Victoria Langley Private fund managers face pressure with regard to their contract management practices on two fronts: from limited partners and regulators. More LPs are negotiating side letters with their general partners, creating unique compliance requirements for GPs. Meanwhile, the U.S. Securities and Exchange Commission has proposed rules with the apparent intent to improve transparency in the private markets and limit preferential terms for some LPs.
Wherever the pressure comes from, fund managers realize they need to adopt more comprehensive contract management solutions. Doing so can improve the internal processes necessary to proactively comply with investor obligations and mitigate the risk of noncompliance.
What is a contract repository?
A contract repository, also known as a contract database, is a centralized location for a business to store and organize its agreements and related documents.
What contract storage looks like on a practical level varies depending on the size and maturity of a business. Small businesses might comfortably rely on spreadsheets and an ad hoc storage system like DropBox. However, mature enterprises typically need more robust contract management systems and technologies to ensure contract compliance.
Additionally, no matter their size, some businesses have to pay close attention to regulatory compliance. For instance, private fund managers might have a relatively low number of contracts yet still benefit from a robust contract management system to mitigate the risk of missing an investor obligation and respond more efficiently to a regulatory audit.
Document repository v. contract repository
Some individuals use the terms document repository and contract repository interchangeably. However, asset managers searching for a digital repository should understand the differences between these two technology solutions.
A document repository, or document management system, has a broader function than a contract management system. Document management systems are meant to capture, store, and retrieve all electronic documents, whatever their file format. They typically prioritize organization and storage, though they may also include collaboration and workflow features, like the ability to check out or lock documents.
Alternatively, a CMS is more likely to have features like redlining or contract obligation tracking that specifically enable a business to navigate the contract management lifecycle.
Which system is more appropriate for an organization depends on the software solution’s features and whether they solve the business’s pain points.
Traditional vs. modern contract repositories
Way back when, businesses kept paper copies of contracts in storage at their brick-and-mortar locations. Eventually, large companies started using offsite storage for paper documents, which was often inconvenient and expensive. Around the same time, digital copies of contracts became more popular, and businesses began storing PDFs on hard drives. Unfortunately, this was the beginning of decentralized contract management.
Downsides of a traditional contract repository system
Traditional contract management often relies on decentralized storage, spreadsheets, and individual memories. Business and legal professionals store contracts on separate devices or a basic cloud storage solution. They then use a spreadsheet to list all the agreements and obligations. Asset managers refer to these spreadsheets as compendia.
While a compendium provides a semblance of organization, it often takes months to complete. According to a recent Ontra survey conducted by Wakefield Research, 43% of respondents said it takes their firm 4 to 6 months to compile or receive a compendium once a fund closes. Another 34% said it takes 1 to 3 months.
These spreadsheets are technically searchable, but they’re a lackluster way to track contract obligations. They are unwieldy, often out of date, and disconnected from the actual contracts. It’s common for private funds professionals to worry about missing investor obligations because of the disadvantages of this form of contract management. In fact, in Ontra’s recent survey, 77% of respondents said they worried about being out of compliance with investor obligations at least once in the past year.
Benefits of a centralized contract management system
A modern central contract repository alleviates the shortcomings of traditional contract management. With a centralized CMS, fund managers can better organize and securely store all their legal agreements.
Because the firm has a dedicated tech solution for contracts, individuals can upload each new agreement into the system and automatically access real-time, accurate information. This process also allows firms to gather structured contract data, which they can use to create alerts and run contract analytics and reports.
Legal and business professionals can find all contracts in one place with a more robust search feature. A CMS allows people to look for documents based on the content of the agreement, not the file names alone. This feature gives people a fast, direct link to the contract language that’s missing with compendia.
A contract repository also allows firms to document and track investor obligations. Depending on the specific CMS, they can create obligation-related tasks and automatic reminders and alerts.
Features to look for in contract repository software
Asset managers in the market for a contract repository should begin their search by identifying the pain points within their current contract management processes as well as the features that would best address those issues.
Some of the most beneficial include:
- A cloud-based solution: Relying on the cloud enables firm employees to access contracts anywhere from an internet-enabled device.
- Security: Firms should work with their internal or external security professionals to determine the minimum security requirements for a tech solution. Many contract repositories offer advanced certifications, such as SOC 2 compliance.
- A user-friendly experience: To ensure everyone within the firm uses the system to its full potential, it needs an intuitive interface, initial training, and ongoing support from the solution provider.
- Collaboration features: In many cases, multiple firm employees and outside counsel work on contracts together. The most helpful contract repositories allow them to communicate and track versions within the platform to minimize back-and-forth emails.
- An electronic signature integration: Leaving a contracting platform to execute a final agreement slows turnaround times. Conversely, a CMS with eSignature capabilities lets everyone finish contracts faster.
- Obligation tracking features: For fund managers, proactively tracking and complying with investor obligations is often the point of a modern CMS. The contract solution should enable the firm’s employees to create and assign obligation-related tasks as well as quickly generate an audit trail.
- Automated notifications: Tracking contract obligations shouldn’t depend on someone’s memory. Instead, a comprehensive contract management solution can enable firms to create alerts and notifications, keeping everyone on track for full compliance.
Implementing a contract repository
Many businesses, including fund managers, put off adopting a centralized contract management system because they fear the initial implementation period. However, private fund managers are uniquely positioned with an obvious starting point: a new fund.
Before raising a new fund, firms can work with a solutions provider to get the new CMS up and running for the next limited partnership agreement, side letters, and other fund documents. Once the firm is up to speed with its new legal tech, it can work internally or with its provider to shift over older fund documentation.
