Tag Archives: Due DIligence

Introduction

For venture capital (VC) firms, the target companies through which investments are generated are a quest that makes for art and science combined. With money at risk combined with the high probability of failure, these project experts will really wade through the frightening landscape to identify startups with the capacity to deliver gargantuan returns. It is a technique that involves great due diligence, strategic thinking, and dynamic knowledge in the marketplace. This article highlights the key areas of concern and strategies that VC firms should observe and employ in picking the right target companies.

Understanding the Dynamics of the Market

Before getting into the criteria governing the decision on the target firms it will be important to have an understanding of the investment landscape underlying the investments in the Market. As gathered from the National Venture Capital Association assignment, NVCA capital investment reached a record of $156.2billion that was distributed across 10,521 deals. This is a sign of 14% loss from the $182billion invested in 2021- it represents the sensitivity amid economic cycles and technological change.

Sector-Specific Considerations

In various business areas, there are challenges and opportunities that every industry will be facing. It affects the criteria of how the investors choose the companies for Investments.

Disruption and innovation to the technology sector are all but very pivotal to the businesses in this industry. VC firms look for companies incorporating high-end technologies with the potential disruption of industries in redefining business conduct within them. For example, the global fintech market will grow from 105.8 billion in 2020 to 324 billion by 2026 at a CAGR of 23.58%, evidence of the attractivity of this sector and investments that the VC firms handle.

Any healthcare and biotechnology firms as well as projects are considered based on the ground of scientific evidence, regulatory mechanisms, and market needs. The global outlook size was estimated to reach a value of $752.88 billion in 2020. The growth period for the years 2021 to 2028 will increase at a compounded annual growth rate of 15.83% through these quoted venture capital firms; a thorough analysis of the success rate and timelines of clinical trials is conducted. For a new drug, for it to enter into the market, its estimated cost reaches up to $2.6 billion.

Brand strength, customer loyalty, and market trends are those factors that most want to turn out to be critical in this consumer goods sector for its growth. Those businesses can grow rapidly which can take advantage of the e-commerce and DTC models. The size of the global e-commerce market was $4.28 trillion in the year 2020. Moreover, it is projected to witness a CAGR of 14.7% from 2021 to 2028. This shows that there is massive room that is getting exposed in this very sector.

The factors pushing the Renewable energy sector, are demand for sustainable solution, regulatory support and development in technologies. End ¬ Renewable energy market which finished an assessment of 881.7 billion around 2020 will grow by a CAGR of 8.4 percent by value during 2021-2028.

Understanding the VC Investment Criteria

Venture Capital firms seek the potential investments based on the following key parameters and assess them.

Market Potential

The Venture Capital firms make search of target companies in large or high-growth ephemeral, with quality demand and lower barriers to entry. It looks for markets, which could project growths at a CAGR of 20-30% over the next five years. The global AI market that stood at $62.35 billion in 2020 will also see growth at a CAGR of 40.2 percent between 2021 and 2028, which will bring multiple scaling opportunities for startups.

Unique Value Proposition

Unique products or services presented in a unique way create unique opportunities for startups to create differentiation. It is more pronounced in order to seek a competitive advantage by the virtue of their differentiated customer experience.

Founding Team

A good founding team with complementing skills and domain knowledge is very crucial. Virtually all successful startups have good execution history. Though, it would be good to note, 23% of all the startups have failed because of their problems; they actually reinforce the necessity of serious observation of the dynamics in the team and the management capabilities during evaluation of the team.

Traction

A few signs of tractions are reflective of the stage of market validation and product-market fit, for example, user or sales growth. 

Financial Performance

Actual projections and clear path to being profitably for even early-degree businesses.

Due Diligence: The Cornerstone of VC Investments

Due diligence is all about disciplined process of identifying a target company’s potential and risk. According to the investment bank – Kohlberg Kravis Robert, the following are the key steps involved in due diligence.

Due Diligence of Venture Capital Investments

Due Diligence of Venture Capital Investments

Market Intelligence

This is about research and consulting with experts to know what our customers need, who our competitors are, and how the marketplace is doing.

Product Evaluation

Having our eyes constantly on our product to know whether they are being synthetic properly and if we will be able to grow through customer satisfaction and technology.

Team Assessment

We have to check on the abilities and work of our founders and particularly the team for a detailed view of their leadership qualities.

Financial Analysis

One has to be interested in the economic state of affairs, how we earn and what we require for it.

Regulatory Evaluation

It is required in order to make sure compliance good contracts and both in law and ethical protection of ideas or concepts.

Strategic Fit and Alignment

There are investment theses laid down by a venture capital firm. These theses always act as guidelines in every decision that a firm makes. It could be a business, funding diploma, geographical, or a return profile basis of decision-making. Also, it is miles very important that there is a strategic fit between a VC firm’s investment thesis and a target organization. Many venture capital firms have an industry focus, be it era, healthcare, or fintech, and often want their target companies to fit their understanding of the employer to be able to use their network and resources efficiently. Venture capital firms also have additional focusses on awesome investment degrees, seed, early-degree or increase -stage associated with their specific danger profile and capital needs. Geographical options, on the other hand, are also crucial because not many firms undertake a decision to invest in any particular geographical region owing to superior market information and local connections. Last but not least, it is also important to know about the return expectation of a VC institute as growth startups offering great exits fit rather well with agencies that want substantial returns.

Building a Strong Network

Venture Capital firms need to know all of the right people in order to have anything to assess. Entrepreneur, industry expert, investor and other thought leader relationships provide rich insights and deal flow to VC firms, and co-investment deal opportunities in many cases. VC firms that remain engaged with incubators, accelerators, and entrepreneur communities will be able to keep their finger on the pulse of emerging startups. But forging relationships with experts in the industry can provide profound insights into the market and validate a startup’s chances. Teaming up with co-investment partners: other investors expand deal flow, help share risks, and add extra eyes to the deal. Also, startups can leverage the resources and the distribution network of large corporations through strategic partnerships that also offer exit support.

Continuous Monitoring and Support

After investing, the VC firms have to guide and assist their portfolio companies in scaling up and reducing their risks. Such involvement includes:

Board Participation

It makes it possible for the VCs to guide in a strategic fashion, check on performances and perform sanity check to the extent it makes sense in light of the business plan by means of joining the board of the company. It also facilitates improvement in communication and making better decisions. It holds correct and instrumental the active role played by the board in more efficient communication and decision making.

Operational Support

Investments in operational infrastructure of marketing, sales, finance, and human resources can serve as that needed boost or rocket fuel to overcome those crucial challenges that let the startups scale with success. Obviously VC firms themselves have inhouse teams or networks to help them with it.

Follow-on Funding

Most start-ups need more substantial capital to achieve their most critical goals. Some Venture Capital firms will offer it to them; some will assist in obtaining follow-on funding, either from them or other sources themselves.

Exit Strategy

For profits to be realized, it is essential that the exit strategies in the form of mergers and acquisitions (M&A), or  IPOs be planned. These investors, in turn, collaborate with their portfolio companies to ensure appropriate exits of such investments, which typically come in the form of an IPO, acquisition, or merger. As many as 162 VC-backed IPOs and 1,065 mergers and acquisitions were completed in 2022 as well, encourage capital outflow through all possible channels of exit. The target companies will have to meet the investment horizon, return and other demands of Venture Capital investors.

