Tag Archives: Private Equity Operations Outsourcing

Introduction

As the COVID 19 pandemic continued to threaten investor sentiments the PE industry was also affected by it. In an increasingly connected world, this is a fact given that the effect of changing trends in one part of the economy is bound to affect trends in another part of the world – a sort of chain reaction. The PE market saw a decline in 2021 in deal-making with the firms becoming more risk-averse and the focus being on stabilizing current portfolio investments.

However, the second half of the year 2021 started seeing more investments with the markets showing more resiliency regions like the Asia Pacific seeing a doubling of the number of investments as compared to 2019. Overall, $628 Bn worth of capital was raised in 2020 which was 20% less than that in 2019.

The dry powder had increased, with the amount swelling to almost $2 Trillion dollars which is close to a record all-time high. IT and healthcare were two of the major focus areas during this time.

Political unrest, the increased adoption of digital technologies, and the increased adoption of ESG are some of the key trends which have been shaping up the industry. This has forced the managers and PE investors to rethink their investments strategies. They have done this by steps such as looking at reshaping their current investment models as well as by relooking at their portfolio investments.

The key to survival in such a scenario is adapting quickly to changing market dynamics, adapting and acting quickly by taking into account the major trends shaping up the industry as well as thinking broadly and executing region and sector-specific strategies. One such example is the adoption of digital technologies so that the entire organization can be on the same page and be swift and nimble to market changes thereby becoming more operationally resilient.

To such an end this exercise would require one to rethink their mandate and investment strategy as well as their business operating models and methods. Greater involvement with key stakeholders and engagement with industry leaders is one such methodology to counteract the ill effects of COVID 19.

Technological changes in themselves is a megatrend impacting all sectors and investments

For us to understand how the Private Equity industry is being affected by the COVID 19 pandemic we must also understand other underlying dominant forces which are shaping up the world.

The Deep Tech revolution

One must have heard of the space race between Blue Origin and SpaceX. Space travel has become a reality and has captured the public imagination. This is one such instance that has seen a diverse and vividly imaginative and technically sound staff coming under one roof to fulfill its mission of space travel.

Quantum computing and the rise of Artificial Intelligence

With the achievement of quantum supremacy as announced by Google and IBM we are slowly but surely entering the age of super intelligence where experts foresee the end of classical computing and Moore’s law with classical computers being replaced by exponentially faster quantum computer cousins. It will soon find its way into automation of services such as credit approval, granting of loans, and automation of several banking processes.

Online security and online data protection

There will also be an increase in rule-breakers when it comes to the world of finance and hence online security and online data protection will be one of the services most in demand.

Cryptocurrency, Blockchain and the world of digital payments

As the internet penetration increases and with adoption and connection by leading technologies such as 4G disruptive services such as cryptocurrencies, blockchain, and digital payments will see a rise. This is evidenced and catalyzed by e-commerce and e retailing which boast of contactless payments to their customers.

Key trends shaping up the global Private Equity industry

It is important to understand the investment trends especially in the US which is the heart of the Private Equity and Venture Capital Industry. Investments by them in startups have increased over the last 20 years yet their rate of return has been below average or just above the average of major stocks listed in the stock markets (even though in the last 10 years they have outperformed the S&P index).

Viewed overall, this is a major problem for the US economy as it not only discounts the innovation premium on which US companies pride themselves but it also affects the investment sentiments of the investors at large.

With this in mind let us look at a few of the latest trends in Private equity investments

Increase in Mergers and Acquisitions

As compared to traditional IPO’s and funding for more traditional ways of organic growth, it is the Mergers and Acquisition route that the Private Equity firms are gravitating towards. One major focus area for this is the insurance sector and the major geographic area are countries like China and India as they ease the rule for participating in their domestic economies.

This trend by the PE/VC firms towards mergers and acquisitions rather than following the traditional IPO route is the primary reason why the returns from investments in startups have been on the decline.

Global Private Equity Trends

Global Private Equity Trends and its impact on PE returns

Focus on Special Purpose Acquisition Vehicles (SPAC’s)

A SPAC is a company that has no commercial operations of its own and has been raised specifically to raise capital through IPOs to acquire or merge with an existing company.

Just to get an idea of the volume of transactions involved, around $80 Billion worth of money was raised by 247 SPACs in 2020 and this amount went up to $96 Billion from 296 SPACs in 2021.

Lowering of interest rates

The decrease in investments activity has meant a fall in rates globally. The coming year 2022 is expected to show a rise in borrowing activity complemented by a not so rapid rise in interest rates.

The rise of the startup ecosystem

The startup ecosystem will be an area of continued focus which means increased investments in cities like the Silicon Valley and much closer to home cities like Bengaluru and Mumbai. However, PE firms are more likely to stay vigilant and go slow with the focus being on sound financial stability as well as relatively risk-free returns.

By June 2020 the number of Unicorn startups in China rose to 227 rivaling those in the US which had 233. The size of Global Unicorns is close to $2 Trillion which although huge means there is still scope of expansion in other geographies of the world.

