FD Profile: Hermes GPE’s Karen Sands
Hermes GPE was formed from the merger of the private equity businesses of Hermes, at that time, the in-house manager for the BT Pension Scheme and Gartmore, manager of the RBS pension scheme. The merger presented many challenges from a Finance & Operations perspective, with the team being tasked to find optimal tech systems and solutions to successfully enact both the merger and the subsequent development of the business. For Hermes GPE’s FD Karen Sands, meeting these challenges has provided an opportunity to significantly expand her role at the firm, becoming an integral part of the success of the business today.
The Drawdown: Your role at Hermes GPE has seen some major progression since you joined as a fund accountant, can you provide an overview of the journey so far?
Karen Sands: My initial role as part of the Hermes Private Equity finance function was pretty much internally facing only. Back then, the finance function was just three of us and as the captive arm for the BT Pension Scheme, investor reporting was very light; just providing fund financial information such as IRR’s and cashflows and so on.
The establishment of Hermes GPE gave me the opportunity to switch from pure fund accounting to being involved in all aspects of financial control for the management firm. I wanted to move my career towards the FD/CFO route; I wanted to be at the heart of decision making for the firm. I spent three years changing my skill sets; learning how to budget, forecast, produce management information and understanding the regulatory needs of the business such as undertaking an ICCAP and submitting regulatory returns. The use of a traditional accounting system which runs multiple ledgers and entities that follow strict accounting standards is a very different approach to fund accounting.
In 2013 I was made FD, taking full responsibility for both corporate and fund finance and operations activities. This meant if we were setting up new funds, I had that automatic ability to tie up cause and effect so setting up a new fund didn’t just mean an additional report to produce, it meant additional revenue, resourcing considerations, business growth ie I had developed a holistic view of the business and the impacts of various new initiatives.
I realised at that point that there’s no such thing as traditional accounting in PE! For fund accounting, you’re looking across performance metrics, the mathematics story, or fund structuring, or reading LPAs and reporting to investors, merging cashflows and capital – so it’s very difficult to define the skill set for that role. Sometimes it requires a technical specialist mindset and at others a commercial approach is needed – both are very necessary as you need to be able to speak the right language.
TDD: How did the Gartmore/Hermes tie up impact the firm’s finance function, especially with regards to merging two separate systems?
KS: First and foremost, we needed to integrate the fund data and use one system in order to present a unified track record. Both Hermes Private Equity and Gartmore Private Equity had a long history and huge amount of data. Each organisation had been operating their own fund systems, each with different methods and processes.
That was an enormous task, which was made even more complex by having common investments between both businesses. Those were challenging times; scanning data going back 20 years.
TDD: After combining the two separate systems and creating a consolidated entity, what was the next task to tackle?
KS: The next major step was preparing to become external market facing. We needed to think about how to extract data; create a unified track record; and how to develop single brand reporting across in excess of 25 live fund mandates. This was all important in terms of matching the increasing sophistication of LP needs.
We concluded our first external fundraisings for PE and Infrastructure in 2014 and 2016. The infrastructure vehicle closed at £1.2bn, while the PE fund closed in 2013 and fund III closed in 2016, both exceeding their target sizes.
Throughout this journey of updating our systems and refocusing the finance function to be more client facing, our technological systems and capabilities have been building up.
TDD: As you’ve been upgrading your systems to meet the business’s changing needs, and as investors become more demanding, which areas of reporting have become most challenging?
KS: Nothing is one-size-fits-all despite the best efforts and intentions by organisations such as ILPA and Invest Europe. Each of our mandates has a level of uniqueness and each investor has their own demands and needs. Those demands and needs have changed over time as LPs become more sophisticated and the regulatory and reporting landscape has evolved. The team and I work across both the infrastructure and PE funds where there can be huge variance in GPs, risk reward, investor type and so on. The different performance metrics across each asset class also need to be taken into account. As well as standard PE metrics (IRR, TVPI) we also need to report on cash yields, income yields etc. Accordingly we need a system to deal with all of the above. In our case customised solutions, actually, are not the answer. Given our complex needs, there is a danger of breaking a system if it has been heavily customised, and updating a customised system can be difficult and lengthy – we cannot afford that operational risk.
TDD: What’s next in terms of increasing your technological capabilities?
KS: We recently moved from server based applications to hosted systems. Hosted solutions move a certain amount of risk to the software provider who are experts in their application and how it should be supported, particularly with regards to patches, hot fixes etc. We use two different systems currently, to distinguish between client and shareholder data and reporting activities. Our next steps are to implement integrated reporting in terms of using tech to improve reports, increase timeliness etc.
We just had a system health check with our technology service provider for fund accounting and we came out in the top 20% of their clients in terms of clean data. That means in terms of how our data is entered onto the system and then what is extracted, there’s little to no manipulation.
TDD: Increasing investor demands and growing levels of regulation are key concerns for finance and operations teams; how are you meeting these challenges?
KS: Because Hermes GPE is a global firm, headquartered in London with offices in New York and Singapore with a global investor base, we have regulatory status in various jurisdictions, so it’s not just the UK / European regulations we deal with, it’s much wider.
Singapore is a very active regulator. In the first quarter of this year alone, we have needed to complete a number of sizeable surveys. The regulator looks through every aspect of the group, not just Hermes GPE’s Singapore activity, so we have to be able to slice and dice all data and deal with those regulatory requests.
Hermes GPE is both a full scope Alternative Investment Fund Manager and a Collective Portfolio Management Investment Firm meaning our regulatory analysis is complex such that we see overlap where potentially the regulatory has not caught up with the implications of holding ‘dual’ permissions thus creating a lot of unknowns. We are facing all the same challenges as other PE firms with regards the changes in the regulatory and tax landscape. We are considering the DIMF rules (disguised investment management fees and carried interest) – specifically working out the impact on co-investments. And, we need to do this all for a global workforce, where various countries have different interpretations of carry and co-investment.
Furthermore, this all happens in the context of mini-cycles throughout the business. Unlike a more traditional PE house, which raises every four or five years, we are running multiple fundraises each year, as well as segregated mandates. At any given time there are around 15 mandates running that need their own reporting cycle.
Regarding investor demands, operational due diligence is key. That’s the way the market is moving. Over the last two years we’ve seen a huge change. Investors today want to understand how we’re dealing with cyber security, or want a tour of our server room, they want to meet the finance team and review processes.
TDD: With such a wide range of complex tasks to oversee, what’s your main priority in planning for the future?
KS: The biggest challenge right now is working out if we are at the top of the cycle, and if so, what are the ramifications of that. It’s almost like invoking your business continuity plans; we’re asking ourselves if we can deal with all of the requests that will come from investors. Have we thought about every cut of data?
There’s also a raft of regulatory change, as well as Brexit, which combined create a lot of uncertainty.
To tackle all of this, we need the best systems and the most robust data and excellent staff to implement and run these processes and systems. Everything must be secure, and meet the needs of our shareholders, clients and stakeholders.