Tag Archives: Private Equity Research Outsourcing

Private equity research outsourcing has quickly changed its character from a measure to cut down on expenses to a function that is among the most important ones for investment firms worldwide. The competition gets tougher, which means that the firms need to assess more and more deals, come up with sharper insights, and manage their portfolios more precisely. Deal teams are now spending almost 40% more time on their due diligence work than during pre-2020 periods. The main reason for this is that macro volatility and regulatory scrutiny require deeper and more thorough analyses, as is the case with high-quality private equity research outsourcing, which becomes transformational. Think of it, the valuation of a buyout from different countries in just two weeks. Outsourced analysts use their experience, databases, and modeling tools to instantly expand a firm’s analytical capacity when internal teams cannot keep up. Besides, outsourcing makes available professionals for specialized tasks like sector benchmarking, operational analysis, and competitive mapping. As a consequence, the screening of deals is faster, the investment memos are stronger, and the decisions made are more informed.

The Rising Need for Private Equity Research Outsourcing

The growing reliance on private equity research outsourcing is closely tied to sustained deal activity over the past cycle. In the Americas alone, annual private equity deal value surged from $713.9 billion in 2020 to a peak of $1.44 trillion in 2021, before normalizing at still-elevated levels exceeding $1.0 trillion in 2024. Globally, quarterly deal values consistently ranged between $370 billion and $700 billion from 2021 through 2025. It reflects both post-pandemic acceleration and subsequent macro-driven recalibration. This volume and volatility significantly increased the analytical burden per transaction, requiring repeated valuation resets, deeper sector work, and faster diligence turnarounds. As deal teams navigate high activity levels amid compressed timelines and fluctuating assumptions, many firms have turned to specialized private equity research outsourcing partners to scale analytical capacity without expanding permanent headcount. Many firms engaging in funds management are already partnering with knowledge support teams. This is to accelerate pre-deal evaluations, especially when working across geographies.

The Rising Need for Private Equity Research Outsourcing

Macroeconomic Volatility Intensifying Research Workloads

Sensitivity scenarios required before a deal can progress have been multiplied due to changing interest rates and moving valuation baselines. MSCI’s Private Markets 2024 report shows that cash-flow projections vary significantly across sectors, prompting analysts to recalibrate their models more frequently than ever. Teams hired as support from outside the company provide the necessary capability to deal with the demands of these iterations.

Regulatory Pressures Requiring Deeper Due Diligence

The global private equity market is at its most regulated point ever. Let us explore the regulatory environment manifested through increased disclosures, ESG scoring, and third-party verification. This in turn, demand and necessitate professional document reviews and compliance to a larger degree. A significant number of firms engage outside analysts for the tasks of operational evaluations, benchmark comparisons, and ESG scoring. This is quite similar to how private equity teams enhance operations via private equity research outsourcing.

Portfolio Diversification Driving Specialized Research Needs

Firms investing in non-traditional industries, for instance, renewable energy or logistics such investments require very specific and deep market intelligence to be considered wise. Private equity research outsourcing partners usually have dedicated teams for each sector with the corresponding databases and deep industry insights. Such a cross-functional team enables the PE deal teams to confidently make decisions without the need to invest in a full-time specialized talent.

Time Compression in Deal Cycles Increasing Analytical Demand

Competition for deals frequently compresses the timelines from months to weeks. Outsourcing provides immediate scalability, something internal teams cannot achieve during peak deal activity. As a result, this helps to reduce bottlenecks and allows partners to quickly respond to new opportunities.

How Private Equity Research Outsourcing Strengthens the Deal Lifecycle

Private equity research outsourcing is a process that brings appreciable value to the entire deal cycle. It includes sourcing, due diligence, investment committee preparation, execution, and portfolio management. All of the steps depend on top-notch data and quick analytical responses. Deal teams, at times during due diligence phases, will want in-depth operational insights. A group of outsourced analysts will be of great assistance in scrutinizing vendors’ arrangements, risks along the supply chain, gaps in leadership, and even regulatory noncompliance. This is the exact functional role that operational evaluations play in the context of due diligence best practices.

