THE PRIVATE EQUITY CFO S GUIDE TO FUND PERFORMANCE ANALYTICS

Transcription

1 THE PRIVATE EQUITY CFO S GUIDE TO FUND PERFORMANCE ANALYTICS

2 Executive Summary Leverage data to its full potential As Chief Financial Officer of a private equity firm, one of your many responsibilities is facilitating the analysis and communication of your funds performance. The insights this data can reveal are more important than ever to your colleagues, stakeholders and investors, yet many CFOs are restricted in leveraging their data to its fullest potential due to outdated systems and processes. In this whitepaper, we ll explore the importance of a robust portfolio analytics process and guide you through the series of questions to ask to ensure your current process is best-in class and helping, not hindering, the growth of your firm. Why is a robust private equity fund performance analytics process important? Is your process accurate, consistent and repeatable? Is your process efficient? Does your process promote information sharing? Does your process facilitate sophisticated requests and analysis? Is your process secure?

3 Why is a robust private equity fund performance analytics process so important? For Internal Portfolio Monitoring and Evaluation As your firm evolves, new funds are raised and the portfolio grows, the value of your performance data only increases more statistically significant data enables more meaningful and actionable insights. Internally, this can help you identify the attribution and correlations between the most successful deals, funds or even individuals. Future fund strategies can then be developed using a more data-driven approach. With investors flocking to private markets strategies in the hopes of out-sized returns, dry powder is plenty and competition for deals between managers is stronger than ever. This data-driven approach can help managers focus their strategies on their evidenced strengths to compete more effectively. For Fundraising and Investor Relations Ensuring an effective performance analytics process is also important for your investor relations and fundraising efforts. Implementing an effective process will enable you to easily point to hard data when raising your next fund, which is key in building trust and confidence with prospective investors. A robust process can also help you better facilitate investors requests during due diligence or ongoing reporting. Many CFOs already believe these requests for information are one of the top contributors to their firm s complexity, 1 yet it is only going to become more of a burden for them if not prepared as investors become more thorough in their due diligence. An evestment survey found 43% of LPs are increasing the amount of quantitative due diligence they undertake. 2 With private equity undergoing major change as it matures as an asset class, CFOs must ensure their processes and systems across the whole business are setup to help the firm adapt and grow in sync with the industry. 1. EY, Global Private Equity Survey evestment, Private Equity LP Due Diligence Trends 2016

4 A Checklist for Best-in-Class Analytics Ensure your analytics process is best-in-class and helping you and your firm extract the maximum amount of value from your performance data.

5 Step 1: Is your process accurate, consistent and repeatable? How are you mitigating the risk of human error impacting the accuracy of your performance calculations? Is your process over reliant on one or two key individuals? If asked by LPs, could you easily point to a repeatable and consistent process? These are the fundamental questions to ask as you evaluate your process. You have a duty to ensure that every time performance numbers are calculated, they are done so accurately. You also have the responsibility to make sure that the integrity of your process supersedes the knowledge of any one individual. While spreadsheets are the tool of choice for many due to their familiarity, they are prone to errors, no matter how competent the users. Increasing complexity in both datasets and formulas is greatly increasing this risk. As you may have read previously, various studies over the years have found that approximately 88% of spreadsheets contain errors. 3 It is no surprise, then, that almost 80% of CFOs say the use of spreadsheets as data sources is their top data management concern. 4 Ensuring consistent accuracy is just one reason for a repeatable process. As stated by a prominent consultant at an evestment Private Equity event last year, more LPs and consultants are probing the operational aspects of fund managers during their due diligence. They believe good operations speak to the overall organization of the firm. This most certainly includes being able to show robust performance analysis and reporting processes. Managers without one should expect a red flag to be raised among their investors. 3. Panko, R., What We Know About Spreadsheet Errors, EY, Global Private Equity Survey 2017

6 Step 2: Is your process efficient? How much manual work does it take to update fund performance with new deals, exits or valuations and evaluate the impact on your total track record? How long does it take you to isolate certain deal sectors or geographies and understand their relative performance? Are you able to quickly model out future performance of unrealized deals and assess the impact on the portfolio for your forecasting? Once calculated, how quickly are colleagues and investors able to consume the results? Growing demands both internally and externally are making the number of requests for performance data more frequent and sophisticated. Servicing these requests cannot be sustainably facilitated through additional staffing. As LPs put pressure on managers to reduce fees, CFOs should be wary of increasing overheads, especially for tasks that are not adding long-term value. A best-in-class process will utilize technology that offers automation of performance calculations to provide far greater efficiency in analysis and reporting, while still retaining an adequate level of flexibility and customization. This will help you scale your abilities more cost-efficiently and align with our goals of achieving operational efficiency firm-wide. In addition to offering scalability, a dedicated portfolio performance analytics solution will free up time for you and your team to focus on strategic tasks that add far greater value to the firm than manual data manipulation. Being able to operate at a more strategic level is more important than ever as LPs intensify their due diligence on managers, the expectation for returns increases and the overall fundraising market becomes more competitive. Time previously spent manipulating a spreadsheet can now be spent forecasting, planning and supporting other departments.

