Significant differences in Private Equity Operations identified by 4vco

London - 10 May 2010

• Private Equity firms underutilize software and technology to their detriment
• Data-driven and tech-savvy younger Private Equity generation bets on boosting operational infrastructure
• Fast-growing and large market of specialist Private Equity operations and software requires specialist advice, selection and implementation
• Increased investment in Private Equity software forecast

4vco, the UK’s leading consultancy specializing exclusively in Private Equity (PE) operations, has identified significant differences in PE firms’ operational set-up. A key finding is that many PE firms significantly underutilize the full benefits that software and technology can provide in boosting performance, efficiency and relationships with investors. However, as a result of the financial crisis, operational processes are now moving to the ‘sweet spot’ of PE firms’ attention as they undertake a healthy degree of introspection and seek to boost internal and operational efficiencies.

Whilst the effects of the downturn on the PE sector are already well documented, another key finding by 4vco is that these market conditions have, in many cases, provided a window for a more radical re-think of how PE firms are managed. Tony Piper, Director and Founder of 4vco, commented: "A myriad of forces have converged to lead a large number of PE firms to a place where they are starting to undertake a root and branch review of their internal operations, including improved ways of courting investors more effectively, developing knowledge management systems that embed value in the company rather than solely in teams or fragmented software, and obtaining a closer integration of the back and front office”.

Fund raising boosted through intelligent use of technology

In the current environment where fees are under pressure, PE houses need to work hard for every penny. Those houses with the best systems that demonstrate a firm and rapid handling of internal data flows will have a key added advantage in the fight for investor flows.

For instance, when raising a new fund, GPs need to standardize their track record and slice/dice their IRRs. Preparing high quality information from fragmented and dispersed sources within a PE firm is a highly time consuming task. 4vco has been working with PE firms through the downturn to select and implement software solutions that improve the quality and effectiveness of this crucial stage in the fund-raising process.

Fund raising for PE firms is also taking longer than before the crisis, as investors undertake additional due diligence and risk profiling. Investors are particularly concerned with deal flow analysis (the number and quality of potential deals, and how long it takes a PE firm to invest). Deal flow analysis will be of special interest to investors considering PE firms sitting on large amounts of cash awaiting allocation, with a recent survey by Prequin revealing that over $500bn is waiting to be invested by buyout firms. As a result of this, a number of firms have been investing into systems that allow them to provide this type of information with a higher degree of granularity and quality compared to their peers.

LP investors in PE funds can also benefit from portfolio construction software that gives the LP an aggregate overview of all underlying investments held in separate funds. For an LP invested in 10 PE funds, each of which may in turn have, for example, ten investments, the benefits of a centralized reporting system providing an overview of the 100 end investments is a tremendous benefit when it comes to analyzing the quality of the underlying cash flows and understanding sector allocation. “This type of customized information, now available to build or buy, would have been relatively scarce just a few years ago, but is a good example of successful data aggregation to investors’ benefit", commented Paul Thompson, a senior consultant with 4vco.

Wide range of software now available designed specifically for PE houses

From instant calculation of share dilutions on a hand-held device to close-touch investor relations and push-button portfolio management, the benefits of PE-specific software products are enticing, but these are not ‘plug and play’ solutions. 4vco highlights a thorough selection process as one of the keys to success. The other is a full understanding of the preparation and implementation stages. Tony Piper comments, “Initial resistance is often a sign of great need and the switch away from a typical spreadsheet-focussed environment requires a significant level of focus and commitment. But experience shows that early adopters of technology have gone on to receive handsome dividends from a relatively small initial investment. The all-in cost of an integrated system compares favourably with the hire of just one junior analyst in the back office.”

There are signs that some PE houses are emerging from the storm of the financial crisis in a better than expected shape. Going forward, 4vco anticipates greater acknowledgement of the correlation between long-term success and modern, innovative operations that are adapted to investor requirements and future regulations. “The bar has been raised and many PE firms will be looking to emerge from the downturn in a stronger and more investor-focused manner”, commented Tony Piper.

The PE sector is now re-appraising its investment in software, systems and operations and is becoming much more fully aware of a supply chain that has come of age and provides solutions tailor-made to the PE sector. “The term ‘private equity’ now covers a broad range of related business models, each with its own nuances and requirements. Hence, selection, set-up and integration are all key success factors when it comes to updating or overhauling operational set-up” said Tony Piper.

The functional focus for PE solutions has also expanded, with increased emphasis upon front and middle office operations. This is partly demand-led, as today’s generation of PE executives are technically savvy, with a firm understanding and high expectations of the products on offer. The mobility of these teams also adds weight to the argument for centralized information management to secure the intellectual property of the firm.

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