Pre-Deal Screening and Prioritization

There is a lot of deal flow, yet time is scarce. Valuation of transactions with high potential is done quickly through outsourcing. Analysts perform rapid screens on market size, competition, and financials to get rid of misaligned opportunities at the very beginning. This reduces the workload for internal teams and increases the speed at which they complete deals.

Investment Committee Support

Memos of superior quality require structured evidence. Teams of external individuals put together comprehensive exhibits, tables containing benchmarks, summaries of finances, and documented references. They help partners develop coherent deal rationales through their painstaking approach.

Execution and Negotiation Assistance

During the last stages of the process, outsourced analysts will take care of updating valuations, negotiating prices, modeling debt, and performing sensitivity testing. With their help, partners are assured of entering negotiations with correct figures and a proper understanding of the associated risks.

Technology’s Transformative Role in Private Equity Research Outsourcing

Technology is, in a very substantial way, radically transforming the whole sphere of private equity research outsourcing. Companies that are already on the AI-driven analysis and automation paths, as well as having integrated access to market databases, are certainly those that will get the insights faster and improve the accuracy of their decisions. 67% of private equity firms are actively investing in AI technologies. 82% of private equity and venture capital firms reported using AI in some capacity, up from 47% the previous year, according to industry research.

Technology’s Role in Private Equity Research Outsourcing

Modern tools use automation and AI to improve data accuracy. These advances resemble the innovations discussed in AI-driven investor intelligence, which help streamline research and outreach.

AI-Enhanced Market Research

AI platforms can interpret vast amounts of data that include financial statements, conference call transcripts, and even industry reports, just to mention a few, in order to detect the patterns that the classical methods might miss. These algorithms pinpoint the threats from the competition, positive or negative public opinion, and the changes in the legal environment for which the company will be affected and thus allowing for a more extensive understanding of the situation.

Automation in Financial Modeling

Automation accelerates tedious tasks like data cleaning, error checking, and formula auditing. PE teams benefit from faster model updates, higher accuracy, and more time for strategic thinking. This also reduces operational risk by minimizing spreadsheet errors. Surveys show 69% of private equity firms use AI for functions. These functions includes automated reporting and analytics dashboards, and 55% use AI-powered research and market intelligence.

Predictive Analytics for Deal Sourcing

Predictive models point out the firms that are early signs of growth or distress. The pipelines become smarter, and the chances are discovered before they are widely seen through these signals.

Workflow Integration and Dashboarding

Top-notch dashboards pool together data from portfolios, financial KPIs, pricing changes, customer defections, and operational measurements. The dashboards that are integrated provide a performance overview that is up to the minute.

How Magistral Consulting Supports Private Equity Research Outsourcing

Magistral Consulting delivers highly specialized private equity research outsourcing designed to strengthen investment workflows from sourcing to exit.

End-to-End Deal Support

For private equity research outsourcing, Magistral is there to help you throughout all the events. This includes deal sourcing, filtering, in-depth analysis, preparation of the investment committee, setting up of the data room, and closing activities. Teams act as a part of the internal deal teams, providing valuable and quick insights.

Specialized Financial Modeling Expertise

Magistral’s analysts create comprehensive financial models, run various what-if analyses, and develop the valuation frameworks. Their financial modeling is in line with the global standards, and it assists the firms to weigh the opportunities in the areas of the valuation ranges, types of financing used, and categories.

Sector-Specific Research and Benchmarking

Magistral’s experts provide valuable information about different sectors such as manufacturing, retail, energy, logistics, and IT. The companies are satisfied with the application of structured models, comparative evaluations, and the use of multiple data sources in triangulation.

Portfolio Monitoring and Value Creation Support

Magistral delivers KPI dashboards, financial trackers, variance analyses, and peer comparisons. This information helps partners to spot the potential value-creating actions early and to take quick action when the performance goes down.

A Natural Wrap-Up

In an environment of rapid changes and growing competitive pressure, the outsourced private equity research gives the strategic depth firms need to keep pace with the competition. The global capabilities of Magistral, the experience in different sectors, and the commitment to analytical excellence will allow private equity investors to make quicker, more intelligent decisions at a larger scale.

