A Universal Playbook: Operational Excellence in Private Equity & Real Estate Investment - Part II of III

Halloween might be behind us but for bleary eyed investment analysts, the terrors of the night are not. At this moment, portfolio analysts all over the world are frozen in fear as they work into the wee hours tying out a waterfall promote structure manually in Excel. I've lived this nightmare and know all too well the feeling of dread anticipating senior Finance leadership review of the output from a model with thousands of potential points of failure and human error. (A "close your eyes and pray" strategy to combat circular reference errors isn't one I recommend when presenting to the Investment Committee).

But as evidenced by the topics and takeaways at the two Investment Advisor events serving as the focus of this series, reliance on manual tools like Excel is starting to go the way of the HP-12C (R.I.P. old friend). Modernization of the Finance Vertical from asset to portfolio to enterprise using end-to-end cloud based technology and data repositories is reducing the time spent on producing the numbers and increasing the time spent analyzing them. As one panelist at Private Equity International (PEI) Operating Partners Forum , a Managing Partner at Ronin Equity, put it as he described how they gauge their back office and reporting effectiveness: "if it's not Value Additive for the business, it should be automated". This panel also unanimously lauded their 10 business day close cycle with "no exceptions". "If Microsoft closed their books daily in 1999 then what excuse do we have?" A roar of applause erupted from the audience and we carried him out on our shoulders.

With the baseline finance and accounting workstreams on autopilot, deal and investment management teams are able to focus on leading versus lagging indicators to support strategic decisions. Proactive versus Reactive. Big talk but this corporate Private Equity peer group is also walking the walk by making the investments, upskilling their talent and managing the change. They were able to justify what I found to be theme #2: Technology Investment in a Downturn. 

The concept of Digital Value Creation was a hot topic at both PEI and the Pension Real Estate Association (PREA) Institutional Investor Conference . The former had several uber-specific sessions ranging from "Cybersecurity in the Modern Age: Do's and Don'ts" to "Advanced Data Science to Govern the Business Throughout the Investment Life-Cycle" serving as think tanks for emerging Finance technologies like AI and machine learning in portfolio value creation. And while robotics and artificial intelligence are not on the immediate horizon for most real estate investment enterprises, the PREA event dedicated multiple sessions to Real Estate Finance Technology Trends.

According to a recent Real Estate Technology Trends report referenced at PREA, the majority of RE Investment organizations leverage the cloud for hosting property and corporate accounting general ledger systems. Beyond that, Excel is used broadly either alone or in conjunction with another system to calculate investor and equity allocations and for asset valuation models. Then you have Data Analytic tools, Leasing software, CRM tools, Asset, and Transaction Management tools. It's a fragmented tech picture to say the least. Even if some of these functions are outsourced, there is still the day of reckoning each month to pull the data together to create a cohesive financial picture and narrative for investors. Several of the conversations I had with fund managers turned to this subject of consolidation and roll up of increasingly stratified investment strategies, property types, investment vehicles, and deal structures. The time and resources dedicated to this would suggest it is, at the very least, accurate, but alas finance teams are constantly battling financial statement integrity. And that's just the historical reporting.

In a session entitled "Allocating Capital Today: A CIO Panel", the discussion was more forward looking, hinging upon how to take advantage of current market dislocation. "Global allocators are faced with surveying the current economic landscape and sensitizing scenarios to determine their investment plans across asset classes and geographic borders" said Kathleen McCarthy, Global Co-Head of Real Estate at Blackstone. She gave some fascinating detail on their portfolio diversification (80% concentrated in warehouses, rental homes, hotels, data centers, and lab office space) and referenced the brave new world of forecasting managing performance metrics in a world beyond the traditional four basic food groups. McCarthy also gave credence to the use of technology to incorporate ESG metrics into their valuation methodology (stay tuned for commentary on theme #3: ESG Investing and Reporting).

Like their corporate peers before them, Real Estate Investment Managers are beginning to take a hard look at their technology ecosystem with a willingness to start from scratch and pull the rug out from under the traditional back office fixtures like Yardi, Argus, and MRI. As evidenced by COVID, a downturn can afford an excellent opportunity to clean house to prepare for future growth. The question isn't how to justify this Operational Technology investment but rather….How can you afford NOT to?....