Exit Strategies- IPO

Exit Strategies- IPO

Magistral Consulting’s Services

Considering our rapidly changing world and the fluid nature of venture capital (VC), choosing the best target companies for VC funding requires both an art and science. After thorough research, Magistral Consulting has developed a strategy for finding those exact startups. We provide research based due-diligence, market intelligence, and strategic alignment bridges to VC firms enabling them to make informed investments.

Understanding Market Dynamics

Magistral Consulting offers a detailed outlook for sector trends. Discover Disruptive Innovations Spurring Growth from AI to Fintech in Technology and navigate complexities in healthcare and biotech with scientific evidence assessments, regulatory landscapes, and market needs.

VC Investment Criteria

Magistral Consulting lends a helping hand to VC firms in evaluating some key criteria of their investment. Recognize target companies which are in emerging markets that enjoy high growth prospects. Appraise ventures that propose by a distinctive product or service to sustain competitive advantage. Market and discipline competencies play a significant role in the founding teams’ appraisal. Determine the degree of market acceptance and prospects for initial revenue and probability calculations for profitable further development through our services.

Strategic Support and Alignment

Ensure the correct investment goals match the particular guidance offered by Magistral Consulting service. Magistral Consulting ensures that the investment goals match the requirements of firms through Strategic Support and Alignment.  We help sensitize strategic alignment with investment theses towards better decision making. establish suitable connections with the entrepreneurs, industry specialists, and investors for creating the continuous flow of the deals and co-investment for its constant growth.

Continuous Monitoring and Support

Achieve targeted goals for portfolio companies with the help of continuous cooperation with Magistral Consulting. We help you closely connect with portfolio companies via board involvement to improve strategic interactions, information flows, governance, and evaluation. We also help develop strategies for exit; mergers, acquisitions, and IPOs, which would give the best returns in terms of meeting the investment goals of the fund. Venture capital investment is an efficient tool that allows an organization to access financing for its business projects from investors who expect to receive a share of profits in exchange for risks they are going to bear.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

VC firms target large market potential companies with distinct predictions. Again, ones that have a very experienced founding team, and that market driving factors evident, such as increased user numbers. Also, clearly laid down financial plans leading to profit growth.

Due diligence provides an understanding of company potential and its associated risks. There is also Market research for product viability, analysing growth potential, verifications on capability of founding team, company's financial health, and its legal framework.

The VC firms either have an industry focus, investing in technology or health care, for example, or an investment stage, like seed or early-stage. They look at the geographical focus and then the return potential of the company into which they are putting money aligns with the expectations concerning big exits.

In this case, strong networks with entrepreneurs, industrialists, and other investors are critical. Such networks facilitate the feedback, improve the scale of opportunities, and further aid in carrying out the implementation through business development. This is in collaboration with incubators and accelerators with the aim of remaining in the loop in terms of new start-ups.

VC firms come with constant helping hands in the form of board participation, strategic advise and assistance with some major functions like marketing and finance. They also help to secure additional financing as well as exiting strategies getting in place such as mergers acquisitions or IPOs which may provide an optimal return yield on investment.

Introduction

In the fast-paced world of business, navigating deals represents a crucial juncture where strategies materialize, decisions solidify, and outcomes are determined. Whether it encompasses mergers, acquisitions, investments, or other transactions, the execution of deals necessitates meticulous planning, extensive research, strategic decision-making, and adept financial modeling. In this detailed exploration, we delve into the nuances of deal execution, unraveling its significance, process, and essential components.

Understanding Deal Execution

Deal execution embodies the process of shepherding a business transaction from its inception to its culmination. It involves translating strategies formulated during negotiation and due diligence phases into actionable steps, with the ultimate aim of finalizing the deal in a manner that maximizes value for all stakeholders. This multifaceted endeavor encompasses various activities, ranging from thorough research and due diligence to intricate financial modeling and valuations, all contributing to the transaction’s success.

Recognizing the Importance of Deal Execution

Effective deal execution holds paramount importance for businesses eyeing growth, expansion, or restructuring. Beyond facilitating the seamless transition of ownership or control, it serves as a conduit for unlocking synergies, creating value, and securing competitive advantages. A well-executed deal can catapult an organization towards enhanced market positioning, heightened shareholder value, and expedited strategic objectives. Conversely, faltering in execution can lead to missed opportunities, financial setbacks, and reputational harm, underscoring the pivotal role of this phase in the deal lifecycle.

Navigating the Deal Execution Process

Navigating the deal execution process can be complex and multifaceted, whether you’re negotiating a business deal, a partnership agreement, or a merger and acquisition. Here’s a general guide to help you navigate through the process effectively:

Deal Execution Process

Deal Execution Process

Developing a Robust Execution Strategy

The formulation of a well-defined execution strategy stands paramount for the successful completion of a deal. This involves outlining key milestones, assigning responsibilities, and establishing clear timelines. A robust strategy ensures that all deal aspects are systematically addressed, thereby minimizing the risk of oversights or delays.

Addressing Regulatory Compliance

Navigating regulatory requirements represents a critical component of deal execution. Failure to comply with relevant laws and regulations can lead to legal complications and jeopardize the deal’s success. Legal advisors must work closely with both parties to identify and address potential regulatory challenges throughout the execution process.

Financial Modeling and Analysis

Thorough financial modeling and analysis are indispensable for informed decision-making during deal execution. Financial experts should assess the target company’s financial statements, cash flow projections, and valuation methodologies. This diligence ensures that the deal aligns with the acquirer’s financial objectives and enhances overall shareholder value.

Steering Negotiations and Documentation

With the groundwork laid and the financial analyses in place, stakeholders proceed to the negotiation and documentation stage. This involves engaging in constructive dialogue, addressing key issues, and formalizing the terms of the deal through legal documentation. 

Fine-tuning the terms of the deal through negotiation, addressing key concerns, and reaching a consensus on pricing, structuring, and other critical aspects of the transaction.

Preparing and reviewing legal documents, including purchase agreements, shareholder agreements, and disclosure schedules, to formalize the terms of the deal and mitigate legal risks.

Closing and Post-Closing Integration

Closing the transaction and integrating the combined entities’ operations are the last steps in the deal execution process. This includes completing legal paperwork, sending money, and handing over ownership or control of the target business. Post-closing integration activities are then carried out to create value and achieve synergies. signing legal papers, sending money, and finishing off all requirements to bring the deal to a close. integrating the combined companies’ operations, systems, and cultures in order to create synergies, maximize deal benefits, and optimize efficiencies. These are all essential procedures for carrying out the contract.

Due Diligence: The Foundation of Informed Decision-Making

A comprehensive and thorough examination carried out by the buyer in order to evaluate the target company’s operational, legal, financial, and strategic aspects is known as due diligence. Identifying possible risks, obligations, and possibilities is the primary objective in order to provide insightful information that will help with decision-making.

Types of Due Diligence

Due diligence comprises various types, each focusing on specific aspects of the target company. Financial due diligence assesses the target’s financial health, while legal due diligence scrutinizes contractual obligations and potential legal issues. Operational due diligence evaluates the efficiency of the target’s operations, while strategic due diligence examines alignment with the acquirer’s goals.

Preliminary Due Diligence

The due diligence process typically commences with preliminary investigations, where the acquirer conducts high-level assessments to gauge the deal’s feasibility and desirability. This phase involves initial reviews of financial statements, legal documents, and other relevant information provided by the target.