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

Utkarsh Kaushik

Utkarsh is a finance professional with expertise in investment research, M&A, and financial modeling. He has built and applied models including DCF, LBO, and comparable analysis, supporting investment banks, private equity, and venture capital firms across diverse sectors. Utkarsh holds an MBA in International Business & Finance from Symbiosis International University, a B.Com (Hons) from Delhi University, and has completed the Stanford Seed program at Stanford Graduate School of Business.

FAQs

What services are included in private equity research outsourcing?

It typically includes deal sourcing, market research, financial modeling, competitive analysis, portfolio monitoring, and due diligence support.

Why do private equity firms outsource research tasks?

Outsourcing expands analytical capacity, accelerates deal timelines, provides specialized expertise, and reduces operating costs while maintaining high-quality insights.

How does outsourcing improve deal evaluation?

It enables deeper market research, standardized modeling, faster benchmarking, and better structured investment memos that support confident decision-making.

Is private equity research outsourcing secure?

Reputable providers implement strict confidentiality protocols, NDAs, encrypted systems, and controlled access to ensure complete data security.

Can outsourcing support post-acquisition value creation?

Yes, outsourced analysts help with KPI tracking, operational benchmarking, margin analysis, and strategic research essential for scaling portfolio companies.

Introduction

Before committing funds to private markets, due diligence for private equity outlines a potential investor’s procedure for evaluating an investment fund’s appeal, value, financial sustainability, and prospects. It is often performed by analysts and such specialists and includes gathering and processing information about a fund’s historical investment record, finances, and other aspects. A limited partnership’s decision to contribute capital to a fund is based on the findings of the due diligence process. Institutional investors often use sophisticated due diligence methods for all their public or private transactions, but due diligence in the private market presents different obstacles.

Challenges faced in Due Diligence for Private Equity

Although all due diligence processes share basic features, private equity teams face specific obstacles during due diligence, as explained below:

Challenges faced in Due Diligence for Private Equity

Private Data

Because the target firm is not publicly traded, less information is available—such as SEC filings—than would be for a public company. Fund managers typically prefer to invest in private businesses, which makes it challenging for the transaction team to gather all the information needed to feel confident.

Third-party data scrapers

Private equity funds now consider third-party providers offering private market data to support due diligence efforts. On the other hand, some data sources are more dependable and valuable than others. Some companies offer financial performance statistics scraped from publicly available information, often confined to a summary. Furthermore, some data sets could be too tiny for investors to trust their accuracy. Investors should seek primary-sourced data from a third-party private equity data provider rather than from pitch books or elsewhere online when evaluating a third-party data provider.

A lengthy process

It is frequently both a manual and time-consuming procedure. Investors increasingly use technology to speed up and streamline their due diligence procedures, ensuring they make the best decisions.

Different Strategy

As many private transactions seem to be financial instead of strategic — i.e., the private equity firm’s sole motivation is to profit from the transaction – the unique perspective. In this case, a private equity deal team may devote more time to the financial components of the transaction than to the managerial or commercial parts, requiring far more information about the company’s financial status.

Confidential Information Memorandum (CIM)

Private equity firms often use the company’s confidential information memorandum (CIM)—a comprehensive document containing financial data, management details, and commercial insights into the customer base, products, and competitors—to drive due diligence. On the other hand, Smart private equity firms do not rely only on the CIM and double-check the data.

The Steps involved in the Process of Due Diligence for Private Equity

Various steps are included in the process of due diligence, these include the following:

Steps involved in the Process of Due Diligence for Private Equity

Industry Due Diligence for Private Equity

The first aspect of due diligence for private equity is a detailed investigation of the target company’s sector. Understanding an industry takes time and based on how in-depth the private equity purchaser wants to go. The process may involve accounting, tax, and legal advisers analyzing the nuances of the business. Private equity buyers may discover other intriguing target companies or decide that a related industry better suits their investment criteria during their sector investigation.

Private equity investors tailor due diligence in the target company’s industry to meet the specific requirements of the transaction. Knowing the industry in which the target company operates, its competitors, and market trends are all part of the exercise. In such an exercise, the investor considers if the specific target industry is growing and how profitable an investment in that sector will be.

