Friday, June 20, 2008

Get a handle on portfolio performance monitoring

The continued credit crisis has resulted in unprecedented scrutiny of private investment transactions that were consummated when deal flow was more robust. Indeed, given today’s uncertain markets, investors demand an exceptionally high degree of accountability on the part of private investment firms, hedge as well as private equity funds.

The markets have grown in both volume and complexity, exacerbating the general partner’s challenge of calculating, analyzing and reporting performance for investors — limited partners and other stakeholders. At the same time, regulators are paying greater attention to valuation methodologies, particularly in this relatively opaque segment of the financial markets.

For instance, Financial Accounting Standard 157 is a framework for measuring fair value based on generally accepted accounting principles. This new accounting standard seeks to consistently apply valuation techniques that use “observable” inputs such as market data to the greatest extent possible. This puts an additional burden on private investment firms.

Against this backdrop, the task of rigorously monitoring and effectively managing portfolio performance has never been more challenging. Private equity firms are turning to technology to help perform both standardized and specialized portfolio performance analyses. The need for more sophisticated technology is particularly acute because all private investment firms perform many of the same operational functions, just in different ways. 

Private investment firms typically invest in diverse industries and sectors leveraging unique strategies that their infrastructures must support in individualized ways. Consequently, the metrics to assess performance can vary greatly from one firm to the next.

Packaged software lacks the flexibility to deliver customized performance monitoring and management support to meet each firm’s unique strategies and requirements. To cope with today’s market vagaries and the complex nature of  private investment, firms are seeking new ways to perform more specialized portfolio performance analyses.

One example of specialized analyses that firms undertake is performance reports of early stage companies. Interested parties look to answer such questions as “How well did the deal team do in choosing the company, and how likely is the fund to see a profitable exit from this position?”

Early stage companies must pay particularly close attention to cash positions. Yet, they generally lack functionally advanced in-house financial reporting systems and long-standing finance expertise to assist in this regard. Performance monitoring software can help general partners monitor benchmarks such as cash burn rates, cash flow projections and balance restrictions as well as the potential need for additional funding.

Private investment firms invested in established companies continue to wrestle with a plethora of systems to monitor performance across their growing volumes of diverse sets of data. With clients and regulators pressing for more visibility into private equity portfolio performance, general partners are asking how technology can help.

Many companies have had significant challenges implementing technical infrastructures that are flexible and dynamic enough to meet their specific needs on an ongoing basis. An apparent paradox in the notoriously heterogeneous private investment operating environment, the objective is to implement “repeatable” processing, such as software systems that make it easier for private investment firms to share and manage performance data. This includes reporting systems to facilitate the management of their books  and in turn the accounting data of their underlying portfolio companies.

General partners need a flexible data management platform that imports and normalizes data in disparate formats from underlying portfolio companies, utilizing standardized templates. This allows firms to create sophisticated performance dashboards that, in turn, allow users to analyze and report on data more accurately and efficiently.

The next generation of solutions can obtain data from virtually any back-end accounting solution or data feed  and integrate seamlessly with internal systems. Once the data is integrated, general partners can easily produce customized analyses and reports. This hybrid between packaged and customized software is the optimal approach for private investment firms looking to navigate today’s mercurial markets.



 

Greg Woolf is founder and CEO of Vantage Reporting Inc. of Newton, which provides component-based software that suppports global investment managers.