Comprehensive Due Diligence

As the deal progresses, due diligence becomes more exhaustive. This phase entails in-depth examinations of the target’s financial records, contracts, intellectual property, employee agreements, and other critical aspects. The engagement of specialists, such as forensic accountants or legal experts, can uncover hidden risks and liabilities that may impact the deal.

Risk Mitigation Strategies in Deal Execution

Risk mitigation strategies are paramount for ensuring the success of deal execution, as they aim to minimize adverse effects and enhance the likelihood of favorable outcomes. In the subsequent discussion, we will delineate various strategies that businesses can adopt to identify, evaluate, and manage risks throughout the deal execution process:

Risk Mitigation Strategies

Risk Mitigation Strategies

Thorough Risk Assessment

Conducting a comprehensive evaluation of potential risks associated with the deal is imperative. This assessment should encompass financial, legal, operational, and strategic aspects. It’s essential to identify both internal factors such as organizational capabilities and readiness, and external factors including market conditions, regulatory changes, and competitive pressures.

Due Diligence

Engaging in rigorous due diligence is essential to uncover any undisclosed risks or liabilities linked to the target company. This involves conducting a thorough examination and analysis of financial records, legal contracts, operational processes, and strategic alignment. Collaborating with experts such as financial advisors, legal counsel, and industry analysts can offer valuable insights and ensure a meticulous due diligence process.

Contingency Planning

Developing robust contingency plans is vital to mitigate potential risks and uncertainties that may arise during deal execution. This includes identifying alternative courses of action and establishing clear protocols for addressing unexpected challenges or deviations from the original plan. Flexibility and agility in responding to unforeseen circumstances are crucial components of effective contingency planning.

Contractual Protections

It is essential to negotiate extensive contractual safeguards in order minimize risks and protect the interests of all parties participating in the transaction. This involves including clauses like indemnity, warranties and representations, and dispute resolution procedures. Contractual provisions that are precise and well-defined helps in risk allocation and the avoidance of possible disagreements or conflicts.

Unlocking Business Success with Magistral Consulting Services

In the realm of business dynamics, access to specialized expertise and strategic guidance is paramount for achieving success. Magistral Consulting distinguishes itself by providing a comprehensive suite of services tailored to empower businesses and drive growth. From financial advisory to strategic planning, Magistral Consulting is committed to assisting clients in overcoming challenges, seizing opportunities, and achieving their goals. Let’s explore the range of services offered by Magistral Consulting and how they can benefit businesses of all sizes.

Financial Advisory Services

Sound financial management is crucial for the success of every business. Magistral Consulting takes pride in delivering expert financial advisory services customized to meet the unique needs and goals of each client. Whether optimizing capital structure, evaluating investment opportunities, or managing risk, our team of financial experts offers strategic guidance and actionable insights to foster business growth.

Strategic Planning and Business Development

In today’s competitive environment, long-term success and sustained growth depend heavily on strategic planning. Collaborating with its clients, Magistral Consulting develops strategic plans that support their objectives, vision, and mission. An extensive analysis of the competitive landscape, market trends, and corporate environment precedes the strategic planning process.

Through collaborative workshops and strategic analysis, we assist clients in identifying opportunities, defining strategic priorities, and formulating actionable plans to achieve their goals. 

Operational Excellence and Performance Improvement

Achieving operational excellence is crucial for optimizing efficiency, cutting costs, and boosting competitiveness. At Magistral Consulting, we provide a suite of services focused on streamlining operational processes and elevating performance across diverse business sectors. Whether it involves refining supply chain operations, optimizing production processes, or enhancing customer service delivery, our team works closely with clients to pinpoint areas for enhancement and deploy tailored solutions.

Technology Advisory and Digital Transformation

In today’s digital age, leveraging technology is critical for staying competitive and fostering innovation. Magistral Consulting provides technology advisory services to help clients harness the power of technology and embark on successful digital transformation journeys. From IT strategy and technology road mapping to digital innovation and cybersecurity, our team offers strategic guidance and practical solutions to address clients’ technology needs.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to  prabhash.choudhary@magistralconsulting.com

Introduction

Fundraising is a tool to achieve a collaborative dream. It is the spark that ignites change. So, if you are looking for fundraising, this article will surely clear all your queries. This article also concentrates on the interaction that we follow for startups and organizations hoping to raise support fundamentally through selling some equity.

Private Equity is a capital investment firm that is not listed on any public stock exchange, and the risk involved is low and is required for the expansion of business and growth of the firm. A venture capital fund is generally invested in the initial stage by the individual or investor, which helps the company grow in the initial period. According to the survey, 51% of startups said that their next source of funds was venture capital. The funding starts from bootstrapping, in which one can use their own money or family, or friend’s money. The other method of funding is through the seed round where angel investors are available for the seed funding.

Importance of Fundraising

Fundraising plays a crucial role for the startup. It can increase visibility and attracts the attention of the market. It can get additional value from the investor. Lack of capital is the main reason for the failure of many small businesses. To reach a larger audience in the market and compete with the other players, businesses need money to grow and increase their sales and marketing efforts. In today’s time, there is a positive trend in startup business funding.

Five Steps of Fundraising are:

Steps in Fundraising for Venture Capital or Private Equity Fund

Steps in Fundraising for Venture Capital or Private Equity Fund

Build up the firm

Before starting the fundraising, the firm should build up its profile, improve its website, strengthen its online presence on social media, and check its marketing toolkit and legal structure. It will not raise the fund if the firm is a proprietary company, partnership company, or limited liability partnership. Only the private limited company gets the funding from the PE or VC firm. So first, one must correct the legal structure of one’s business for raising funds and then build the core team, hire the advisory board, and invest in a graphic designer to make the website and business logo. Any limited partner prefers to see a strong portfolio and professional presence of the company.

Private placement memorandum

It is a legal disclosure agreement prepared by the companies and given to an investor for their capital. Creating a private placement memorandum is also essential for the investor. It mainly focuses on gaining long-term capital appreciation through the control investment. This document must include a detailed message about the athletic background, investment strategy, opportunity, and risk.

Research and analysis

Comprehensive research about market reach, market size, and the number of potential customers is done. What is a company’s breakeven, return on investment, and how much is the revenue and profitability of the company? The company vision and plan should be clear. The company should prepare a budget sheet and prepare certain specific questions related to the budget sheet which the investor may ask. The company should check all the financial and legal details before reaching out to the investor. The company should influence how the firm has a competitive advantage and how it will optimize the resources and use it in the best possible way. It also involves doing detailed research and finding the right investors according to one’s industry. Many investment bankers provide investment to the firm, so finding the right investor according to your business is essential. One will easily raise the fund when one gets the right kind of investor, Consequently the company valuation will also increase.

Pitch deck

This is a document where the company should prepare the details about the team member, the company, competition, business model, financials, plans to expand, patent, strategy, etc. and then it is presented to the investor. The pitch deck should be attractive so that investors agree to invest in the business. It must include the return on the investment and how one can expand the company, and future income projections. The investor should see the profitability and the scope of the companies he will prefer to invest in. The goals and objective of the fund, why investment is needed, and where you will support the amount should be clarified. A competitive landscape, marketing opportunities, and detailed information about the shareholder should be necessary.