Quality of Earnings Assessment

Although the financial portion of due diligence for private equity examines the same papers as any other due diligence procedure. It emphasizes the ‘quality of earnings.’ Separating extraordinary revenues and expenses from past income statements examines what the target company can earn on an ongoing basis.

By removing these remarkable factors from the financial figures, the private equity client gains a more realistic picture of the company’s current growth and future trajectory. The ‘quality of earnings’ analysis can be as in-depth as the private equity buyer requires. It could, for example, include a worst-case scenario in which several of the target firm’s top clients cancel ongoing contracts and analyze the impact on the target company.

Legal Due Diligence for Private Equity

The deal team must be confident about proceeding before the firm invests time and money in legal due diligence for private equity.

The legal team conducts due diligence to assess the transaction’s legal implications. Then, confirm the firm’s assumptions, ensure legal compliance, and verify that the firm isn’t exposed to unforeseen liabilities.

Legal due diligence for private equity deals should focus on the following areas:

The legal ramifications of a change of power at the target firm.
Regulatory constraints of the target company.
Agreements for exclusive supply or purchase.
Contractual agreements with current vendors, suppliers, and customers and how the transaction affects them.

Operational Due Diligence for Private Equity

Private equity transactions aim to enhance a target company’s operations and increase its value before exit. The deal team collaborates with financial and legal experts to identify operational changes for value generation. Due diligence involves understanding a manager’s internal processes to protect investors from operational errors or fraud. With limited resources, this can be challenging, as minor infractions can lead to larger issues. Investors can choose fund managers based on a clear understanding of operational risks, improving portfolio quality and avoiding reputational and financial risks.

Future of Due Diligence for Private Equity

Asset competition has been intense, and it is expected to continue. More investors are vying for a smaller pool of assets, and potential targets. Management teams are less capable or willing to devote time and resources to responding to diligence demands. As a result, due diligence for private equity companies is growing more complex as they increasingly analyze more data and look for ways to make purchases more efficient.

-Due to market conditions, private equity firms have had to reconcile risk mitigation and wealth development.

-More technology and analytics will be used, and more sell-side investigation.

Firms can do the following to fulfill the intention of making the diligence process much more efficient and digital:

-Utilize data and analytics technologies to generate quicker, more actionable insights by embracing digital diligence.

-Integrate sell-side diligence into their procedures the proper way.

-To the degree that it can underwrite investments, focus on value generation.

-Improve ESG diligence by collecting and analyzing data more consistently.

Magistral’s Services on Due Diligence for Private Equity

Magistral Consulting’s due diligence for private equity services ensures that an asset generates healthy returns. The services include:

Industry Research

With the acquisition target in mind, analysts examine the target industry for potential headwinds, tailwinds, and short- to medium-term security and returns.

Due Diligence

A detailed corporate profile is created utilizing primary and secondary research to detect any risks.

Due Diligence Questionnaire

This service involves the preparation of due diligence questionnaire leading to further analysis with targets and investors.

Primary Research

We conduct exploratory interviews with all stakeholders at the Target Company—including management, employees, ex-employees, vendors, and investors—to uncover any future liabilities.

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 in 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 Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com

Introduction

Deal origination for Private Equity or Deal sourcing is the process by which investment firms identify opportunities. Larger volume deals are sourced to maintain a viable deal flow. Building a deal flow is the most important step because making good investment decisions is reliant on seeing many deals and selecting the best among them to pursue.

The effectiveness of the deal origination process ensures a healthy portfolio of investments that further ensures healthy returns to the Limited Partner investors. Hence its business-critical for a Private Equity firm to make sure the deal origination process works, and works well to meet the investment objectives.

Some venture capitalists, private equity investors, and investment bankers use various methods to source deals whereas some firms reach out to a team of specialists to help with the process of deal origination via outsourcing.

