The Private Capital Talent Series Episode 10: Fund operations, where workflow innovation goes to die

The spreadsheet is never going to go away in private capital fund operations. And AI, RPA and blockchain are going to arrive on the shores of PE and VC workflows last.
We ask Steven Boydstun of MUFG why, and why what you should do next is not what you think. Steven explains why the right next step is not to sit back and get complacent. Steven discusses why smart firms are going the other way, and tripling down on the right technologies.



Chris Gale  00:03

Welcome to the Private Capital Talent Series and “Where Workflow Innovation Goes to Die” – that very provocative title, which we’ll get into. We have Steven Boydston from MUFG Financial Group and Richard Change here at PFA Solutions. Before we kick off, we’re going to read the following: The views we’re expressing today are solely our own and should not be attributed to PFA Solutions, or MUFG Investor Services, or its affiliates. Our presentation is solely for educational purposes and does not constitute any form of professional advice.


Steven, you are our special guest. Do you mind opening us up and talking about MUFG and what you’re doing?


Steven Boydstun  00:54

Thank you. I’ve been working with MUFG since 2019. I was chief technology officer for a bit. In 2021, I took over the business of private equity, real estate, and private debt fund administration in the US for MUFG Investor Services. We’re in the US focused on those industries, growing like most people are in the fund administration business, serving our clients at MUFG for 16 years. But the business itself has been around since 2000. I actually had a run here, when we first started up. So, I’ve been in the industry for 23 years, working in technology, primarily, with a lot of great companies. I’m very opinionated about the technology space and love to share my thoughts with folks like yourself and Richard.


Chris Gale  02:07

The two of you know each other from a previous life?


Steven Boydstun  02:15

We actually did work together. We knew each other a bit. Richard and I were working at TPG. Richard came in and did a fabulous job with me as we built out their platform. That’s how we got to know each other, and then we suffer each other now from here on out.


Chris Gale  02:41

Fantastic. To our topic for this webcast, how are you specifically responding to the market?


Steven Boydstun  02:50

It’s an interesting question. To go back a little bit, there was a webcast where we hosted three industry leaders. Some of their remarks were really spot on. There’s a lot of uncertainty in the market right now. As that uncertainty happens, people are focusing on how to become more effective, focusing on their back office, and their operations in general. The other thing that they are doing is looking around corners, asking, “Where’s it going? How’s it going to go?” In private equity, these are times of opportunity. They’re not ones of terror. They wonder, “Is it going to fall out from under us?” because the markets are not responding exactly like normal. Everybody’s in this wait-and-see position. This one’s been a little more pronounced. But, again, this is private equity. Change is in their wheelhouse. So, ultimately, despite the concerns, everybody’s excited about what’s going to happen next.


Chris Gale  03:57

On the previous webcast, one of the participants was talking about how this is a vital time for a lot of scenario planning. A lot of scenario planning is done on spreadsheets. What is your philosophy on spreadsheets and how it relates to your approach to helping clients?


Steven Boydstun  04:19

In general, I think technology in our industry is very interesting. Spreadsheets are an answer to a challenge in our industry. The private equity industry has been established for a while but it’s still a very small industry with a small number of players. So, the vendors that come into the industry, the big enterprise vendors that dominate public markets and whatnot – like when SAP sells something, they sell it for 450,000 times, while our market-leading vendors sell it maybe 800 times tops. The deals that you have to strike to work those things are much different. We’re looking at tools, but always as tools that need to be adapted. Nobody has the same installation. It’s not configuration. It’s a lot of customization. One of the things that you see is that spreadsheets tend to be the go-to when a system doesn’t adapt correctly.