The investor needs to know how the company’s valuation will grow. The format of the pitch deck should be significant. The pitch to the investor should be professional. The companies should prepare before giving a final rise to the investor so that the last pitch to the investor should be appealing and realistic.

Due Diligence

It is the investigation and review performed to check the process of all the financial and legal documents produced before the investor. The investor should verify all the company’s claims and evaluate the business, check the economic situation, compound annual growth rate, liquidity ratio, profit margin, previous loan, or funding. Due diligence is a necessary process, and the company should clarify or answer all the doubts and questions of the investor. The company should arrange all the documents before going to the investor pitch and do due diligence because if the company misses any records, the funding may not be approved. In this process, the company signs a binding agreement.

Due Diligence process:

A due diligence process is an organized checklist to analyze the company ownership and organization, financial ratio, legal documents, shareholder value, future growth potential, and management. These documents are mandatory for a smooth process and should be prepared before starting the fundraising process.

Due Diligence for Private Equity

Due Diligence for Private Equity

The due diligence package includes the following documents:

-Subscription agreement

-Summary of the contract

-Name of the advisor to the fund

-Sample report

-Asset allocation

-Estimated timeline

-Investment transaction

-Management references

-A pipeline of deals

-The risk mitigation

-Conflict of interest.

Term Sheet

The term sheet includes all details related to the terms and conditions of the agreement. It is issued by the investor, in which detailed information about the company valuation, percentage stake, investor commitment, and liquidity preferences, the right of both parties, how much capital should be invested are mentioned.

The shareholder agreement is also issued, which is the detailed version of the term sheet that mentions all the details of the duties, right, jurisdiction, and arbitration of the company. The share subscription agreement should also explain the share and company stake terms.

These documents should be made so that it does not lead to a legal battle if any. Negotiation is also crucial. The investor generally negotiates more to cut the company’s valuation. The firm should take care of that. Investor relations also play an essential role and set the company’s credibility. If the relationship is good, then it may attract the other investor. The company should also explain the report, growth, and the new project to the existing investor. So, if the company is invested in the relationship, it will undoubtedly benefit in the long run.

 The five steps, as mentioned above, are simple to raise funds. Raising money through venture capital and private equity in series funding is mentioned in the article. Generally, raising funds for the first time for a startup is quite tricky, and it needs a good network, so outsourcing the fundraising support is needed.

Magistral’s Services on Fundraising

 Magistral consulting offers solutions in the following categories –

Fundraising Documentation

Magistral consulting prepares all documents that are helpful in fundraising. It also includes polishing the material to ensure the papers’ standards and design.

Magistral’s investor database

Magistral consulting database help to find the right kind of investor. There are more than 25K+ records of investors.

Specialized lead generation

For business-to-business development particular lead generation program is generated.

Analyst support

Magistral consulting ensures analyst support at every fundraising step. 

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family OfficesInvestment BanksAsset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE fundsCorporates and Portfolio companies. Its functional expertise is around Deal originationDeal Execution, Due Diligence, Financial ModelingPortfolio Management and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is Authored by Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Introduction

Private Equity (PE) consulting has been around for a while. Many consulting firms have practices offering private equity consulting services. It is interesting to note that even global consulting firms rely on offshoring to a great extent to deliver value to private equity clients on their most pressing issues. Offshoring reduces costs of consulting firms and some of it must be passed onto the clients (we hope!!). But what if all the advantages of offshoring could be passed onto the clients directly?

Read further to know more!!

Private Equity Consulting and Offshoring: Why it’s a match made in heaven?

Management Consulting as an industry has been around for more than 100 years on the back of its solid value proposition for clients. It brings in expertise, experience, political leverage, data sources, network, and usually signs business outcome-based projects with the clients. Usually, benefits outweigh the costs by 3X to 10X.

Private Equity Consulting and Offshoring

Private Equity Consulting and Offshoring brought together

Offshoring also picked up with the advent of the internet. As the work was possible with the help of the internet and advanced communication options, offshoring started to make sense for low-end jobs like call centers and data entry. It was followed by IT and now it is the turn of high-end research, analytics, and consulting jobs. The value proposition of offshoring is cost efficiency and scale. In most cases, offshoring also results in improvements in terms of quality and delivery apart from cost-cutting.

When we combine the forces, we have the impact of consulting with the cost advantages of offshoring, making it an unbeatable value proposition for clients in their marketplace. Management consulting overheads like weekly flights for consultants, high-end hotels for stay, and highly-priced consultants, all of which are paid by the clients are reduced by remote working and service delivery. At the same time, task offshoring to a group with all the expertise in a given industry brings a scale that can be taken advantage of, by smaller clients.

Business Outcomes for Private Equity Industry and the Services Offered

Major work streams at all private equity companies, big or small, comprise of following workstreams:

Fundraising and marketing or investor relations

Deal origination

Deal execution along with due diligence; and 

Portfolio management to get into the operational details of portfolio companies to make it more valuable

Private Equity Consulting Business Outcomes

Private Equity Consulting Business Outcomes

Magistral's Service Offerings for Private Equity

Magistral’s service offerings for Private Equity

Here is how Private Equity consulting helps in these workstreams

Fund Raising and Marketing/ Investor Relations

A fund is established when it has a healthy pipeline of potential investors apart from the existing ones. This is the area where most emerging managers struggle. The game does not even start if the firm is not able to raise the angel fund. However, like everything else in life, robust results need time and consistent efforts. PE consulting helps reach out to the investors and maintain a continuous touch-point to drive home the value proposition of the fund and thus enable successful fundraising rounds.

 

The services that help in fundraising are

Fundraising documentation

Fundraising requires a lot of documentation. Sometimes it could be enormous for an emerging manager. At the same time, it needs to be streamlined for established managers. Magistral helps prepare documents like Private Placement Memorandums (PPMs)/ Confidential Information Memorandums (CIMs), pitch decks, financial models and projections, teasers, and strategy and marketing documentation.

Investor profiling and reach-out

Funds specializing in different areas have different ideal profiles for investors or limited partners. Magistral helps in profiling and reach out to these investors. Magistral also has an in-house database that carries leads of more than 15000+ Limited Partners (LPs) and General Partners (GPs). It can also access databases of other players if the task needs it.

Design and Data Support

Magistral has an in-house design team that streamlines the PowerPoint designs and makes them consistent with the global marketing standards. It’s like we receive the content in raw form, sometimes scribbles from a notepad or whiteboard, and the output is a well-designed PowerPoint that could directly be sent to investors. Similarly, pitch decks and PPMs could also be designed to look more powerful visually. Likewise, data could be streamlined related to investors or CRM systems that the clients use.

Newsletters

Multiple touch-points with investors mark content like Newsletters, PoV documents, Industry reports, and market research. Magistral has experience working with hundreds of clients working on these assignments. It has access to resources like secondary sources, interviews with the panel of experts, and triangulations to come up with market sizes, etc. Worthy content establishes the authority of the Private Equity fund in the eyes of accredited investors.

Sustainable Investment and Impact Assessment

We have a specific service offering around ESG analysis, sustainable investments, and impact assessments of the current or potential assets acquired by the Private Equity firms.