Deal Origination Process for Private Equity

There are multiple approaches to Deal Origination for Private Equity Firms. Some of them are

Traditional Outbound Approach

Here, the deal origination and sourcing largely depend on a wide area of personal networks, contacts, and the good reputation of the firm. Having knowledge of specific industries and the idea of similar deals taking place in the market is an added advantage for placing bids. This approach becomes successful only on the firm’s broad network of contacts, referrals, and a good reputation among founders. Firms compete against each other in process of bidding and their success depends on gaining specific industry knowledge. This typically leads to overvalued assets as all VCs and PEs are looking at the same deals.

Pros of outbound deals:

No matter how much things have changed but still the fundamentals of sales remain the same as they are based on human nature. And that makes outbound deals still very successful
It’s predictable and gives immediate results on the outbound process as it involves getting instant feedback from the prospective targets

Inbound deals

Inbound deal sourcing refers to all incoming leads, whether they come from existing relationships or unknown founders seeking investment. This is when a founder approaches the firm due to networking, good reputation, or word of mouth about the firm.

Pros of inbound deals:

Owners and operators are more likely to meet when they share a connection with you already
A shared network gives more knowledge which helps in creating more personalized interactions, giving a competitive edge
These deals move comparatively faster as introductions are warm and made only when seeking investments

Outsourced Approach

Traditional methods are nowadays giving way to modern online dealing platforms. Several financial technology companies help in deal origination for private equity firms and enable them to go beyond their network of contacts and source deals by reaching a broad audience on the basis of various criteria. Firms outsource certain parts of the investing value chain to reduce operational costs while maintaining quality and effectiveness.

Pros of Outsourced Approach:

Cost-effective
It casts a wider net of reaching out to target companies, that ensures exclusive deals that may help a Private Equity firm in delivering outsized IRRs for its Limited Partner investors
The deal pipeline continues to be populated in spite of multiple demands like new deals from the top management of the firm
The SOP ensures standardized elimination of targets not suitable to PE’s investment philosophy
Netting in the assets that are fairly valued

Magistral’s Process of Deal Origination for Private Equity Firms

There are various steps involved in the deal origination of private equity firms. These steps include Industry Research, Making SOPs, Evaluating, Ranking, and Contacting the shortlisted companies.

Magistral's Private Equity Deal Origination Process

Deal Origination Process for Private Equity

Industry Research

This step focuses on taking out a list of companies that looks fit in terms of market position, competitive advantages, multiple avenues of growth, stable and recurring cash flows, low capital requirements, strong management team, favorable industry trends, etc. The inputs from research feed into the next step of SOPs

SOPs

This step is considered majorly after discussion with the clients, standard operating procedures (SOPs) are prepared in order to take care of the requirement of Private Equity clients while performing deal origination and deal sourcing process. A formal signoff is taken from the client once all the steps in detail are identified. Magistral performs this step for its clients without any cost to them

Evaluation

Various criteria are looked into while evaluating a target. Some of these are related to investors such as the investor’s ability to fund, if multiple investments can be made, if the investor has an interest in lead investing, his level of portfolio diversification, etc. The major part of the evaluation of the target is to ensure it meets the investment philosophy of the investor and is in a position to generate value over the investment horizon. The factors like industry, sub-industry, niche, management, team, past fundraising, strategy, marketing, finances, etc are evaluated for targets.

Ranking

On the basis of the above research, the analysts rank the various targets which best align with the investment philosophy of the Private Equity firm. The targets are ranked as per the suitability

Contact

The final shortlisted investors are then contacted via mail or calls in order to close the best possible deal for a private equity firm. All the support required during the negotiations is provided as well.

Magistral’s Private Equity Deal Origination/ Deal Sourcing Case Study

The client and the business situation

A leading private equity company, investing in a broad range of markets such as energy, retail, and technology. The client wanted to deploy the capital to meet up its investment strategies and therefore wanted Magistral to find the best deals for the company at good valuations.

Magistral’s PE Deal Origination/ Deal Sourcing Case Study

Magistral’s solution

Magistral appointed a dedicated manager for taking the existing list of potential target companies, populate it further, and review them carefully
The team created Standard Operating Procedures at no cost to the client, detailing the process thoroughly along with research and ranking methodology.
A team of analysts started evaluating and ranking targets on different parameters already set out in the SOP
The team contacted shortlisted companies via call or mail and then proceeded with the agreement, documentation, and deal negotiations.

