Side letters have become far more difficult to manage in recent years. More investors are demanding longer and more complex side letters, which has resulted in an abundance of obligations to track and comply with across investors and strategies. To overcome this challenge, private fund managers need a purpose-built solution.
Ontra’s AI-powered Legal Operating System for Private Markets has helped automate and streamline mission-critical legal processes across the fund lifecycle for 700+ investment firms. Many of these firms use Insight to digitize limited partnership agreements (LPAs) and side letters, better manage their investor obligations, and respond swiftly to SEC exams.
Take a look at how Pharos Capital Group, AllianceBernstein, and a U.S.-based hedge fund conquered growing side letter volumes and time-consuming compliance processes with Insight.
Pharos Capital Group digitized 30+ side letters per fund and saved 40 hours in SEC response time with Insight.
Challenge #1: Rapid firm growth contributed to more side letters
Given the rapid growth of its alternatives platform, AllianceBernstein recognized the need to simplify LPA and side letter compliance. The large, globally distributed organization required a dedicated software solution to provide multiple teams with visibility into the firm’s obligations to its alternatives investors.
AllianceBernstein’s former VP of Alternatives Legal, Neal Kalechofsky, set out to find a solution that could support the organization at scale. Specifically, he needed a cost-effective solution that would give stakeholders access to and create accountability for the growing number of private fund documents and investor obligations.
Challenge #2: High side letter volume became unwieldy
A U.S.-based hedge fund’s process for managing investor obligations was entirely manual. The hedge fund’s legal professionals spent hours copying side letter provisions into a master tracking spreadsheet. Then, once a month, the legal team asked key stakeholders across the compliance, accounting, tax, treasury, investor relations, and risk departments to determine whether any events triggered side letter obligations and confirm whether the firm had met any related compliance requirements.
“Our funds grew quickly, and our side letter spreadsheet was becoming unwieldy. It just couldn’t scale along with our growth. Plus, coordinating across six different groups of internal stakeholders was tricky to manage,” said the hedge fund’s counsel.
Manual processes distracted from other mission-critical priorities, and the firm worried about the amount of time spent managing obligations and the cost of making a mistake.
Challenge #3: Compliance processes became too time-consuming
Pharos Capital Group traditionally relied on its chief compliance officer and senior management’s collective memory and manual efforts to stay on top of investor obligations.
Kimberly Futrell, CCO and Chief Financial Officer at Pharos, explained that this became a time- and labor-intensive process as the company expanded. For example, if her team needed to know who had co-investment rights, team members would discuss among themselves and then verify by examining side letters. This process often involved reviewing a physical compendium of 20-30 side letters at a time.
Pharos Capital, AllianceBernstein, and a U.S.-based hedge fund solved side letter challenges with Insight
Decision-makers identified Insight — Ontra’s AI-powered private fund lifecycle solution — as a great fit for their firms’ needs.
“By implementing Insight across our alternatives platform, we were able to create a single source of truth across the whole organization,” said Kalechofsky.
AllianceBernstein has partnered with Ontra for over three years now, and throughout that time, Insight has helped ensure the firm remains compliant with all event-based and recurring obligations. With Insight, the firm can run quarterly compliance checks, facilitating alignment on internal review and sign-off processes to make sure all stakeholders are prepared for SEC exams.
The U.S.-based hedge fund uses Insight to manage side letters and agreements across four separate funds, with plans to expand as the firm grows. Insight enables various internal teams to quickly surface key obligations without digging through emails, combing through shared drives, flipping through underlying contracts, or asking other teams to find documents.
Insight’s AI Search and SmartLine features enable the firm’s teams to quickly locate precedent, group similar provisions, and redline text to highlight key differences. The hedge fund can leverage these features to understand existing obligations and enhance future negotiations.
Additionally, Insight makes it easy to build multi-stakeholder workflows that keep various functions at Pharos on the same page. Insight facilitates crucial cross-functional collaboration, transparency, and accountability that keeps pace with a firm’s growing investor obligations.
“The ability to address investor obligations so efficiently and in a comprehensive way is a time-saver and a valuable piece of our compliance function,” said Futrell.
Insight plays a critical role in SEC exam response
About a year after Pharos started working with Ontra, the AI-powered solution became a critical part of the company’s compliance strategy ahead of an SEC exam.
The SEC asked Pharos to provide a list of side letters between any private fund managed by the advisor and any investor or beneficial owners. Futrell worked with the team at Ontra to procure the data she needed from Insight in minutes. This starkly contrasts the days or even weeks it would have taken in the past.
Data from the funds onboarded to Insight only took about 15 minutes each to download and review before crafting a response to the SEC. Futrell and her colleagues spent an additional 10 hours on each fund not in Insight, resulting in an extra 2-3 days of pulling side letter provisions.
When asked if Insight ultimately achieved the objectives set out for it, Futrell responded, “Yes! Top of the list was being able to confidently and quickly provide that list of side letter provisions to the SEC when asked for it. And that was exactly what Insight did.”
The power of an AI-backed private fund lifecycle solution
Ontra is the leading provider of AI-powered legal technology solutions for the world’s most prominent private markets firms. We count over 700 GPs, investment banks, and advisers among our customers and partners worldwide, including Blackstone, KKR, Apollo, and Carlyle.
Insight from Ontra is the AI platform powering the private fund lifecycle. By embracing this innovative legal technology solution, firms can simplify fund management, proactively manage risk, increase transparency, and reduce expenses.
“[Insight] is like insurance for my peace of mind because I want assurance that I’m performing my job and meeting my responsibilities to the best of my ability,” said Futrell.
Key Insight benefits include:
- AI-enabled contact digitization: Ontra’s AI engine, Synapse, which combines proprietary machine learning and GPT-4, quickly digitizes side letters in Insight. AI transforms side letters into structured data, categorizing and grouping clauses, and generating obligation names, descriptions, and categories — with human-in-the-loop oversight, of course.
- Searchable, digital compendia: Insight is purpose-built to store and manage critical fund documents, including LPAs, side letters, MFN election forms, and more. With AI-powered search, quickly surface contract provisions and, with SmartLine, identify similarities and differences among provisions.
- Obligation compliance workflow tools: Assign, monitor, and report on compliance efforts by utilizing multi-stakeholder task workflows. Export fund documents and data in just a few clicks during audits and SEC exams.
- Digital MFN elections: Run modern, digital MFN election processes through Insight. Create forms, distribute forms, track investor responses, and automatically update obligations in one end-to-end platform.
Ready to conquer side letter management?
If your firm struggles with a massive number of side letters and investor obligations, your team can shift to a centralized platform and single source of truth in Insight.
Sign up for an Insight demo to see how you could more efficiently manage side letter compliance and SEC exam responses.