Deal Origination

Deal origination services make sure that the focus of the GP is on the suitable targets and populate the deal pipeline with more appropriate deals, to be taken up as and when required. Picking up the right deals is the lifeblood of PE operations. It’s by picking up the right deals that a GP can offer superlative returns to its LP investors. Magistral helps with Deal Flow support and Inbound deal flow analysis.

The deal origination related services offered are:

Industry tracking and landscaping

A Private Equity firm needs to scan the environment for investing continually. It needs to track its key markets, geographies, and industry regularly to take advantage of emerging trends. Magistral has helped multiple clients in tracking industries like healthcare, SaaS, blockchain, cybersecurity, heavy engineering, and many others.

Potential target identification

A list of suitable potential targets is generated using secondary and primary sources. As per the investment thesis, the targets satisfy a host of customizable criteria like revenue, profits, employees, industry, geography, and being open for investments. Secondary sources include databases, whereas primary sources are industry associations, accelerators, angel investor groups, etc.

Target company profiling

Once the list is generated for potential targets, the next step is to shortlist the companies of interest and go for a deeper dive.  A target company is profiled for its business details, strategy, latest developments, management, SWOT, Porter’s 5 forces, and other customized information. Understanding the openness of the company for an investor on the board is also studied at this stage.

Target pipeline management

For deals to be continuously happening, the pipeline needs to be populated continuously. There should be deals in all stages of deal-making. That is ensured by filling the targets in the funnel on an ongoing basis.

ESG Analysis

ESG or impact analysis is more critical than it was ever before. It’s imperative then that Private Equity firms evaluate the deals for ESG fitments. A company that performs better on ESG frameworks is a more sustainable investment and makes a far-reaching impact on the society and communities it serves.

Inbound deal flow management

If a firm receives lots of inbound inquiries, there needs to be an agency to sort out the worthy opportunities from the non-serious ones. Magistral matches the opportunities with the GPs investment thesis and brings forward the best deals.

Summarizing and preparing IMs:

If start-ups send IMs, the same need to be summarized for discussion with the investment committee. Magistral summarizes the Investment memos into investcomms decks for quick and effective decision making.

Deal Viability Analysis: This involves getting into the nitty-gritty of a deal, identifying red flags both inside out and outside in, to make sure the deal produces the impact, which is the aim of the investment to start with. This is achieved from the exhaustive and comprehensive market and company research.

Deal Execution and Due Diligence

Deal execution and due diligence ensure the right investment decisions to produce significant returns, identifying risks for better planning post-investment or M&A.

Here the services are about providing all the foresight and intelligence to make the right decisions. The primary service offerings here are:

Target company due diligence

Here, Magistral takes access to the data rooms and analyses the information to produce highly relevant deliverables and insights. Due diligence includes financial, operational, and ESG related aspects of a firm. Magistral works with both Private Equity firms and Investee companies. It prepares Due Diligence Questionnaires (DDQs) and collects information from the investee companies, either directly or indirectly.

Industry Research

Here, industry research is more specific and has to do with the target company’s operations. The industry in which the target operates and details like trends, SWOT, Porter’s five forces, key competition, pricing trends, news. etc. are captured to provide a holistic view about the industry in which the target company operates

Detailed company profiling and competitive intelligence

In this stage of the company profile, details are captured from multiple sources like ex-employees, management, existing employees, vendors, competition, investors, and industry stakeholders. Also, information related to competition and their strategy is captured using primary and secondary sources.

Investment Memorandums

If the investment needs to be made with other co-investors, standard documentation is applicable like Investment Memorandum, Confidential Information memorandum, Pitch Deck, and Financial Models.

Modeling and Valuations

This exercise ensures that deal is made at the right prices so that there is a significant upside for the investment returns. Magistral has prepared 100+ financial models for valuations in industries like SaaS, tech, healthcare, IT, manufacturing, B2C retail, fashion, chemicals, and e-commerce. Here the information and assumptions required to prepare a financial model are captured from detailed discussions with the client. The models in which Magistral has expertise include and are not limited to 3 parts financial models, LBO analysis, DCF modeling, Real Estate modeling, precedent transaction analysis, comparable analysis, and impact analysis.

Portfolio Management and Fund Management

Portfolio Management aims at maximizing the value of the investment in a company by a Private Equity firm. This is achieved by supporting various tasks of the acquired company to reach more customers, hence improving revenue or reducing operations’ costs. Fund Management is about streamlining the functions of the fund itself to focus on the core tasks of investing and fundraising.

Here the services are:

ESG Compliance Monitoring

Magistral, after assessing the ESG maturity of an investee company, suggests a set of metrics monitored periodically after the investment is made. The data is collected on these metrics and reported to the board and management along with investors every quarter.

Outsourced CFO

Outsourced CFO services are relevant for both funds and the portfolio companies, specifically in the cases where the PE firm invests in start-ups or smaller firms. These companies may not be in a position to invest in a full-time CFO and thus may go for an outsourced CFO that is fractional and provides the operational and cost flexibility. Sometimes Financial Process and Accounting could be outsourced, while CFO could be kept in-house. These tasks include accounting, bookkeeping, administration, procurement, and preparation of financial statements

Outsourced Fund Administration

This service is specifically for funds and takes care of all the administrative aspects of the fund like fund accounting, expense monitoring, trade reconciliation, distribution waterfalls, taxes, fees, incentives, expenses, etc.

Strategy and Business Development support

After the investments, most PE firms focus on growing the revenues of the portfolio companies. This is done through a slew of interventions on strategy and marketing. Magistral supports these activities by providing services like consumer and market studies, new product or market development, lead generation, which is critical in the B2B space, and finding follow-on acquisition or buyer for the investee companies.

And this is how Private Equity consulting joins forces with offshoring to provide an unbeatable competitive advantage for our clients.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family OfficesInvestment BanksAsset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE fundsCorporates and Portfolio companies. Its functional expertise is around Deal originationDeal Execution, Due Diligence, Financial ModelingPortfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

What is Due Diligence?

Due Diligence Definition: It is an exercise done to check the quality of an investment before committing funds to it. There are lots of claims that are made by an asset manager, a company founder, a real estate developer, or anyone else who is interested in selling the asset or a stake of it thereof. These claims need to be satisfactorily validated before the funds are committed to buying the asset or a part of it.

 

Due Diligence in Finance

Due diligence is a general term of analyzing the investment before committing the funds. Financial due diligence concerns with the assets that generate returns and are financial in nature like private or public companies, start-ups, hedge funds, real estate, and real estate funds.

 

What does due diligence consist of?

Due diligence for financial aspects validates the claims of the seller through a detailed study of the documentation supporting the sellers’ claims. The Due Diligence period depends on the size and the nature of the asset on which it is being performed. The speed at which the data is made available also impacts the Due Diligence period. A start-up which is a small set-up could be checked in say a few weeks’ time, whereas bigger corporates may take months before the exercise for the whole company is performed.