Outcomes

Within 6 months, the firm was introduced to more than 30 opportunities.
The effort resulted in detailed due diligence with two transactions that were quickly closed

Typical Outcomes of Magistral’s Deal Origination Services for Private Equity

According to a recent survey, 88% of private equity investors indicate their most important 2021 objective is deploying capital- a nearly 10-point increase from last year.

While working with Magistral, IRR is improved due to an exhaustive scan of the investible universe. There is approximately a 30-50% reduction in operational costs for target screening. Database costs are justified through rationalized services.

Over the years, Magistral has delivered multiple analyses that go into supporting and facilitating million-dollar global transactions. The team has so far worked with 200+ clients and facilitated transactions worth billions of dollars.

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

Equity Research of listed stocks forms a major part of operations in Hedge Funds, Investment Banks, and many Asset Management firms.

Analysts use different methods to conduct equity research, but they primarily aim to determine a stock’s intrinsic value and assess whether it is overvalued or undervalued. Based on this analysis, they issue buy, sell, or hold recommendations to asset managers or their clients.

What makes an equity research exercise comprehensive?

Though equity research exercise could potentially be a theoretical exercise where an Equity Research analyst puts in a few hours’ of efforts, crunch numbers, and comes up with a recommendation. Analysts almost always prepare these models and simply feed in the P&L, Balance Sheet, and Cash Flow numbers—readily available in the public domain for listed stocks—to determine the valuation and recommendation for the stock.

It is however the further details that determine the quality of the research. These are a variety of sources, qualitative inputs and their quantification, Evaluation of the ongoing news and buzz related to the stock, social media activity, rumors, and the subjective calls of analyst that makes the difference. It’s amazing that some analysts even track the brand of the watch that the CEO wears to the analyst conferences. They make subjective calls on the stock on an information point as minute as that or say body language of the management in a conference call.

If a stock is to watched as closely as needed to take calls worth millions, it’s not possible for an equity research analyst to proceed in a templated way for all the stocks she needs to track. It needs to go much beyond that.

Parts of a comprehensive Equity Research exercise

Here is what differentiates a comprehensive analysis from a basic one

Sources of Information: Sources of information if more the merrier. Sources of information if diverse allows us to analyze the stock closely. For example, a database that carries information about all the legal cases pending against a company would add color to the analysis that will have a material impact on the overall recommendation for the stock. Usual sources of information are P&L, Balance sheet, and cash flow statements, all of which are publicly available for a listed stock apart from news about the stock, regulatory filings, 10Ks, conference calls, and ESG related compliance documents.

Forecast and Assumptions: A financial forecast is often oversimplified by merely projecting past growth into the future, but that approach is rarely accurate. The core of any robust forecast lies in its assumptions, which must be reasonable and ideally validated by industry experts. Companies may be optimistic about new strategies, but such expectations should be evaluated against industry benchmarks. If a company’s forecast outpaces industry projections, one must examine whether it has outperformed the industry before. For example, if a healthcare firm claims it will lead the market in five years, has it achieved similar milestones in the past? The strength of any financial model depends on the depth and validity of its assumptions—verified by data and historical performance.

Company Valuation Analysis

Equity Quantitative Research focuses on valuing a company using multiple methods to ensure consistency across different approaches. When there’s a significant difference in valuations, the analyst must determine the most suitable value with strong justification. Analysts commonly apply valuation models such as Discounted Cash Flow (DCF) to project future cash flows and discount them to present value. They use Relative Valuation to benchmark the company against its peers and determine whether it’s undervalued or overvalued. They also employ the Sum of the Parts method to break down a diversified business into individual components and evaluate each separately. Risk Assessment is also critical—it identifies potential risks and quantifies their impact on the company’s valuation. Together, these methods help analysts build a more balanced and defensible view of a company’s worth.

