Why fund waterfall and carry calculations need to be automated

Luke Hinchliffe

Marketing Director

There is a myriad of SaaS (Software as a Service) applications available for almost every aspect of financial services processes, from back-office and operations through to front-office and everything in between. Within private markets alone, there are dedicated CRM solutions, financial modeling, fund accounting, valuation management and investor reporting to name but a few of the cloud-based solutions available.  

While many solutions promise to be “end-to-end" and “enterprise” they are often actually point solutions and become part of, what should be, a carefully orchestrated tech stack. And so, while private market organizations ponder whether to build or buy, it’s worth considering which highly specialized parts of a business process should be automated by experts who genuinely offer best of breed solutions.

CFOs and COOs are some of the most time-poor executives within private market institutions, since it’s their responsibility to provide accurate and timely numbers for investments, including working out management and performance fees, every LP’s share in return of capital, hurdle and so on. Research shows that many CFOs still rely on manual spreadsheets for their waterfall calculations, and while Excel is an excellent tool, it doesn’t lend itself well to carry calculations. Ultimately, they’re too complex and hard to automate in a spreadsheet and prone to human error.

The complexity of terms

We know that GPs (General Partners) spend a lot of their time running various distribution calculations. LPs (Limited Partners) however, such as pension funds, who have a certain percentage invested in alternatives, can only realistically apportion a fraction of their time and resources into these calculations. There is no strong incentive for them to hire dedicated specialists for this task.

Keeping track of the fees associated with fund management, partnership expenses, and carried interest imposed by general partners can prove to be a complex task, primarily due to inconsistent reporting practices and a pervasive lack of transparency in the industry. In addition, misinterpreted terms from LPAs (Limited Partnership Agreements) can lead to inaccuracies, overpayments, and discrepancies with fund returns.

The open-ended style that LPAs use, coupled with vague and sometimes ambiguous terms can result in real challenges for reporting. They can even result in regulatory fines and enforcements, such as when this US investment advisor was penalized by the SEC (Securities and Exchange Commission) after management fees were mis-calculated after terms were misinterpreted.

Automating each LPA step

Automation for fund distribution waterfall and carry calculations is a classic example of how technology can give time-poor executives back their valuable time. The qashqade application has at its core, a powerful calculation engine that empowers you to effortlessly generate and execute any calculation you need. You have the capability to construct each step of an LPA, regardless of its complexity or the specific asset class involved. Once you've determined the carried interest (carry), you can employ qashqade to allocate carry points to individuals.

This extends far beyond basic calculations, enabling users to simulate intricate scenarios. For instance, if you're negotiating a deal and wish to gauge the impact on your carry when selling for an additional €100 million, you can input this information into the software. Within seconds, it will provide you with a precise calculation of the outcome.

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