Due Diligence Process

The process sometimes may take long periods and may require expertise. An external consultant can be hired for a Due diligence fee to make the process more objective

Here are the steps that are required for a detailed Due Diligence exercise:

Establishing the purpose of the investment

The investor needs to identify the purpose of the investment to do due diligence on the relevant aspects of the financial assets. For example, an investor wants to invest in a start-up with an aim of explosive growth in the next few years, so that he could exit the investment with massive gains. Or another investor wants to invest in a Real Estate fund specializing in infrastructure to generate a regular flow of income. Establishing the purpose clarifies the areas where the due diligence should be focused on. This leads to the development of the Due Diligence framework

Identifying the focus areas for Due Diligence

Once the purpose is established, investors should identify their focus areas for due diligence accordingly. In the above example say for the start-up the future growth is very important. What are the factors on which the future growth would depend? These are the market in which the start-up operates, its competition, its product, the capability of the team, etc. Similarly, for the Real Estate investment, the quality of underlying assets is important so that the investor could be assured of regular returns. This leads to doing due diligence on the type and quality of investments done by the RE fund, contracts signed, leases, rent rolls, tenants, users, market conditions, and everything else that may have an impact on the RE yield, where the fund operates

Preparing Due Diligence Questionnaires

A questionnaire needs to be prepared for each focus area. The way it works is that one starts with a broad question and set of other supporting questions. The questionnaire is followed by the collection of all the relevant data and documents. The seller provides the due diligence documents through data rooms, that could be physical or virtual. Investors or their representatives go through the details of all the data and documents and ask for clarifications if that is so required. A Due diligence checklist is also prepared to find out all the relevant supporting documents. A Due Diligence Analyst keeps track of the documents in the data room and the actions completed.

Preparing Due Diligence Report

Once the study of all the data and documents is complete, the service provider prepares a due diligence report for the investors. It carries all the details about the investments, outcomes that could reasonably be expected from the investments, and red flags that the investor should be concerned about. Some reports clearly suggest if the investor should go ahead with the investment at all

Magistral Consulting has experience in conducting due diligence for start-ups, private companies, public companies, and funds. It covers all aspects of due diligence done by Private Equity, Venture Capital, Investment Banks, Family Offices, and Fund of Funds. Here are the broad types of Due Diligence

Types of Financial Due Diligence

Various types of Due Diligence performed by Investment Banks, Private Equity, Venture Capital and Family Office firms

Due Diligence of a Company

Due diligence for companies is typically done before investing in or Mergers and Acquisitions of companies. This is also done before buying a business. The areas covered in the process largely depend on the size of the company and the purpose of the investment. While doing due diligence for companies, the following are the areas that should be looked into

Financial Performance-Past and Forecast

This is very critical for bigger companies. As usually the investments are done for returns from stocks, which is directly related to the expected financial performance of the company. It also impacts company valuation and stock price. Past financial performance is pulled out and compared with regulatory filings. Also studied are the market, trends, cyclicity, inventory, and other financial aspects. P&L and balance sheets are dived into to find any outliers. This is compared with peers in the same industry to look for anything that may raise suspicion. Forecast assumptions are checked for validity. Departmental budgets are scrutinized for authenticity and to find improvement potential. Previous audit reports are seen for regularly repeated observations. Usually, for start-ups, this is not a critical factor, as they are still in process of streamlining the revenue sources. Still, for start-ups that are looking to raise funds beyond seed or Series A, it’s imperative to get into the details of financials.

Strategy

Another aspect of companies that need closer careful evaluation is their strategy. The growth rates of the markets, and product categories, it plans to expand into is closely studied. It is checked if the current portfolio of its products and services is the most favorable from cost and growth perspectives. Risks are also evaluated along with the competition of the company. In the case of Start-ups and smaller companies, growth rates, competition and trends are looked into closely to verify the assumptions made while valuing the company

Operations

various other functions of the company are also studied under this like Manufacturing, Procurement, Human Resources, Technology, etc. It is evaluated with a lens of efficiency and cost. This is to evaluate the scope of operational efficiency in case the ownership of the company changes hands. Again this is not so important for smaller or start-up companies.

Team

Due diligence on the team is very important for start-up companies. Their experience, skills, qualifications, and past achievements are looked into to have a comprehensive view of their capabilities and future potential. This factor is not that important in the case of large companies where this exercise is being done for M&A

Product

This is very important for SaaS-based tech start-ups. The product needs to be checked as to where is it in the development stage. If it is fully developed, whether its UI, features, etc. are working properly. If not how much time and effort will go into developing the product. Is there even a chance of whether the team will ever be able to develop the product? For bigger companies, the entire portfolio of the product is studied to find out winners

Customers

In the case of B2B health of the biggest clients is checked out to suggest the sustainability of the market for the company. In the case of the B2C demographic profile and its future changes are analyzed to understand any revenue impact in the future. For SaaS-based tech companies, the nature of customers is understood whether they are free, freemium, or paid and the average ticket price to understand the sustainability of the business in the long run

Due Diligence of Funds

Due diligence of funds is usually done by Fund of Funds, Family Offices, and other investors who are interested in investing in the fund. The process, in this case, is different from the  process followed in case of companies

Activities of Due Diligence

Major differences between due diligence of companies and funds

Here are the items that are looked at while performing due diligence for the funds

Fund Performance

This is true for both Real Estate and Hedge Funds. All the technical parameters related to the fund performance are looked at while making a decision.  This evaluates not only the returns that the fund has generated in the past but also the volatility and the risk taken to produce those returns. Funds’ performance is benchmarked with the indices that carry no investment risks

 

Team

Here the profile of Fund Managers is looked into. Their experience qualification and past performance are looked into while evaluating the team. This is again true for both Hedge Funds and Real Estate funds

 

Investment Focus

The investment focus of the fund is analyzed to see if it is in line with the expectations of the investor. If it is a hedge fund that its markets, stocks, and geography are considered whereas if it is a Real Estate fund then the Real Estate Class and geography are considered for the exercise.

 

Underlying Portfolio

This is slightly more important in the case of Due Diligence of Real Estate funds as compared to Hedge funds as the Hedge Fund portfolio churns more often, whereas the Real Estate portfolio is more or less permanent. The quality of the underlying portfolio is looked at for the potential of generating regular returns. If there are any red flags in any of the properties, the same is highlighted. Real Estate properties and assets are analyzed for price trends, forecasts, rent, value increase, neighborhoods, and future potential of the asset.

Markets

This is more relevant for niche Real Estate funds that are dealing in specialist RE categories like handicap hostels or Self-storage. The potential in the underlying theme is objectively evaluated to find out the potential of returns that could be generated in the future

 

Magistral has experience and capabilities in providing Due Diligence Services to global clients in the space of Private Equity, Venture Capital, Investment Banking, and Family Offices

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family OfficesInvestment BanksAsset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE fundsCorporates and Portfolio companies. Its functional expertise is around Deal originationDeal Execution, Due Diligence, Financial ModelingPortfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

 

What are Outsourced Investment Officer (OCIO) Services?

An Outsourced Investment Officer services or OCIO provide support in terms of research and analytics for investment decisions by a company, Private Equity or Venture Capital Fund, Hedge Fund, Family Office, or an Investment Bank. Simply put, An Outsourced Chief Investment Officer fills in for a regular Chief Investment Officer as and when required. Mostly it comprises activities that support a CIO in performing his services effectively.

When is OCIO needed?

Outsourced Chief Investment Officer services are designed for funds like Private Equity, Venture Capital, and Hedge Funds, and for Family Offices, Investment Banks, and M&A functions of Corporates

Need of OCIO Services

When it makes sense to outsource Chief Investment Officer?