Qualitative Assessment

Numbers do tell the story but miss while indicating the future, which is unknown. That is where the qualitative inputs come into play. An experienced analyst can convert these qualitative inputs into quantitative ones that impact the valuation. Some of these qualitative inputs are quality of management, Competitive intensity in the industry, ESG initiatives and risks, and analyzing Porter’s 5 forces. It’s to be noted that Porter’s 5 forces is a highly qualitative model and needs to be put on a quantification scale.

Different institutions approach equity research differently depending on their business and operational needs. Here is how Equity Research differs across institutions

Equity Research for Investment Banks

Equity Research at Investment Banks is as much as a Marketing exercise as it is operational. Usually, an Investment Bank would send stock recommendations to all its current and potential clients. Analysts sometimes avoid detailing these recommendations, as they reserve in-depth research for high-paying clients. They prepare an equity research report for every stock, using a template with similar content across all stocks the bank tracks. It also suggests the buy, sell, or hold recommendations along with the price range to expect for each stock. Detailed equity research is also done for the buy-side. There are multiple research report templates that are available with an Investment Bank.

Earlier the research cost was added to the brokerage cost for an investment bank. Now a regulatory notification in Europe bars Investment Banks from clubbing brokerage and research costs together. This means now research needs to be high quality and needs to be provided only when the client demands. It’s just a matter of time that these regulations catch hold in the United States and other financial markets across the world.

Equity Research for Hedge Funds

Equity Research for hedge funds is done towards the aim of portfolio management and taking long and short positions regarding listed stocks

Hedge Funds are quite secretive about the methodology they follow while picking up stocks. Sometimes firms justify secrecy. As they truly have something unique, but most of the time they use it as a marketing gimmick to avoid further questions about their methodology. Many claim to use Machine Learning and Artificial Intelligence to pick up the stocks. Equity Research in Hedge Fund parlance is the most critical part of Operations. There is also a huge reliance on Technology with trades mostly intraday and sometimes in milliseconds!! But there is nothing that has replaced the good old fundamental analysis.

Hedge Funds also specialize in technical analysis apart from fundamental analysis. Technical analysis uses mathematical formulas to project trends and thus the future stock price for short term trades.

Equity Research for Private Equity

Private Equity usually deals in Private stocks but sometimes they do pick up stake in listed companies as well. Private Equity firms conduct equity research differently from Hedge Funds and Investment Banks. They usually aim to buy a significant stake and therefore access much more information and management bandwidth. It uses that leverage to get and analyze information that is usually not available in the public domain.

Equity Research for Asset Managers

All other forms of Equity Research vary in complexity and methodology. But mostly sticking to finding the intrinsic value of the stock with the aim of finding undervalued stocks for investments. Some Asset Managers specifically perform equity research for retail investors.

Magistral’s Approach for Equity Research

Magistral is an equity research firm that focuses on Fundamental Research to find out the intrinsic value of a stock using multiple sources. We start with multiple sources in our methodology and continually refresh those sources to update the model with the latest intelligence. We also prepare customized Equity Research report. Here is how our Equity Research Process looks like

Magistral’s Equity Research Methodology

Our equity research services are customizable and scalable as per clients’ requirements. Magistral has delivered multiple Equity Research projects in the past

About Magistral

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

The Trend of Outsourcing is Finally Observed in the Private Equity Sector

Traditionally Investment Banks have been at the forefront of operations outsourcing. Almost all the biggest investment banks either have captives or have vendor arrangements in low-cost countries like India. Private Equity in comparison is the new kid on the block. Venture Capital is even newer. As the traditional model of a fixed management fee of the AUM comes under strain, Private Equity firms must look for alternatives to bring down the costs. Also for funds, that just invest along the bandwagon, with minimum analysis and fewer analysts to support operations, have started giving an impression to Limited Partners, that they possibly could do it themselves and save on the unnecessary fund management fee. Hence Private Equity needs to expand operations and expand it cheaply. That is where Private Equity Outsourcing becomes increasingly important.

Why Private Equity Outsourcing or Venture Capital Outsourcing is business-critical now?

Professionals commonly refer to Private Equity Outsourcing as Private Equity Back Office Outsourcing, Fund Administration Outsourcing, Research Outsourcing, Business Process Outsourcing, or simply Fund Outsourcing. On the Venture Capital side, they use terms like Venture Capital Outsourcing, Venture Capital Fund Outsourcing, and Venture Capital Business Process Outsourcing.

