“Yield is the product, reports are the wrapping paper”
Private Equity fund managers have always had a difficult job. It’s not easy raising several hundred million dollars from Limited Partners – and that’s just the first step.
Now you’ve got to put that money to work. This requires deal flow, due diligence, and ultimately the correct valuation of assets to be successful.
Once an investment is made, your portfolio manager and analysts must “watch the eggs in the basket.” The baskets might include distressed credit or venture capital, but either way the health of the eggs is important.
Investors want more transparency and more information. How you collect the information and how you present it is key to a good working relationship.
So the question becomes “How often should I check the eggs?” Once a day, once a week, or once a month? “Real-time” or daily would be the optimal choice, but is it technically feasible?
Portfolio managers rely on timely financials from their operating companies to monitor the situation. In normal times, delayed financials are annoying, but might not necessarily be mission-critical. Throw a pandemic into the process and monitoring the health of your investments in real-time moves from being a project for next year to a necessity today.
If you bought the credit, is EBITDA still a good proxy for cash flow? Doubtful when your investment is forced to close overnight.
For your SaaS investments, do you have a plug-in to instantly look at your Expansion, Churned, or Contraction MRR?
If staying on top of this were not stressful enough, now add in the auditors. PWC & EY are not cheap. For CFOs, the longer the auditors stick around the less time is spent checking the eggs and the higher your audit fees are. The quicker you can answer their questions the better. Ideally, you want all your documentation around your accounting in one easy to access location that doesn’t require you to dig through emails to find communication threads about accounting decisions. At the end of this process, if all goes well the fund will deliver a product to its partners that makes them happy. In the fund management business, bigger is better and yield is the product.
However, sometimes fund managers forget that a nice package is part of the total product. Nobody presents their fiancé with a ring from Tiffany’s wrapped in newspaper. Still not convinced? Try giving your daughter a LOL doll at Christmas without the package and well…. it won’t end well.
Technology has improved to the point where for many physical products you can easily customize the package. The same thing is happening right now in the financial world around digital products. For Private Equity and Venture Capital, your partners cannot customize the product, but they can help you customize the wrapping.
Producers of luxury goods such as Apple, Cartier, and Poltrona Frau have always known that the package is equally important when presenting the product. Billions of dollars are spent every year on market research to determine what luxury buyers want.
For Fund managers, now is the time to start asking your partners what they want and deliver a world-class product in a custom wrapper. After all, your partners were kind enough to give you a hundred million dollars – so don’t you think they deserve it?
About The Author
Mark is an accountant at Trusted CFO Solutions who “combines his intellect with a very astute knowledge of the capital markets to deliver a winning combination to any business venture.” Connect with Mark on Linkedin here.