Richard Change  05:51

You can’t read Microsoft Excel from an analytical console. Everybody knows that it can do exactly what you need it to do. There are all sorts of functionality always coming in with Microsoft Excel as an analytical tool. It’s unbeatable. But when you start to make that Excel spreadsheet your data source for scheduled investments or even some accounting transactions, it starts to lose its scale. You have one version of that file that sometimes gets manipulated by this person or that department or that group. We truly pride ourselves on a pithy solution – removing Excel from a data source mechanism. It’s still a great analytical tool. Everything within our platform you can export to Excel. It’s accelerating Excel from being the data source of information and then leveraging it for the analytical tool that it’s meant to be.


Chris Gale  06:49

Those spreadsheet debates are concluding, but I think it’s important to get the framework together for what we want to talk about. Are you saying, Steven, that the private capital software market is so small that it’s difficult to make software that can be as flexible as those firms need? And so, it’s hard to beat the spreadsheet or Excel for its flexibility?


Steven Boydstun  07:30

Yes. The flexibility is there. It’s an individual tool. That’s a really important thing. When we talk about tooling, if it’s an individual tool, and it’s very simple, you can do complex things in it individually. But that’s where its utility runs out. That’s why you need systems. The other thing is that there are a lot of different innovations that are happening in the industry. Private markets are slow to adopt, but these innovations will have an impact. Everybody that I know is working hard on those. For instance, artificial intelligence. The first pass was about, “How do I get documents picked off the web to provide to my client?” and things like that. Now you’re looking at ChatGPT and large language models to do it. Both of those are our challenges because our datasets are so small and infrequent. They are going to keep working on it. It will have an impact. So, it’s important to start having that systematic mindset to be able to take advantage of those things. But to say that tomorrow I’m going to put in AI and we’re going to have all these great efficiencies is a misnomer. At this stage, I think of them as very valuable tools. Our folks and our people will still be our driving engines for the foreseeable future as we keep up with the industry.


But, in terms of having AI as a tool that enables scaling and nails productivity, one example could be how we deal with large, limited LPs and each one of the clients that we serve. Wouldn’t it be nice if you had a ChatGPT that learned all your LPs and, while you’re working on some particularly complex accounting transaction, you can ask it a question – “Does the LP allow for this sort of transaction?” –  you start thinking about those things as tools. All of a sudden, your projects change from one of scale and mass production and everything to one of intelligence and learning. So, I think those would work really well. In the future, this robotic process automation or RPA will be the same no matter the scale. We’re not going to put a team of robots. One accountant can go out to the portal and do it. It’s annoying, but it’s not cost-effective to train a robot to do it. Because of the scale, I think,  foundationally – and Richard and I have talked about this for years –  one thing that is going to change this quite a bit is blockchain and distributed ledger. It will hit the private markets as people seek to get and unlock value. Real estate has done a fair job of tokenizing hard assets. But I think it’s going to open up the market to assign private value that’s been locked away for years and tokenize it so you’re able to exchange that value. That will, in turn, democratize, if you will, the private markets. You know, we’re always trying to get to the high net worths, but our models are making it very difficult to do. I’m interested to see where that technology goes and, on the MUFG side, where our clients take us. We want to be there when they’re ready to take that journey, as many of them are.


Richard Change  11:33

To Steven’s point, it’s no secret that private equity has been looking to go down market for a long time. The tokenization of particular funds via distributed ledger, meanwhile, provides firms with a better opportunity to attract more of the retail-investor-type crowd. KKR did a piece of their healthcare fund as a tokenized, distributed ledger. We’re going to see more of that. That is a way to go down market, open private equity up a bit. It’s going to have a huge impact on the back office. From an operational standpoint, I think these are opportunities that vendors will have to be prepared to help provide that scale, accountability, and the audit trail to make sure operations are still consistent.