 

It’s not possible to hire a full-time CIO in all situations. In many business scenarios, there is a requirement of a team that supports the CIO. This size of the team changes as per the deal flow. Some of these situations are:

-The fund is small and cannot afford a full-time CIO

-The fund is still raising and cannot onboard a full-time CIO unless the fund reaches its target close

-A full-time CIO is there but there are way too many investment decisions that need analysis and hence the requirement of a trained investing team

-A Corporate house is looking for a specific opportunity of M&A and does not want to hire a full-time CIO for a few deals here and there

 

What are the advantages of an Outsourced Chief Investment Officer?

Outsourced Chief Investment Officer makes an absolute sense when looked at from the cost perspective.  When outsourced to a low-cost country, OCIO could produce a benefit of a 30-70% reduction in cost by either outsourcing the CIO or the team or some of the functions and projects. A specific function where the in-house team lacks the expertise could be outsourced as well. Here are the typical advantages of outsourced CIO:

30-70% reduction in the costs depending on the location from where the outsourcing takes place

A plug and play outsourced Chief Investment Officer model where a CIO comes into play when required. If there is only one deal that has to take place in a year, it makes sense to hire a CIO for only as many days as required. Outsourced CIO fits in perfectly for this requirement

A specific Skillset requirement: With complex investing scenarios and multiple complex options in investing, there are many niche skills that are required to make an investment decision. Outsourcing could be done for these niche skills whenever required

Team Augmentation: This is the most important advantage of outsourcing the CIO. It’s not about replacing or hiring an outside CIO, it’s about augmenting the team under the current CIO. It may so happen that business requires enhanced analyst capacity due to increased deal flow or a few special one-time projects. Outsourced Chief Investment Officer Services fill in perfectly here and augment the team as required

Activities under Outsourced CIO

The activities that come under OCIO are either the overall decision analytics or a particular subset of activities that lump under the investment decision making process. Here are the activities that form the major part of Outsourced CIO services:

Outsourced Chief Investment Officer Services

Activities provided under OCIO services

Investments

Research and Analytics services for investments are performed under this service. The investment could be done in companies, stocks, funds, or real estate. Almost all the subset of activities could be outsourced. Here are the typical examples of the projects

-Finding out the right price for a company stock

-Finding out the valuation of a private or a public company

-Doing due diligence of a fund or a company before investment

-Originating deals as per the investment objectives of the fund

-Maintaining and populating the deal pipeline for future deals

-Profiling potential companies or investing

-Profiling various Hedge funds for investing in case of Fund of Funds

-Other Strategy, Research, or Marketing tasks

Portfolio Management

Research and Analytics services that are required for the smooth functioning of portfolio companies come under this. For Hedge funds, it will be continuously evaluating long-short positions. Here are the typical projects that could be outsourced:

-Valuation of portfolio companies

-Research support for portfolio companies

-Marketing and Business development support for portfolio companies

-Evaluating long term long and short positions of a long-short equity hedge fund

-List generation for a portfolio company to sell its products

-Lead generation for further acquisition or finding a buyer of the company

-Market entry strategy for a new market or a new product

-Annual business plans

-Key accounts management for major clients of the portfolio companies

-New product development and related market research for portfolio companies

Operations

Under these services are the activities that enable the smooth functioning of a fund. This comprises Middle and Back office operations outsourcing. Some of the examples of the projects undertaken are:

-Fund administration services

-Annual and quarterly audits

-Tax preparations

-Investor portfolio accounting, subscriptions, and redemptions

-Fee waterfalls

-Middle office outsourcing

-Back office outsourcing

-Trade accounting

-Exception handling

-Cash and Trade reconciliation

Under this multiple software also could be used to make sure many of these activities are automated and processes efficiently

Outsourced Chief Investment Officer Model

The way an outsourced CIO model works is by hiring FTEs offshore. FTE stands for Full-Time Employees/Equivalents. These are the offshore-based analysts who support multiple tasks related to investment research and decision making. Apart from hiring full-time resources, there are options for buying analyst hours or outsourcing a specific project.

Magistral Consulting has helped multiple funds and companies in outsourcing CIO related activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About Magistral

Magistral is a leading research, analytics, and consulting services provider for Investment Banks, Private Equity, Venture Capital, Family Offices, and Hedge Funds. It has more than 100 clients across the globe. If you need any of Magistral’s work samples or need to talk to any of its existing clients and referenced drop a line at www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Why Private Investments are more important than they ever were?

Wealth creation has moved from ‘Post-IPO’ in public markets to ‘Pre-IPO’ in private markets. All indicators related to private investments are at an all-time high. Gone are the days, when institutional investors would invest in primary and secondary markets to stay in the security for the long term, for continued wealth creation and regular flow of dividends. Increasingly, experienced investment managers are investing in private markets, scaling the company, merge it with others, and take the bigger entity public to create wealth for themselves, while limiting the returns upside for retail and other institutional investors in the secondary market. Robust Due diligence exercise is imperative.

At least in the near future, it can be said that IPO will not be the source of funds for the companies also. It is going to be the private investors in the form of Angel, Private Equity, and Venture Capital firms. Companies are increasingly postponing their IPOs in favor of private investors due to less regulatory requirements, the savvy nature of investors to back maverick ideas, less number of stakeholders to manage, and industry-specific knowledge of investors that can be used for further scaling companies. But private investments from investors’ point of view are very different from investing in equities where all the data is available upfront. Due diligence of private target companies is a painstaking process. As part of due diligence, the following are the items that need to be checked before a private investment is signed and closed:

Founders and the Founding Team: We hear this often that a VC backs a ‘team’ and not a company. So when we talk about due diligence of early-stage investment, the team acquires the center-stage, in terms of investment decision making. There are a host of questions that need answering before backing a founding team. For example, whether one of the founders was sacked in the last job due to charges of sexual harassment against him? How founders behave with their teams when investors are not around? Are the educational and experience credentials claimed by founders correct and verifiable? Has someone spoken to the references provided? And so many more!!

When millions are riding on the personal conduct of a group of people, no investor would want to repeat a ‘Travis Kalanick’ episode. It is thus imperative to get into all the minute details about the founding team’s business and personal conduct.

Market and Industry of the Target Company: Another oft-repeated saying of the Alternative Investment industry is that ‘it is better to invest in an average company in a rising industry rather than backing an excellent company in a declining industry’. To be on the top of the industry trends and how it is going to unfold in the near to mid-term is imperative for risk aversion of the invested capital. An industry with all its hues of multiple sub-industries with cross-germination of tech into it needs a specialist intervention in terms of market research and forecasts

Past Financial Performance: The target company usually provides data on revenue and market traction. Although dollars coming into a bank account is a fairly straight-forward end KPI, there are multiple other market traction KPIs that finally ensure dollars in the account at some point in time in the future. These traction KPIs are industry-specific like the number of paid customers, freemium customers, free to paid customer conversion rates, claimed market share, etc. It would have been fairly simple if the company would have provided these numbers accurately. Sometimes clouds are deliberately maintained on data. One sees a month-on-month increasing number of customers, but what is not known is the percentage of paid customers amongst them or worst still, maybe the whole surge has come from free membership campaigns. Devil is in the details. Talking to market and tech experts along with customers will go a long way in ensuring the right investment decision.

