August, 2017 - Private Equity firms consider return on their investment as a key determinant while evaluating buying decisions. There are several criterions that go into short listing target companies including favorable market trends, stable and recurring cash flows, low capital expenditure requirements and a strong management team. Interestingly, while all these factors will help to consummate a strategic buyout across the drawing board, however they do not guarantee returns post the acquisition.
The big question remains!!
In an economic scenario where companies are scrutinizing every investment, how can you maximize the returns obtained from your investment portfolio throughout its life cycle?
The common practice followed by leading players include either carving out to separate the strategic assets from the non-strategic ones from across the portfolio pool or reaching out to partners / servicing providers who are industry experts and are fully equipped to service the non-strategic assets functions of a business. However, this approach comes with its own set of challenges. Increasing direct & indirect expenditures can eat into the profitability of the portfolio and as a result private equity firms feel constrained from making investments that are cost-prohibitive in nature. At the same time, it is also essential for the PE firm to take a Go/No Go decision to ensure its underlying strategic objectives are met as well as the desired returns are realized.
Where do Private Equity firms go from here?
Off late, Private Equity firms (PE) have started to graduate beyond their traditional roles as mere providers of capital. Against a backdrop of extensive regulatory & market change, PE firms are under mounting pressure to deliver greater transparency, better reporting & tighter accounting controls. Regulations like the Dodd-Frank Act, the Alternative Investment Fund Managers Directive (AIFMD) & the Foreign Account Tax Compliance Act (FATCA) are focusing attention on the transparency, quality & timeliness of information. With deals becoming more expensive, PE firms need to find ways to improve their ROI. Therefore, PE firms are on the lookout for true business partners, who can contribute significantly to business growth, operational excellence and provide management guidance. The recent trend has been to reach out to specialized service providers in the area of Finance & Accounting (F&A), Payroll, Technical Support and Human Resources to support the operations of their portfolio companies.
Further, there are industry estimates to suggest that a growing number of institutional investors and private equity firms are learning that the most prudent way to succeed in the lucrative private equity space lies in outsourcing administration and operations. The graph below aptly depicts that Improving management reporting through mastering data, automating routine processes and outsourcing are among the top five operating imperatives for the PE firms.
Source: EY 2017: Global Private Equity Survey
The research further goes on to elaborate that it’s becoming increasingly difficult for private equity firms to hire expert accountants with relevant and sufficient experience in Finance and Accounting (F&A) for managing financials of their portfolio companies.
Additionally, historically, obtaining timely, insightful financial information from portfolio companies can be challenging due to diverse reasons including:
- Shortage of affordable high quality finance personnel
- Disparate and legacy systems that don’t allow for critical drill-down and analysis
- Lack of proper internal controls affecting accuracy of numbers
- Process inefficiencies across companies that lead to questions of methodology vs. the message of the financials.
In such a scenario, implementing a Shared Service Model across the portfolio companies has emerged as an effective strategy to bridge the gap that can help to obtain robust and timely information that facilitates effective decision making, improves the revenue capture and lowers the operating expenses across the portfolio companies.
Quatrro has been a leader in providing the Platform based solution built on the approach of a Shared Service Model and has helped a lot of its PE clients to leverage all of these benefits. A case in point is of one of the Quatrro’s Middle Market Private Equity client that has invested in Restaurant Franchisors /Franchisees. Some of the challenges faced by the client are highlighted below:
- Inconsistent financial statements
- Increased accounting costs
- Inability to spot trends and effectively manage investments.
Quatrro worked towards eliminating redundant processes and minimizing divergence to maximize the benefits of a shared services model for the client. Value delivered to the client are as follows:
- Full transparency into investments and financials
- Accurate, consistent, timely financials that are standardized across concepts
- Quick, actionable insights into the financial health of the business
- The ability to spot trends before they become problems
- Renewed focus on core competencies, customer service and top-line growth among portfolio businesses
Thus, by combining Finance and Accounting best practices with platform based architecture and cloud based technology, private equity investment firms can now leverage the benefits of a shared services model and imbibe it as a value added component of their overarching investment strategy. For additional information on how Quatrro can help you realize your strategic objectives, please contact