Large amounts of capital are flowing into private equity real estate (PERE). According to data provider Preqin, the total capital raised globally for real estate funds in both Q1 and Q2 of 2015, exceeded capital raised for any other fund type, including buyout funds. And, while the systems used at the asset level for property management are mature and well established from a technology perspective, the practices in place for PERE fund administration, investor accounting and reporting tend to lag well behind.
The investor accounting function within many PERE firms is largely managed in spreadsheets that tend to be inefficient and prone to risks and errors. Increasingly complex fund structures, multiple fund closings, partner transfers and intricate fee calculations make for a dizzying maze of spreadsheets without adequate controls. Likewise, investor reporting is often handled through homegrown, in-house developed portals that have become dated, are costly to maintain and lack the interactivity and drill-through capabilities that investors now expect.
Fundamental to solving these challenges, however, is recognizing that they are not real estate challenges at all. Buyout, venture, infrastructure and natural resource funds have similar requirements pertaining to fund administration, investor accounting and reporting. A clear line must be drawn between the challenges that are purely a function of private equity fund administration versus the intricacies that arise from managing real estate as the underlying asset. With that in mind, however, there are nuances specific to real estate that are important to consider when improving accounting and reporting. For example, many real estate funds use third-party operators to manage properties. These operators perform the property-level accounting on their own systems using charts of accounts that naturally differ from that of the fund. Activity across properties therefore needs to be normalized, using a consistent chart of accounts, to facilitate the accounting and financial reporting processes of the fund.
When rolling up activity across properties, it’s also important to consider the implications for performance reporting. Mapping components such as capital expenditures, sales, income, and appreciation is necessary in order to compute asset-level performance returns, including variations by region and property type, income and appreciation, leveraged and unleveraged returns.
While it has fewer implications for fund accounting, another key consideration concerns aggregating and normalizing key metrics on the property such as major tenants, occupancy rates, and property improvements. The fund may also want to share this information with investors in the quarterly report.
While the challenge is considerable, it is more attainable than most realize. PERE general partners do not need to build some kind of super-system that can handle both the intricacies of day-to-day real estate operations and also deliver sophisticated private equity accounting and reporting requirements. They simply require the right tool for each job, and a thoughtful approach to connecting the dots in between.
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