Up until now, PE houses have handled their portfolio valuations with some degree of discretion, navigating in the grey zone between quoted comparables and sometimes longer term approaches to value. The vast majority opted for a customized approach, with models that they carefully crafted over time to suit their business and the needs of stakeholders. The AIFM Directive has somewhat changed this by introducing stricter rules on reporting, including stringent requirements on the underlying valuation process.
As a result, PE houses are finding themselves pondering the same question: how can one segregate the valuation function from portfolio management without seeing costs spiral upwards?
Out with outsourcing
Outsourcing valuation has long been unthinkable for the industry, since valuation lies at the core of performance reporting and GPs want to keep their grip on this process. With their in-depth knowledge of portfolio companies and custom of using bespoke calculations, PE managers have – quite justifiably – eschewed this option, as well as the cookie cutter approach offered by software vendors. Although a shift in mindset will be needed for the new regulatory era, there are alternatives out there which can be considered by those wishing to avoid costly options such as outsourcing. The name of the game will be making sufficient efficiency improvements to find a healthy balance between the old way and the new rules.
Putting the GP first
Increasingly, we’re being asked to cast an independent eye on the valuation process of companies who are struggling to bring greater operational efficiency without sacrificing quality. In close collaboration with PE managers, we’ve had to develop new ways of achieving their goals. Our collaboration is bearing fruit in the form of a solution that automates valuation using Visual Basic Excel programming as well as external financial data sources which can plug into it.
The beauty of this approach is that the model can be tailored according to the existing cash flow streams that each GP receives.
Every manager is different, so we work with them to understand, in terms of output, what type of value drivers they want to use and what type of information they want to release. Whereas in a traditional approach to value, 80% of time may be spent on data collection, formatting the results and the rest being spent on analysis; our re-engineering of the valuation process using technology leads to the reverse being true.
While the GP lies at the heart of this approach, the end goal is achieving efficiency. It’s important to be consistent across the entire portfolio and standardize the approach implemented. By taking a holistic view, costs are pushed down and efficiency achieved without jeopardizing the quality of the output. Even when we perform valuation reviews, this re-engineered approach to value leads to significant efficiencies.