7 Step 3: Does your process promote information sharing? Does your process allow the IR team to dig into fund and firm performance themselves to better understand strengths and weaknesses? Can your investor relations team or finance colleagues self-serve to get the information required by investors quickly? Can crucial track record, fund and portfolio company level information be accessed on-the-go via any laptop or tablet? Leveraging data can help investor relations create more compelling pitches, the deal team focus on their data-justified niche and more. They can only perform to the best of their ability with readilyavailable access to the data and getting hands-on. Getting an LP to a fund commitment isn t solely about transparency and trust. It is about helping them through their due diligence process and respecting their timelines. It s not just the amount of data you share, it s about the timeliness of that too, as was stated by a prominent investment consultant during an evestment-hosted panel. LPs know roughly how many hours their due diligence takes, but the end result can vary greatly due to slow responsiveness from GPs responding to data requests. You can ensure efficient response by enabling members of the IR team to access and use your performance analytics tool. A best-in-class system will facilitate this more open approach to data, but also ensure complete accuracy, security and privacy of the information.

8 Step 4: Does your process facilitate more sophisticated requests & analysis? Can you easily calculate sophisticated metrics and analysis, such as Valuation Bridges and Public Market Equivalents? Does it have the sophistication and flexibility to facilitate investments across currencies? Does it ensure you are keeping up with industry standards? Investors are becoming more and more sophisticated in their analysis, which means you need to be as well. New measures of performance are now becoming commonplace and routinely used. 50% of investors are increasing their use of Public Market Equivalent analysis, for example. Your process should facilitate more advanced performance analysis so you can not only provide investors with the metrics they need, but also better understand your performance yourself to enhance your messaging and ensure differentiation from the crowd. One trap PE firms can fall into is relying on their accounting system to try and carry out sophisticated, granular analysis on their fund performance and communicate it internally and externally. One strategy to deal with complexity has been implementing one-stop-shop fund accounting solutions. Unfortunately, the promise of a single solution for accounting, portfolio management and investor relations remains unfulfilled. 5 While a level of analytics functionality may exist in these platforms, it is not the system s primary purpose and so it can fall short in meeting you and your investors needs. Ensure you have the right tools for your needs and understand the value that implementing specialist performance analysis software alongside other systems can bring to your process as a whole. 5. EY, Global Private Equity Survey 2017

9 Step 5: Is your process secure? Does your process ensure sensitive information is accessible only on a permission-basis internally as well as externally? Can you not only grant, but recall, access to this information if needed? Can you view who has access and who has actually accessed your performance data to form an audit trail if required? Is your key performance data protected by financial industry standard encryption? For yourself, your portfolio companies, and investors, you need to have confidence in the security of your current and historical performance data. Private information should stay private. While data rooms are used for the transfer of information, less thought is usually given to the security and privacy of where performance data is housed on a day-to-day basis. Also, if performance is shared via a data room on a spreadsheet, as a manager you have no insight into who else then has access to that information. Best practice is to implement a portfolio analytics system that also acts as a secure, centralized repository of data for both you and your investors.

10 EVESTMENT Performance analytics software designed specifically for private markets can automate the calculation of total track record, fund and/or deal performance, mitigating errors and offering a more robust, consistent and repeatable way to calculate and store performance data. If you re interested in upgrading your current systems and processes to enhance your firm s capabilities, speak to us today about evestment TopQ. Contact Us T: +1 (877) E: privatemarkets@evestment.com W: About evestment evestment provides a flexible suite of easy-to-use, cloud-based solutions to help the institutional investing community identify and capitalize on global investment trends, better select and monitor investment managers and more successfully enable asset managers to market their funds worldwide. With the largest, most comprehensive global database of traditional and alternative strategies, delivered through leading-edge technology and backed by fantastic client service, evestment helps its clients be more strategic, efficient and informed.