Steven Boydstun  12:28

One of the distinguishing characteristics of our industry is that it’s very decentralized. Each private equity house deals with their clients. That decentralization is part of their value. Pushing that into the public market, you have this tendency to go towards beta. Centralization and the peer-to-peer relationship the distributed ledger will afford our clients will take hold. But I recognize that they still have a long way to go to get to these markets if you think about the drawdown structure of most of the private equity funds that allow them to pull down capital deployed at the speed of capital and then return it at the speed of delivery, that sort of activity. Everything I’ve seen, even the organizations in the market today, they’re fully funded. So how will tokenization handle the drawdown? I’ve seen different trading platforms try to accomplish that. But each time it’s like a sketch of how it works. You’re wondering, behind the scenes, “How do the partnership transfers happen? What do the LPs allow for? How does the size of the fund or the participants of the fund matter?” There are a lot of regulatory hurdles and things to get over. More importantly, our value add for clients is doing that quickly. Alpha takes a lot of creativity. If you put them in a box, you’re going to be sacrificing that to some degree out in the market.


Chris Gale  14:24

There is a Q&A button. Anybody who wants us to go down a particular thread, let us know via the Q&A. I want to come back to workflows, spreadsheets, and systems but, before I do, I want to ask Richard about distributed ledgers and blockchain, and drawdowns. I’m thinking more of carry and compensation, which is a PFA Solutions concentration of expertise. Do you have any thoughts on blockchain and distributed ledger? How might that run into the carried interest? Comparable? Or maybe not?


Richard Change  15:09

We’ve been having discussions with clients to think about that. It could have an impact. One of the things that, as an employee of a firm, I’m looking for is liquidity. When I look to leave that firm, how do I achieve that? Sometimes I still would have an existing relationship with that firm because I’m receiving a K-1 every particular year because I still have a vested interest in whatever assets that I had when I was there. Being able to potentially sever that more easily is something that our firms are looking to do as well, too, because now there’s one less maintenance vertical that they must focus on for that particular person who is no longer there with that firm. It’s something that clients are thinking about, you know, “How can we do this?” and “How can we also scale with that particular concept?”


Steven Boydstun  16:08

The compensation schemes that Richard’s software manages are very internal, very private to the different firms, and very, very complex. Those firms are just trying to compensate their employees with shares and the deals they are on, etc. Wouldn’t that be awesome if they had an internal exchange for those employees that they could manage and treat more like an equity plan, a traditional equity plan than what we have today? It is very hard to manage, very difficult to manage. And keeping those employees happy at those firms is critical. I like that as a use case for exploring tokenization. It’s internal. You can explore it. It’s dealing with your money. But it’s not public. Regarding the public aspects of it, there’s still a lot of legislation that has to happen, especially in the US, to make that real. The internal operations, simplifying those in compensating your employees working with a firm like PFA, doing that, I think, is an amazing evolution for the whole practice of compensation internally.


Richard Change  17:29

They’re recognizing that tradeoff, Steven. If they can exit quickly from the firm, there’s less of a handcuff or incentive to stay. At the same time, the tradeoff of being able to jettison the managing partner who’s no longer with the firm after X number of years is a big win. That’s a huge win. People are starting to think about all the effort and energy that goes into continuously managing the activities of someone who’s no longer there.


Steven Boydstun  18:03

Restricted stock units. We all had them, right? Restricted tokens. There are a lot of ways to do it. It’s a great evolution. It’s what I said at the beginning when I started going down the distributed ledger rabbit hole, which I love to go down. It’s going to have some foundational changes to the market. It’s an exciting time for technology. But back to the original topic. These aren’t spreadsheets anymore.


Chris Gale  18:39

There’s a question on blockchain. Spreadsheets seem like they’re from the past, but they never go away. Then we have these new systems that are supposedly going to descend upon us and free us from spreadsheets, but they never seem to quite get there. So there always seems to be a sort of gap. If we’re talking about distributed ledger, automation, or RPA, how do you approach it? You said it’s not spreadsheets necessarily to blame for when things fall apart as a system. Can you talk more about culture and systems?


