In investment Allocations hedge funds and private equity fall into the same alternatives bucket. But when it comes to technology, they have historically been worlds apart. “Hedge funds are software companies as much as investment companies,” says Jeremy Payne, senior vice president at New York–based data provider Capital IQ, a Standard & Poor’s subsidiary with customers in both camps. Private equity firms, by contrast, rely mainly on a few readily accessible “tools of the trade”: e-mail, BlackBerry devices and Excel spreadsheets.
Recent market developments, however, may soon punch holes in that generalization. Private equity firms have grown bigger and more complex, demanding sophisticated applications; today’s credit crunch has crimped deal making but put an even greater premium on risk management and advanced analytics. Private equity firms don’t operate at the frenetic, split-second trading pace of many hedge funds — they typically do at most 20 deals a year — but both serve a mix of institutional and high-net-worth investors and face scrutiny from institutions regarding operational and data quality. Just so, the technological requirements of these two types of firms are converging — and the firms are using technologies from many of the same sources.
Although private equity funds may not go so far as wanting to be software companies, they are “tired of running out of space on spreadsheets,” notes James Hutter, global head of JPMorgan Private Equity Fund Services. So these firms are shopping in the financial technology bazaar.
Hutter’s unit, which serves more than 200 funds with $50 billion in total committed capital, is part of JPMorgan Chase & Co.’s treasury and securities services business, which also supports hedge funds within its broad range of asset and transaction services. Similarly positioned is Citigroup, which through its $800 million acquisition of Bisys Group last August obtained, along with a hedge fund services business, a private equity unit that now has 550 funds and $80 billion in capital under administration.
Those are full-service businesses that appeal to firms seeking a one-stop relationship. JPMorgan’s DealVault technology, released in April, allows for tracking and analysis through the entire life cycle of a deal, in fully auditable formats integrated with back-office and accounting systems, viewable over a secure Internet connection. Having “all of these things wrapped into one” is essential for a top-tier private equity firm, says Marc Unger, CFO and COO of CCMP Capital Advisors, a New York–based firm and former JPMorgan affiliate that has more than $10 billion under management.
Joseph Patellaro, head of Citi Private Equity Services, adds that automation fosters standardization and hence efficiencies, “so that when a firm launches another fund, it can easily grow — it is repeatable.”
But comprehensive processing platforms like Citi’s and JPMorgan’s aren’t the only choices. Private equity firms can buy systems from vendors specializing in their businesses or in specific tasks, such as deal structuring, portfolio management or reporting. One established product for the private equity and venture capital sectors is Investran, which Wayne, Pennsylvania–based SunGard Data Systems acquired in 2004. As more and more firms hire staff to focus on operations and technology, they are increasingly able to take a “best of breed” approach to assemble their infrastructures, says James Wolstenholme, banking and investment services research director at Stamford, Connecticut–based advisory firm Gartner. “They’re moving away from one overall front-to-back-office system to separate but mergeable components,” he explains.
A case in point is Hamilton Lane, which has more than $10 billion in private equity assets under management and $75 billion in advisory assets. The firm is using the Deal Manager and Fund-of-Funds modules from Vantage Reporting, a Newton, Massachusetts, software company with private equity and hedge fund customers. Says Thomas Kerr, a principal of Bala Cynwyd, Pennsylvania–based Hamilton Lane, “We were using a number of disparate systems, both third-party and homegrown, and found flexibility and easy integration with our existing infrastructure in Vantage.”
But available options didn’t work for New York alternatives manager Tiedemann Investment Group; it installed its own shareholder and partnership accounting system, Penny, in 2006, and last year spun off a subsidiary, TKS Solutions, to market Penny to other funds. One way or another, says TKS president Ron Kashden, “a fund has to have credibility with investors by getting statements out on time and offering efficient reporting.”