Future Financial Performance: Future financial performance is usually a linear or exponential extrapolation of current performance or sometimes just pulled out of the hat to sell a rosy picture of the future. Many times, the company is struggling to meet expenses currently, but future forecasts graph takes off like a rocket headed into space. All these forecasts need to be taken with a pinch of salt. It’s worthwhile to check and challenge all the assumptions that have gone into coming up with the financial model and the forecasts. It is a factor that could literally make or break for your millions going into the private investment.

Customers: Proof of the pudding is in the eating. Customers talking well of a company is a good sign for investors. Also, customers vote with their dollars. Talking to them gives an idea about the customer journey, pain points, existing alternatives to product or service and what exactly would be needed for them to shell out those dollars for the product or service. This requires a specialist Market Research agency that has expertise in ghost shopping and customer surveys.

Employees: One of the first people who bought into a vision is the ‘employees’ of the start-up. A place that has happy employees speaks louder than any other credential for the founder. At the same time, a toxic culture will be quicksand that will absorb millions of dollars in no time, without a blip on revenue numbers. Most founders are not ‘Steve Jobs’ type visionary. They are average folks, who get stressed with day to day running of the start-up machinery, which takes a toll on them. How do they behave with their employees at that point in time is a fairly good indicator of an individual’s potential as an effective stakeholder manager currently and in the future? A research agency can provide honest feedback on this indicator.

Regulations: Are there any regulatory risks in the business, that will come into play after scaling up of operations? Thorough research and liaising with government agencies can go a long way in avoiding statutory and regulatory risks that might plague your investment in the future.

Other Investors: Old boys of the industry do remark that ‘VCs and PEs hunt in packs’. It is heard often. Other investors are more of a support than a threat. If they have voted with their dollars than it might be a good company. Also in situations of B2C tech where winners take it all or a small group of winners take it all, funding dollars make the difference between the winner and the laggards. Multiple investors backing a company will take care of those dollars, which means your own investment is safer. At this point, verifying the claim of the company about other lead investors, co-investors, and conversations going on needs to be verified by a neutral agency.

Magistral Consulting helps Private Equity, Venture Capital, Family Offices, and Investment Banks in performing due diligence for private assets. All these steps are taken care of, in our proprietary research method that is designed to eliminate potential investment risks. A concise weight-based evaluation metrics with clear recommendations about future potential and risks are delivered in aggressive timelines. As our delivery centers are based out of low-cost countries, it builds in significant savings in terms of research costs as well. To know more, please get in touch with info@magistralconsulting.com

The author is CEO of Magistral Consulting and can be reached at prabhash.choudhary@magistralconsulting.com for any clarifications and queries.

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Are you a Private Equity or a Venture Capital firm that has finalized the asset with a huge manufacturing base? Then read on….

Valuing a factory or a manufacturing company can be tricky. Number oriented investment bankers are more comfortable with the valuation derived from the financial models. All the assets like land, factories, machineries, inventories, vehicles etc. are taken into account with assumptions on depreciation to arrive at a value that a manufacturing-based asset deserves.

There is one thing that often gets overlooked in the financial models. That is the potential for factory to save costs or improving productivity in future. Assessing this has significant element of experience and intuition. It can have an impact on the final COGS and thus improve the bottom-line of the overall organization. An improved bottom-line that is possible in future will have a bearing on the current valuation. It also decides if the asset managers will be able to derive the value that they plan from the asset in the future.

I will detail a few tools here, that can give experienced operations personnel, a quick and dirty guide to indicate the improvements that are possible in the operations of a manufacturing company or a factory.

Productivity Improvements Studies

DILO: DILO stands for “Day in the Life Of”. It has been used for years now by productivity improvement consultants. DILO is shadowing personnel for a whole shift/day to understand nature of all activities performed by him, and whether they are value adding or not. DILO is performed over the activities of first level supervisor in the plant. It’s not done for the people at the top and it’s not done for people at the lowest rung too. First supervisory level DILO gives a firsthand idea about the cultural DNA of the organization. It also helps zeroing on the productivity improvements that is possible. A 20% productivity improvement using improved systems is not exactly unheard of.

Management Control Systems: An effective Management Control System study charts out flow of information in the organization and the actions that are being taken on the same. Production planning processes, production control processes and production reporting processes are taken into account. All KPIs/KRAs and review mechanisms are studied too. This study should be able to show gaps in the processes and improvements possible. This can be repeated for functions of Maintenance, Quality Control, Supply Chain, R&D or any other function that has an important bearing on the final output.

Pit-stop studies: A pit stop study is conducted to see if the flow of material, men and information happen as they happen during a pit-stop in F1 racing. It also records all the bottlenecks for not achieving the pit stop level efficiencies. Analysis of these bottlenecks give a fair idea about the improvements possible

Bottleneck Study: Identifying a clear line of value addition itself is a task in multiple industries, but if processes are visibility and logically connected, a bottleneck study can be done to find out the bottleneck process or a bottleneck machine. Once identified it’s clear that any improvement that is done on the bottleneck process/machine improves the productivity of the whole line. We need to study the bottleneck machines/processes in further details to find out downtimes and reasons for the same. More avoidable the reasons are, more chances of improvements. A bottleneck process improvement has been able to show 10% improvements in throughput even across process-wise mature plants.

Process Maps: A simple flow of material and information exposes the gaps in processes. Material waiting for information or material waiting for other material or machines or men, all cause delays. As per the established principles of Toyota Production System and lean methodology, wastes need to be identified. Once identified, it needs to be ascertained, if these wastes are avoidable. Again, more avoidable the reasons, more chances of improvements.

Quality Processes: Reduction in quality rejected items directly adds to the throughput. Finding out the effectiveness of quality systems can point towards improvements possible due to reduction in quality rejects.

5S and other housekeeping systems: It makes the workplace clutter free. Absence or presence of these systems point towards the current processes maturity and thus improvements possible.

Cost Optimization Studies

Material Cost: Material costs most often are the highest cost bucket for a factory. There is some raw material fed at the beginning of the production line and there is output in terms of finished product at the other end. All the material that is lost in between is the dollars lost. In process industries, this is also referred as material yield. Finding out the potential to reduce this waste is guaranteed to give future direct bottom-line benefits.

Inventory Cost: In some industry cost of inventory is huge. If inventory turns are not monitored carefully, it leads to working capital being tied up in inventory. Finding out if A, B, C classifications are there and if there are inventory standards for each classification can be a starting point. In case there are standards, a quick audit of some A class materials will show potential of releasing stuck working capital back to P&L.

Procurement Costs: A quick look at procurement processes show if there is some value that can be derived from tighter procurement standards. Few things that can be looked at include, how contracts are finalized, presence of penalty clauses in contracts, contracts negotiations process, RFQ process, low cost country sourcing potential, supply chain cost reduction possibilities, mass discounts and vendor rationalization possibilities. A tighter procurement process has known to produce 10% savings in the spends related to material.

All these studies will also need to be supported by number crunching exercises. It all depends on the extent and quality of data available in the factory.

A dipstick study can be concluded in 2-3 weeks’ time for a plant that produces around 200-1000 Crore worth of stock by a team of 3-4 people. This exercise gives an input to valuation of the plant and the company. It also acts as the road-map for the management in case the asset gets acquired.

Prabhash Choudhary, CEO, Magistral Consulting.

Magistral (www.magistralconsulting.com) is a leading consulting research and analytics firm that helps PE/VC firms globally in performing operational due diligence. The author can be reached at prabhash.choudhary@magistralconsulting.com for queries.

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