Steven Boydstun  19:32

Both go hand in hand. What Richard talked about was Excel being like a data set that everybody’s trying to use, and everybody’s been there. We’ve all had that horrible spreadsheet in the corner, call it the beast, that nobody wants to touch. Everybody wondered who built it and what planet they were from. The interesting thing about that is that a spreadsheet takes a small, quite a simple behavior and allows complexity so when your client or when your firm decides to try something, that’s the whiteboard in which people operate. The problem is the speed at which we operate as humans.


I’ve worked in the past where I’ve set up private equity firms. They ask, “What accounting system do I get?” I go, “Excel.” And they say, “Oh, my gosh, that’s terrible, we came for you for advice.” I say, “I’m giving you real advice here. You’ve got to figure this out before you start putting in the systems.” Putting in a system, it’s about the third fund that you start going, “This is out of control.” You start trying to look for systems. But by that point in time, you’ve now got three years of track record. What happens with Excel, from a cultural standpoint, it undermines the team environment. This is a team sport. The back office is a team sport. Everybody’s playing a part. The more you can get a couple of people around a problem, the better you’re going to be able to achieve success there. Excel takes it out of being a team sport. I see it all the time. You go into a place. You got these five great accountants that, together, could conquer the world. You start scratching the surface. Underneath that, they’re all working on spreadsheets that are different. So, they can’t do anything together. That’s not how I do it. Organizing around a system forces you into a cultural norm of a shared responsibility for something. That cultural norm plays well. In times of change, going back to that webcast where you’re trying to get a forecast out, everybody being on the same page around that stuff is critical. Or, with PFA, the idea of flowing up all of the compensation, very complex stuff into the hands of the partners to make decisions there. If it’s spreadsheets, you don’t want to be on that one that gets missed or was locked. You want to be out in front and see what your data is about.


Chris Gale  22:22

If I’m hearing you correctly, Excel is excellent and will continue to be with us as the end of the evolutionary chain in terms of a whiteboard. Then it’s a question of taking what you’ve done correctly in a spreadsheet and shifting over to a system. Then we can talk about blockchain as a particular destination among other technology destinations? Is there any advice that you would share? If I am a GP, and I’m thinking about making sure my organization is in a position to take advantage of distributed ledger technology, is there something I can do between Excel and distributed ledger technology to make sure I have the systems in place to be able to receive whatever benefits or advanced benefits within the industry?


Steven Boydstun  23:32

Let’s demystify what blockchain is. It’s a database. That’s all it is. It’s a database. It’s very secure, and it’s distributed. So, you can do a lot of amazing things. It’s quite inefficient. But it’s very, very good withholding value because you can’t break it. So, the first thing you want to do is get into a system. For instance, in Richard’s case, he’s gathering up data to make compensation decisions. That’s the first step. Now people are ready to say, “Hey, let’s take this subset, this thing at the end of the line, and let’s write it to a chain.” Then hopefully that chain can be distributed down the line if you want to provide liquidity and that chain can cross chains and get to another chain to be able to provide liquidity and get the cash back to the employees’ hands. It starts with the migration to a more centralized way to manage and constrain your data. Then it’s going to take another journey down to a more robust and narrow form in the blockchain. So, I think that journey is an evolution, which you’re going to come to when your centralized data is there. I also want to add that Excel itself is becoming a lot more enabled. Microsoft is doing a great amount of work with that. They’re doing a lot of workflows with it. They have AI-enabled stuff in that, too. It’s still going to be an individual activity, but you can bridge that into systems. Good systems can pull in Excel and export Excel. It’s very important. In accounting systems today, if you don’t use that, you don’t have good work papers. There’s an evolution that goes on, that starts with first getting into a system and getting the skill set in which to understand the data better.


