Introduction- What is Portfolio Management?
Portfolio Management Services are the services that keep a portfolio of investments healthy and prime them to produce expected returns on investments.
Sometimes portfolio management is passive, where it mostly deals with analyzing the assets and its performance. In some cases, portfolio management is quite active, where the manager is expected to get into the operations of the invested company and make sure its operational aspects are fine-tuned so that the asset enhances its intrinsic value
Whatever is the underlying nature of the portfolio, portfolio management concerns about managing the asset properly and prepare it to give superlative returns for the investors
What constitutes a Portfolio?
A portfolio has a different meaning for different institutional investors. A Venture Capital or a Private Equity firm may mean invested companies as its portfolio. These companies can vary in size. Sometimes they are start-ups or smaller companies, whereas some other times they could be multibillion-dollar enterprises with businesses in many countries. These companies could be public or private
A Hedge Fund calls the stocks where it has invested as its portfolio. These are publicly traded stocks and trade on global exchanges.
A Fund of Funds will call its underlying Hedge Funds as its portfolio. A Fund of Funds invests in funds like Hedge Funds. So all the hedge funds where it decides to park the money are its portfolio
A Real Estate fund will call its Real Estate investment as its portfolio. Various funds specialize in multiple RE asset classes like residential, commercial, infrastructure, and multiple other versions of it therein.
An Investment Bank or a Commercial Bank may have different asset classes, depending on its business model and clientele, calling an underlying asset as the portfolio. They can be Real Estate, Real Estate Classes, Cryptocurrencies, Commodities, and anything else that generates a return and is invested with an aim of either generating returns or appreciation in capital value.
Depending on the underlying asset, the portfolio management approach takes different paths
Portfolio Management for Private Equity and Venture Capital
When Portfolio Management is talked about for Private Equity or Venture Capital firms, it means helping the portfolio of companies, mostly private, in appreciating its valuation. This appreciation in value comes from improving revenue or cutting costs. The ultimate aim of investing in companies by Private Equity or Venture Capital firm is to exit at a valuation that is multiple times over the initial investment. A significant part of the fund is in the portfolio management business.
Multiple things could be done to make sure the portfolio company grows its revenue and keeps its costs in control
Outsourcing some of these services produce multiple benefits like reduction in operations’ cost, improvement in quality, etc.
Here are the services and all of it could be effectively outsourced in the portfolio management process to further net in the cost savings:
All the elements of companies’ portfolio management that could be outsourced
Business Research
Business Research touches multiple aspects of operations for a small company. It plays a vital role in Finance, Sales, Marketing, Strategy, and Procurement. Almost all research tasks in these functions could be outsourced. Investors taking in hands the research function take the nerve cells of the organization in control. From there, the company could be managed more closely and with better control. One of the most important aspects of business research is fine-tuning the business strategy. Investors can devise the expansion plans and study whether they are on track.
Marketing
Marketing and specifically the elements of Digital marketing could be outsourced well. Components of digital marketing like content marketing, web design, social media advertising, SEO, and everything else related could be outsourced and outsourced well. Marketing is the most important lever when it comes to growing the business of a small company aggressively. Topline growth increases the valuation of the company almost simultaneously.
Business Development
Specifically, for B2B businesses in the portfolio, there are multiple outsourceable elements for business development. This includes list and lead generation to onboard newer accounts faster. Also, account-based management is important for bigger clients of a smaller portfolio company.
Mergers and Acquisition
After the initial investment, the struggle for the investor takes another direction. It is to raise further rounds of fund-raising or start finding a bigger buyer for the company. Multiple activities are spanned out of this objective. For example, generating the list of potential buyers or investors and all the accompanying documents that go towards an M&A exercise.
Fund-Raising
Fund Raising is an ongoing cause for venture-funded companies. After the seed round, the preparations start for a further round of fund-raise like Series A, Series B, Series C, and so on. This leads to a continued quest for generating a pipeline of investors for further rounds of fund-raising. This activity of generating and populating pipeline could be effectively outsourced while the management focuses on revenue and profitability
Outsourced CFO
A full-time CFO is something that a small start-up may struggle to have. When a VC fund invests in multiple start-ups, it could have a centrally located CFO for all these companies. To further save costs, this CFO or parts of the CFO team could be outsourced. An outsourced CFO brings in the expertise of a tenured CFO along with the scalability of an outsourced team.
Product Design and Development
Many investments specifically in the VC space happens in the pre-product development stage or immediately after the proof of concept still leaving the product with some problems that need to be ironed out. This is when product design and development services come into play. It helps in setting up websites, making apps, and initial marketing to gain the users and change the UI or business strategy if required. It’s just that with outsourcing, these business and technical iterations become a lot cheaper.
Lead and List Generation
An ongoing company needs a list-building exercise all the time whether it’s about getting a new client or an investor or a vendor or anyone else for any other type of business collaboration.
Portfolio Management for Hedge Funds, Investment Banks and other Asset Managers
This section is for anyone else who is not dealing with investing in private companies. This is also for anyone who does not get into an active management role in a company’s day to day affairs. The underlying assets in this portfolio could range from Real Estate and all its classes like residential, commercial, land, buildings, infrastructure, etc., cryptocurrencies, public company stocks, commodities, and everything else that is bought, sold, or traded for capital appreciation or returns. Portfolio Management strategies, in this case, differ significantly from explained earlier and here different tools and models are used for Portfolio Management
Here are the aspects of such a portfolio management project that could be outsourced effectively
Activities that could be outsourced for Portfolio Management of funds and other assets
NAV Tracking
Almost all types of assets need regular NAV tracking. NAV which stands for Net Asset Value is the underlying value of the asset that changes from time to time. All the changes need capturing for investor communication periodically. NAV of some assets is easy to capture, whereas with other assets it follows a difficult process. Portfolio Management and Investment Analysis are connected as the successful investing strategy need to be doubled down on. Several KPIs for Portfolio Management are tracked as well.
Investor Relations
Investors need to be reached out for all the information like the value of their holdings, taxes, fund management fees, waterfalls, etc. Sometimes they would also need a primer on the strategy of the fund or change in the plans by the fund manager. A Portfolio Management dashboard is often prepared and is automated for the information of investors
Middle Office
All the middle office activities like fund administration could be effectively outsourced. This form majority of research, and analytics jobs performed at a Fund. Automated tools for portfolio management is used here.
Back Office
All the tasks like book-keeping could be outsourced at a fraction of the cost. There are multiple software for portfolio management and book-keeping that could be used in the process
Marketing
Most marketing activities like CRM, Marketing communications, reports, and content could be outsourced as well.
Why outsource portfolio management?
Outsourcing has multiple benefits for a Portfolio Management Office. Cost-saving is an obvious one. Here are the factors that add to the charm of an outsourced deal:
Cost: Cost savings of 30-70% from outsourcing portfolio management is very typical. The cost that you save depend on the geography from where you want to outsource and the technical skills required to do the job effectively
Skill inventory: Many small fund management teams operate at a suboptimal level and are not able to meet the standards of bigger funds as their support services don’t match up with that of much bigger funds. Outsourcing presents an opportunity for smaller fund teams for skill enhancements. Outsourcing brings the skills to the team without permanent hiring
Quality: The work quality that is outsourced is of global standards and helps raise the bar for the internal team as well
Risk: Outsourcing reduces the portfolio management risk significantly
Flexibility: A Portfolio Management Analyst can either be hired full-time offshore or in parts or services can be availed on an hourly basis
Magistral has helped multiple fund managers in outsourcing portfolio management and other aspects of operations.
About Magistral
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 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.