Some of the global startups include the fabled FAAMNG (Facebook, Amazon, Apple, Microsoft, Netflix, and Google) which accounts for more than 25% of Standard and Poor’s total market capitalization.

Conclusion

The year 2021 has been a watershed year for us with the COVID 19 pandemic teaching us vital lessons. Companies have not only learned to respect uncertainty but also learned that they need to be nimble and agile when it comes to dealing with real-world situations. Hopefully, these lessons will be remembered by us for generations to come.

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 Modeling, 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 could reach out to  prabhash.choudhary@magistralconsulting.com

 

 

Introduction

Covid-19 is a massive challenge not only for the global economy but for humanity as a whole. This is once in a lifetime black swan event which is going to rewrite the rules of businesses across geographies and industries. As the details and impact of this tragedy are still unfolding, here are the steps that Private Equity firms can take, including Private Equity Operations outsourcing, which will significantly mitigate the risk in these tough times:

Focus on Employees

A PE firm should first and foremost secure its employees. This can either be done through offering work-flexibility or giving incentives for effective testing and treatments. The partners should act as the role model and it makes sense to communicate the firm’s commitment towards the health and wellness of their employees. In the scenario where all the work is done remotely, it also makes sense to communicate more often through continuous audio and video calls.

Streamline Processes

An event like Covid-19 will test the Business Continuity Planning elements of even the most agile organizations. It’s an opportunity for Private Equity firms to fine-tune theirs. Making sure all important elements of the business are efficiently run is the need of the hour, whether it is about continuously looking for more investment targets, having effective investment committee meetings remotely, and being in touch with the management of portfolio companies for any assistance required. Board and other meetings need to be done remotely and assure the portfolio companies of the financial assistance and other support. This is also a good time to test operations’ outsourcing because if anything, this is going to be the time of hyperactivity, fishing for opportunities. An outsourcing agency can help in taking care of the additional work-load

Zoom in on Portfolio Companies

Covid-19 will impact every business on the planet. PE firms should dedicate most of their time in assessing its impact on their portfolio companies. It will largely depend on the industry in which the portfolio companies are. Some portfolio companies say in the business of Pharma, Healthcare and FMCG need to move faster to adjust their processes to take business advantage and to make themselves available for this humanitarian challenge. Also, there will be some businesses like frontline retail, hospitality, and airlines that are bound to take a hit. Analyzing where to focus the resources and energy is going to be crucial. A PE firm that moves quickly and decisively during these times will see earlier and more profitable exits as compared to peers in the future

Financial Challenges of the Portfolio Companies

Once it is identified as to which portfolio companies will need financial support, the next step would be to get into the details of the Balance sheet and business of these portfolio companies to fine-tune the contours of the package. Here are some of the operational areas that could be looked into: 

-Vendor Payments: Can payments to vendors be postponed/staggered? Can contracts be re-negotiated for better terms?

-Collections: Can collections from clients be expedited? Is it possible to collect early by giving discounts? What has been the impact of Covid-19 on customer’s businesses? Is there leverage available? If the impact has been positive, can it be monetized quickly?

-Debt options: What are the short term debt options available to the business? Which is the most competitive option in terms of interest rates? Can there be some advantages that can be taken on the back of historically low-interest rates currently prevailing?

-Further infusion of cash: If the business has long-term viability and would emerge victorious after the Covid-19 challenge, it might make sense to offer cash to the portfolio company as an equity or debt

-Opportunities of M&A: If there are portfolio companies that are similar and operate in the same industry, are there enough synergies to justify an M&A to tide over the financial challenges?

 

Putting Dry Powder to Work

Private Equity as an industry has entered this phase with a record dry powder with them. It is time to put that dry powder to use. If there are any businesses that are going through tough times and would need urgent infusion to stay afloat, recovery would be swift and returns may very well justify the risk. The trick here is to stay in the industry where the firm has expertise in, and may very well be aware of the targets and its operational challenges to decipher if the challenge faced is short term or strategic

Communicate well with LPs

Limited Partners like everyone else are panicked too. In these times of uncertainty, they look forward to receiving as much information as possible on their past investments and the impact of Covid-19 on the operations of the firm and the portfolio companies. A more frequent and dedicated newsletter highlighting all the risks and rewards would go a long way in earning their long term loyalty with the firm and the fund. It’s time to communicate well and communicate more, albeit remotely

 

Overall it can be concluded that if handled effectively, these times can very well turn out to be an opportunity for global private equity firms. The need is to be operationally agile and hyperactive.

 

We wish as humanity we see through this challenge successfully and emerge stronger out of this. Stay Safe!! Stay Indoors!!

Magistral Consulting has helped multiple Private Equity firms in reducing costs through operations outsourcing. To drop a business inquiry visit here

 

The Author is the CEO of Magistral Consulting (www.magistralconsulting.com), a firm that helps global Private Equity firms in outsourcing operations. He can be reached at Prabhash.choudhary@magistralconsulting.com for any queries.

 

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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