Managing carried interest, however, has never been more complex at pretty much the wrong time. It’s hard to avoid operational pain when people come and go, firms manage multiple funds, and carried interest plans multiply, especially if the firm relies solely on spreadsheets.

Firms might pursue deal-by-deal carry allocations, base them on years at the firm or other negotiated arrangements and increase certain individuals’ allocations on deals where they were involved or decrease allocations where they weren’t. Allocations might change over time, too. Tallying compensation therefore requires accuracy, scalability, and flexibility.  

But operational gaps are undermining many private capital firms’ efforts to manage carry and compensation. 

In private equity, venture capital, and other firms, the front office includes sales and corporate finance, the middle office manages risk and IT resources, and the back office performs administrative tasks, support, and payments. 

Front-office performance usually sets the standard for success. CFOs know, though, that middle and back-office operations are also key to winning. Misalignment across those three offices – especially between the front and middle offices – is especially likely to lead to frustration over carried interest allocations. 

That frustration, incidentally, is one reason why retaining talent can be difficult in the private capital industry. Seventy-six percent of CFOs of the largest private equity firms say that both finding and keeping talent are critical to growth, according to an EY survey released this year. At smaller firms that rely more on outsourcing, 60 percent of CFOs said retention of the right people is a priority. This talent storm is occurring as accountants are leaving their jobs in record numbers, too.  

The front office work of figuring out everyone’s place in the carry waterfall is obviously the most important incentive in retention. The middle office has an important role, too, however, in making sure that promises are met on time and that the system for tracking and awarding allocations is transparent and reliable. 

For private capital firms managing multiple carried interest and compensation plans, aligning the front and middle offices means looking beyond spreadsheets to get the job done. New SaaS solutions in particular provide cross-functional efficiencies, onboarding, communications, and data and performance analysis that bridge operational gaps and reduce the stress that hurts success and retention in the hyper-competitive private equity field. 

There’s still a place for spreadsheets in managing carry and compensation. You can prove out a plan using them, for example. Staying on spreadsheets long-term, though, is hard. They start falling apart as plans proliferate, team members leave, or new members join, and when there’s an exception here or there – and there’s always going to be an exception here and there. Spreadsheets undermine control. 

Private capital CFOs need a system to handle this complexity. They need a database structure where they can run reports and exercise reliable controls, like retrieving information from years ago without digging through spreadsheets in one’s email archive.  

Shifting to SaaS for carried interest allocation management does not mean ditching Excel. Let’s be honest – most CFOs have at least a half dozen spreadsheets open on their computer right now. In fact, be sure to shop for carry and compensation software applications that export data to Excel. 

What SaaS solutions help avoid is spreadsheet disorder. Private equity firms can generate spreadsheets with 40 tabs to create employee statements. A mistake in a formula in a single cell can have far-reaching consequences. 

SaaS solutions create a controlled state on a shared platform that uses indicators to mark exceptions and catches mistakes quickly so they can be fixed rather than cause frustration.  

These innovative solutions aren’t just for established firms that have outgrown their legacy systems or spreadsheets. Even at startup funds, forward-thinking CFOs are deploying these technologies now to avoid the disruption of overhauling their carry and compensation management when they have little choice but to adopt the latest solutions to keep pace with their growth. 

Software solutions also enable an emerging level of creativity and nuance in carry and compensation. Among venture capital firms and funds of funds, some firms are deploying high-watermark or catch-up provisions for new joiners. That adds complexity to the accounting operations staff in the middle office unless they are using an agile solution.   

CFOs are thinking about more than carried interest when it comes to compensation, retention and where to become more efficient, of course.  

Firms are increasingly seeking ways to aggregate compensation data across the enterprise, to view and report on salary details, bonuses, retirement contributions, management company income, and equity investments by partners/employees – all in a single view. They are using this data, furthermore, for year-end budgeting, strategising, forecasting, and fairness of pay initiatives, such as diversity and gender pay gap analyses. New SaaS solutions can be tailored to provide these services, too.  

All this complexity is giving private capital CFOs headaches today. Solutions that effectively bridge the front and middle office can alleviate pain.