Date: Aug 26 2021
The Eton Solutions platform, AtlasFive®, is a game-changing, comprehensive enterprise management system for family offices. It is a cloud-native application suite which facilities end to end family office management and has capabilities that include entity management, data aggregation, investment reporting, general ledger accounting, partnership accounting, transaction initiation and document management.
Family offices use various multi-owner entity structures such as partnerships, Limited Liability Companies, Sub- S corps, Common Trust Funds, among others, to provide a range of legal, operational, wealth transfer, and tax benefits. Creative estate and tax planning have led to more widespread use and increased complexity in allocating profit, loss, and distribution among the partners (members). Herewith, we look at some of the complexities and solutions to address them. Throughout, we will refer to these entities as ‘funds.’
A primary consideration when using fund structures in the family office is to represent the ownership within the fund’s partner capital accounts and on the books of the investor entities (partner books) as ownership of a fund asset/Investment. This dual-entity recordkeeping requirement creates a challenge to ensure that the information is always in sync. The use of a fully integrated system can help alleviate the burden. Simple integrated accounting systems have been around for many years and could solve some underlying reconciliation issues. The newest generation of fully integrated systems takes the integration task multiple steps beyond, incorporating Client Relationship Management (CRM), Document Management, Operations, Cash Management, Performance Attribution, and Tax Preparation.
A real-world example can serve as a case study:
Assume a family has a fund that invests in private equity deals. Each deal is considered a separate tranche, with separate ownership percentages from other tranches. In the upcoming new tranche, the investors are John Sr (the patriarch), his two children (John Jr and Mary), and two trusts he established for his grandchildren – totaling five partners. John Sr will invest $6 million in the deal and earn a preferred return of 5% on invested capital; each trust will contribute $2 million, and John Jr. and Mary will each contribute $3 million. John Jr. is short on liquidity, so John Sr. will loan him his contributed capital. John Jr, Mary, and the trusts are Common Partners. John Sr is both the Preferred and the General Partner. Capital percentages upon contribution are John 6/16 = 37.5%, John Jr. & Mary 18.75% each, and the 2 trusts 12.5% each. However, the Common Partners’ share of profit and loss is John Jr. & Mary 30% each, and the two trusts 20% each, which is after the preferred partner.
You ask yourself: “Can my current system(s) track all of this information, where is it all, and what is needed to enter it?”
In a fully integrated system, you can expect to:
- See the relationships of the entities defined in the CRM – e.g., ownership structures accounts each entity holds, key counterparties, the banking details for funding the transactions, and other attributes accessible to other modules in the system.
- Hold the documents that define the legal terms are in document Management, which may be linked to the actual transaction(s) for improved audit trails.
- View the five capital transactions entered in ONE place, in ONE step, which will then:
- Maintain the capital ledger in the partnership entity by tranche
- Update the investment ledger for purchase of the fund on the books of John Sr, John Jr, Mary, and each of the trusts
- Create the inter-entity loan between John Sr and John Jr.
- Make all entries in the underlying General Ledger of each of the six entities (the fund and the investors)
- Create the cash flow (wire) transactions and send instructions to the various funding banks for processing
- A workflow processor will route the transaction(s) and their components to the assigned user/business function to review and approve – with customized business rules for routing, such as dollar limits or for transactions between counterparties
- A data feed will automatically retrieve the resulting bank transactions and cash balances and reconcile the same to internal records. It will also show the available cash balance per bank for those entities sending cash as a control.
- Investments of the fund will be marked-to-market, as needed, and their profit/loss recorded in the GL for allocation to the partners.
- Partner capital accounts will be appropriately recorded for use in periodic allocations of profit/loss and for detailed tax allocations necessary to produce partner K1s.
- The partners’ capital ledger will support a wide variety of automated allocation methods – such as by tranche, preferred returns, incentive fees with hurdle and claw back provisions, carried interest, separate allocation of ordinary vs. capital gain items, among others.
Overall, an integrated system like Eton Solutions’ AtlasFive, built around a single database, offers improved control, accuracy, and efficiency, as well as a clear audit trail of how a complex event, with many components, can be viewed in its entirety.