Richard Change  25:54

Saying what Steve has said differently: it’s conforming, right? You are going to have to undergo a conforming of your data and your processes. With every single firm that we’ve worked with, we go through a process to conform their data, standardizing it, normalizing everything into sort of a canonical model of what their world looks like. The last step that we always advise for our clients is identifying the exception. There are always exceptions, right? Finding that person who knows where the bodies are buried as far as these exceptions go, why they exist, and how we cannot go to file that exception – those are the main steps to moving forward. It’s conforming your data across the different assets that you may manage. But then you need to figure out the exceptions to those rules that you’re not going to create.


Chris Gale  26:46

Perfect. On the two questions. First, do we need a new word for blockchain and tokens, mainly for our money and our industry? Before you answer, I’m going to ask you the second question. What are your thoughts on PE transparency and standardizing PE data exchange? Is the proliferation of Excel largely due to GPs’ resistance to full transparency?


Steven Boydstun  27:35

That’s been a question since I’ve been in the industry, right? It started with XBRL. Then we got ILPA. There have been tons of efforts. What does that tell you about our industry? They don’t want to standardize. The funny thing is, they’ll standardize for whatever that guy giving $400 million wants. Standardization is great. It’s why public markets can innovate and do different things and derivatives and stuff like that. But the reality is that standardization is conformity to a degree. I use your word, conformity. But is standardization and conformity agreeing to that which might take the ability to move and change out of it? I go back to looking at how LPAs are written today. Because that’s how they make alpha. If change happens in an industry, they can adapt to it without being stuck on something. I’ve always said it will continue to stay this way until the government forces us to report. But I also don’t think standardization today is all that important to get what we need out of the data.


Richard Change  29:13

We participated in a good number of efforts. We’re working with Private Capital Data Standards. There’s a need for full transparency. I totally agree. But the thing is, it’s more of a chicken-and-egg problem, right? LPs want standardization and GPs are looking for LPs they can provide standardization to. On the other side, we realize that, sure, we can take someone’s capital account statement, convert it to XML, JSON, whatever have you, and ship it over to him. Now that LP has a digital form of their capital account statement. But do they have a system on their side that can consume that information and do something with it? It’s a problem in the industry for sure that you know, can but most likely won’t be addressed. To Stevens Point, top-down pressure – regulation – will help drive that adoption as well. Right now, the squeaky wheel gets the oil. If I have an LP that’s looking for an output in a particular template, and I need to send that to them every quarter, that’s what’s happening right now. GPs at some point will get fed up with the different variations of templates that they have to subscribe to and produce every quarter. But until that happens, I think we’re stuck in a stalemate.


Chris Gale  30:42

All right, lightning round. What is your new word to replace blockchain? Or tokens?


Steven Boydstun  30:54

I’m trying to think of what would I replace blockchain and tokens with. I don’t know if it needs replacing.


Richard Change  31:07

We typically refer to it as a distributed ledger. That’s one thing that separates it from the blockchain to avoid that crypto rabbit hole. At the end of the day, Steven is correct. It’s a database, right? It’s an immutable database that’s distributed. So distributed ledger is how we typically refer to it. Tokenization – I don’t know if you need a replacement for that because that’s, in essence, what we’re doing, right? I’m sure smarter will come up with something a little bit better. But, fundamentally, that’s what we’re trying to do in tech.


Steven Boydstun  31:43

The interesting thing about the distributed ledgers that are out there – and there are many of them – is don’t worry about picking the right one. This is not system selection. You got private blockchains or whatever. This is the start of an industry that will remain decentralized for some time. The main thing in that people are saying now is, “Get out there.” Do something with it. Don’t wait on the standardization shakeup. Because it’s not going to happen anytime soon. It’s based on peer-to-peer stuff. That means Richard, and I could come up with our own blockchain and talk back and forth with it. This is a fundamental change.


Chris Gale  32:51

There’s so much. The conversation went by way too quickly. Thank you both very, very much. Thank you, to everybody who joined and stuck with us. Much appreciated.


Steven Boydstun  33:05

Thank you. Thanks for having me.


Richard Change  33:06

Yeah. Thanks for having us. Take care.

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