Outsourcing has produced long-lasting benefits as Investment Banks have been enjoying it for over a decade now. Here are the major ones:

Cost Savings: It brings in cost savings in the tune of 30-70% depending on the location of the fund operations. This allows the fund to book a higher percentage of management fees as profits or deliver greater returns to limited partners.

Skill Advantages: Private Equity operations are usually performed by small teams. Venture Capital teams are even smaller. All that leads to quick decision making and lower costs, but also results in a lack of business-critical skills. Outsourcing gives access to those skills for smaller Private Equity and Venture Capital teams

Extended Team: Outsourced team acts as an extended team that works on plug and play model. You ramp up when required and dismantle when not required. Just before an acquisition, have a higher number of analysts and after the investment, when work-load lessens, have a lower number of analysts. That leads to costs optimized as per the work-load

Time Zone Advantages: The work moves at double the pace. Teams when they leave work in evenings in the United States, United Kingdom, and parts of Europe, drop a message to the teams based out of India to carry on further work. Similarly, the India-based team completes and delivers the work in their evening, allowing client teams to find and continue working on it the next morning. Hence critical jobs move at effectively double the pace, day and night literally!!

Confidential: A due diligence does not always happen with the target knowing about it. Sometimes, firms need to act quickly and maintain confidentiality. In such cases, conducting due diligence discreetly becomes challenging for in-house teams. An outsourced partner can handle the process without revealing the name of the interested party.

So what all could be outsourced under Private Equity outsourcing?

We can divide Private Equity and Venture Capital outsourcing trends based on the functional specializations firms actively outsource.

Private Equity Outsourcing or Venture Capital Outsourcing practically works across the operational value chain of the fund operations and management.

You can outsource the following elements without compromising quality or productivity:

Fund Raising and Investor Relations: All operational aspects of fund-raising and investor relations could be outsourced. This includes pitch decks for funds and the portfolio companies, Investor reach-out programs, confidential information memorandums or Private Placement Memorandums, CRM data management, and Newsletters

Investment Operations: This is where the maximum potential of outsourcing is. Firms can effectively outsource nearly all aspects of investing, including industry and country analysis, target company profiles, due-diligence , financial modeling, valuations, and other ongoing or ad-hoc investment analysis tasks. Private Equity research outsourcing or Venture Capital research outsourcing is one of the fastest-growing areas here

Portfolio Management: If a Private Equity or Venture Capital firm takes a hands-on approach to managing its portfolio companies, it makes perfect sense to establish a ‘Centre of Excellence’. This centralized team can handle Strategy, Research, Data Analytics, Procurement, and Digital Marketing. Consolidating these functions in one place to support all portfolio companies efficiently. If that place is in a low-cost country, it brings in massive cost savings as compared to having similar functions separately in all portfolio companies. The centralized team can prioritize tasks around board meetings and quickly replicate successful projects across portfolio companies for faster execution.

Fund Administration: Private Equity Fund Administration or Venture Capital Fund Administration is something that has caught the fancy of limited partners recently. It makes sense to keep the financial reporting of a fund with a third party. This approach reduces financial risk, promotes best practices in fund management, and ensures unbiased financial reporting to investors. As a best practice, firms should consider outsourcing this function. Multiple elements of Private Equity Back Office Outsourcing or Private Equity Business Process Outsourcing like accounting and expenses form a part of this. This is quite similar in the case of Venture Capital Business Process Outsourcing or Venture Capital Back Office Outsourcing.

Firms usually outsource other aspects of fund management such as Strategy, Research, and Analytics.

About Magistral Consulting

Magistral Consulting (www.magistralconsulting.com) has helped dozens of Private Equity and Venture Capital firms in outsourcing their operations. With delivery centers based out of India, it has sales offices in New York, San Francisco, London, Oslo, and Singapore. To drop a business inquiry, visit https://magistralconsulting.com/contact/

About the Author

Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsulting.com for any queries or clarifications.

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.