to download and nothing to put on a server. It's all administered by Intralinks. We didn't have to go through a major overhaul."

When it comes to private-equity funds, communicating with investors is a leading challenge. The fund usually comprises the general partner (GP), which is in charge of managing the money, and a number of limited partners, which range from private individuals to large pension funds. As such, their technology know-how and capability can vary dramatically and participants are often spread out around the world.

Industry standards call for the fund to provide LPs with financial statements within 45 days of the end of a quarter. It's a mad rush for the GPs, which must collect financials from the companies in which they've invested, crunch the numbers and then produce their own statements that are sent to the LPs.

Traditionally, it has been done through a blend of fax machines and couriers, which results in a blizzard of paper and a hectic scramble for firms to meet the deadline. Collins notes that his assistant "is buried under paper for three to four days getting this together. As a small firm, we don't have a dedicated team to get this out the door."

It's a common problem among private-equity firms. John Jaggers is the general partner in charge of the back-office operations at Sevin Rosen Funds. Based in Palo Alto, Calif., Sevin Rosen is into its eighth private fund and has between 400 and 500 LPs located around the world. The firm manages $1.5 billion invested in 50 to 60 companies.

"The Internet is a Godsend for us," he says. That's because, prior to the internal electronic-reporting system Sevin Rosen built, "We were sending out a giant mailing." He says when you look at the 45-day deadline and the fact that the mail can take another week, it's almost two months from the end of the quarter before LPs get numbers. That was too long, he says, noting the firm surveyed its investors and found that they wanted "quicker posting of the financial numbers."

The turn-around time for reporting "has become more important. Three to four years ago, it was not an issue," he says. Now, however, LPs have to answer to their own shareholders and there's a greater demand for timely reporting.

Sevin Rosen had already created the Entrepreneur Exchange, a Web site for entrepreneurs seeking capital, so it decided to create and develop a site for LPs.

Using CommonSpot, a content-management system from PaperThin, Inc. of Quincy, Mass., the firm developed its LP portal. "It fit our needs really well." The firm uses the system to authorize users and the documents are posted in PDF format. Sevin Rosen already had a Web master and the development cost was in the "low five digits. There was not a lot of development resources."

He says the system integrates with the firm's CRM program and its portfolio-accounting system. "I didn't see a lot of gnashing of teeth" when building it, which is "usually a good sign," he jokes. Now, Sevin Rosen is publishing info "much faster," within days of the end of the quarter.

Jaggers says that electronic reporting creates a self-service environment for limited partners. "We used to field a lot more phone calls than we do now," and staff would have to dig up lost reports. Now, there's a historical record that LPs can simply tap into when needed. Another benefit is reduced costs.

Allison Murdoff, director of investor relations at Thomas Weisel Partners in San Francisco, whose firm also uses Intralinks, says the reporting period used to be "laborious and expensive. This really streamlined our process," she says, estimating that it cut costs by 20 to 25 percent. Moreover, she says, "several of us can be using it at once." But it's not just financials that firms are reporting, clients are also using their systems to disseminate notices of distributions and capital calls.

Murdoff, whose firm is in the process of rolling out Intralinks to its 500 to 600 LPs in the four funds they manage, says down the road her firm will be looking at using the system for things like fund raising and launching new funds.

Limited partners seem to like electronic reporting. Ronald Sandquist, managing director of private equity at Advantus Capital Management, which has invested more than $500 million in about 79 private-equity funds, says it can be a daunting task to manage information at the quarter. "There's a lot of paper coming in at you." He says systems like Intralinks and Sevin Rosen's "help us get at it more quickly."

It's also a "nice way to preserve and store data," he says, adding that it's easier to share the information in-house with colleagues.

Adam Sloan, senior vice president for private equity at Intralinks, notes there are about 1,800 private-equity firms that could benefit by electronic reporting. It reduces the chaos of the reporting period and eliminates the need for firms to photocopy multiple documents, he says, noting that many private-equity firms are "very, very lean compared to big investment banks."

For New Mountain's Collins, the technology is keeping his firm "ahead of the curve" and he expects it will become standard fare for other private-equity firms down the road.