The benefits of an effective treasury management system for private equity and venture firms

Introduction

Private equity (PE) and venture (VC) firms that close a relatively small number of deals in a year often think that because they don’t move cash frequently, it’s not worth investing in technology solutions to address risk and inefficiencies related to treasury management activities. That view can be shortsighted, however. In my nearly 25 years of experience selecting and setting up treasury management systems as both a head of treasury and operations and as a consultant, I’ve found that PE/VC firms often wait until they face serious challenges caused by inefficient, manual processes for dealing with their cash and credit position before they decide to take action.

The challenges can run the gamut from inconvenient to existential:

• An email is hacked and wire instructions get changed, leading to a payment or funds flow being redirected fraudulently. A variety of assets can wind up subject to this type of fraud, from management company expenses to limited partner distributions or even funds flows themselves.
• CFOs, partners and other high-value fund employees spend an inordinate amount of their time reviewing and approving wires because they don’t trust the process.
• A lack of transparency into the fund’s credit picture creates a lapse in debt covenants in a volatile market.
• Inefficiencies make it impossible to scale the fund with the resources available. Manual processes based on emails and spreadsheets can easily end up including incomplete or poorly standardized data, especially when different groups use the same tools in different ways.
• Potential risk associated with financial intermediaries goes undetected and instability emerges unexpectedly, leaving funds behind the curve as they work to solve the problem reactively. This type of risk can extend into portfolio companies’ banking relationships, which are rarely monitored as part of a fund’s total risk exposure.
• Funds often struggle to manage liquidity quickly and accurately, in large part because they lack reporting and dashboards that consolidate all sources of capital and threats to it. This type of reporting can help ensure that funds can project and prepare for cash positions at any point in the near future. Conversely, if periods of idle cash emerge either at the fund or management company level, a lack of proper reporting tools can cause funds to identify opportunities to optimize their cash position late in the game—or miss those opportunities entirely.

In my experience, PE/VC teams enjoy a significant uptick in scalability and control after they implement a TMS. The higher the transaction volume and the more complexity in their operations, the bigger that impact tends to be.

 

Firms that grow with inefficient legacy processes in place aren’t just using resources inefficiently. They are also increasing the risk that a fraudulent wire request will slip through the cracks, especially as their systems become more complex. Furthermore, as the volume of deals rises, it becomes increasingly difficult for funds to visualize the big picture across the portfolio.

A TMS offers a relatively low-cost and quickly implemented solution to these issues. The greater visibility, automation and risk mitigation benefits associated with these systems means firms gain tangible value from them relatively quickly as well. Firms often enjoy hard cost savings through reduced fees for wires, as well as savings in soft costs that are more difficult to quantify. I have seen TMS implementations that resulted in a 50% reduction in staff time for moving money and forecasting cash. 

In addition to these benefits, a TMS typically costs from $125,000 to $300,000 per year, making it a relatively inexpensive part of a firm’s technology ecosystem. While the majority of the cost can usually be booked as a fund expense, some firms opt not to bother due to the low cost.  

Finding the right treasury management system (TMS) for your funds

The right TMS for a given firm delivers what you actually need to operate more efficiently today and to build a foundation for growth down the road.

Before starting to look at TMS solutions, assess your current state of operations to identify your needs:

• Assess peripheral operational needs such as hedging, collateral management, debt management, etc. to understand how all key pieces fit together.
• Identify opportunities to complete multiple related workstreams in a single action.
• Evaluate your growth trajectory and future objectives to ensure that a solution implemented today will stand up five to 10 years down the line as the firm evolves.
• Measure time spent on treasury-related activities in the current state—the outcome is often surprising, and the potential for cutting that time back is usually significant.
• Determine what existing systems need to integrate with the TMS and ensure the proper support is in place to implement those integrations.

Once you’ve determined your requirements, you can evaluate systems for best fit and assemble an implementation plan. In my experience, a typical TMS implementation can address at least 80% of a fund’s needs in its initial phase, which usually lasts about six months.

 

Planning for a smooth implementation

Although it’s possible to vet, select and implement a TMS on your own, third-party consultants can make the process substantially smoother and faster, especially if you have a small team with relatively little TMS experience.

If you choose to use a consultant, look for one that can help you:

• Understand the available options and match them to your existing systems and needs.
• Decrease implementation times and achieve faster return on your investment.
• Focus on best practices, optimize resource utilization and revisit policies to strengthen and right-size them.
• Understand what additional value these systems can bring, including potential cost savings, risk mitigation, fraud reduction and future technological flexibility to support a fund’s growth.
• Navigate vendor pricing to get the best value for the functionality you need.

An ounce of prevention is worth a pound of cure

The right TMS can provide the risk mitigation and scalability benefits of a full-fledged treasury operation at a much lower cost. These platforms provide greater visibility and opportunities for automation, making them a strong foundation for future growth.

As funds scale, the odds that they encounter challenges related to inefficient legacy processes rise dramatically. In my experience, the potential risks involved mean it’s better to implement a solution a few months before you think you need it than to implement one hurriedly in the wake of an unexpected and potentially preventable cash flow issue.