In this article, our VP of Sales North America, Jason Haft, shares his insight into how firms have adapted and embraced technology and why he believes "Implementation 2.0," or the move to LemonEdge, is more straightforward than you may think.
Spreadsheets, spreadsheets, and more spreadsheets
Before any centralized systems came into existence, firms relied heavily on Excel (yes, even more than today). It served as the allocation engine, tracked key deals under evaluation and the status of the most current fundraising, and acted as a data repository for most all the metrics relating to their portfolio companies. Today, it's still the way many firms will start, and it serves the purpose for at least the first 3-5 years of a private equity firm's life.
As Jason explains:
"As a firm grows, the Excel solution soon becomes unsustainable, and systems need to be implemented to move operations out of individual spreadsheets and into something more centralized."
Out of the requirement for centralization grew a marketplace of solutions to act as a GL. They offered everything from financial reporting to CRM systems and more to support a firm's growing portfolio. Each time a firm implemented one of these solutions, the project focused on eliminating risk and implementing controls to assure internal stakeholders and external investors that their operations were modern and trustworthy.
Implementation 1.0
The first major implementation in a firm's growth was to shore up the fund GL to bring key financial reporting into a single system. However, when firms undertook these initial implementations, they uncovered the first issues - bringing together data that is managed in various Excel files and different systems is incredibly hard!
Jason adds:
"To migrate from disparate data to something more centralized needs an intimate knowledge of the firm's history and plenty of investment to decipher where the breaks are, how to address them, and shore them up. In private equity, there are countless examples of implementations that ran significantly over budget and exceeded timelines, and once finished, there was understandably little appetite to take on more automation."
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Success (well, in part, at least)
From implementation 1.0, firms achieved their goal of being able to produce the critical quarterly reports from their system and accepted that they would live with the other processes offline (back in Excel).
Some ambitious firms would promise to revisit those processes after a couple of quarters of activity. But what often happened was once the GL issue was solved, firms moved on to other projects: CRM, Portfolio Monitoring, and Treasury Management, all in the interest of addressing those concerns of living in Excel.
But what about the initial problem, the one that was deemed so critical it was the first tackled? How many vital processes can a firm sustain living in Excel if they genuinely want to have strong controls over its processes?
When firms look at ways to get out of Excel, the legacy platforms offer few options to enhance their capabilities to support custom calculations. The choices are to either go back to the vendor and build a see if they can build a custom solution or build applications surrounding the GL to handle these calculations.
As Jason shares:
"For the Custom Calculations, typically, they are a black box where you can't see the code performing the calculations. When a scenario comes up that you haven't accounted for in your requirements, you invariably either go back to the vendor to rebuild at an additional unbudgeted cost or stop using the solution altogether. These enhancements create other complexities when upgrading the solution and become a deterrent to staying current on the current release."
Building custom applications comes with risks, as PE firms are usually staffed with a small technology team and don't have the resources to support building these applications. Some of the larger firms have dozens of employees building and managing applications to put the requisite controls around their processes. But it's expensive and time-consuming.
The LemonEdge difference
Neither of the abovementioned options is ideal, and there's long been a gap in the market for something different, better, and ultimately, more modern.
Designed with over 20 years of experience in the industry, LemonEdge was built from the ground up to give firms the control they are looking for and the extensibility they crave.
Starting with our Allocation Engine, the system understands how funds are being set up today and can provide real-time straight-through processing to ensure you can provide all the reporting you need. Allocation Engine will take a transaction recorded at the lowest level in the fund structure and allocate to all the partners at all levels instantaneously. You no longer have to wait till the end of a quarter before being able to run a separate process to move transactions throughout the structure, LemonEdge provides the ability to see transactions at all levels in real time.
Next, our Transaction Codes offer users a logical way of entering their quarterly activity with controls to ensure consistency across all users in the system.
Algorithms provides the extensibility needed to handle complex calculations. Users who can build the offline Excel models your firm is using today can develop embedded custom calculations using LemonEdge Algorithms, pulling data from the system into the Algorithm, then have those calculations write data back into LemonEdge. Any future enhancements or modifications are handled by those same users giving you the confidence the system can grow as your firm grows.
Lastly, the Canvas technology LemonEdge provides allows you to take all features mentioned above and use them to do scenario planning and what if analysis on the platform through the front end. Want to see how projected distributions can affect the carry your fund receives? Set up a new Canvas and you’ll have the answer in minutes.
Implementation 2.0
While this sounds appealing, it's understandable that firms are hesitant about jumping into another implementation phase, given all the pain and investment involved the first time around.
However, this is an area where hindsight can offer a way forward. Now that you have a system, your data is in a much better state today than before the first implementation. Not to mention, there are now many applications that can support the migration of data from one defined table structure to another.
As Jason surmises
LemonEdge is an exciting way forward and can offer firms modern solutions to problems that are critical to a fund's operations. Using a modern technology stack allows us to address age-old issues and gives firms an extensible platform to handle whatever changes come at them in the future.
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