Hello, I'm Alice Murray editor of the drawdown and welcome to
private Equity talks. The past two years, have
highlighted the importance of good liquidity Management in
private Capital funds, the ability to quickly provide
liquidity to portfolio companies and or investors is an absolute
necessity for private Capital fund CFOs the fast forward to
today. CFOs also have to contend with
Rising interest rates and high inflation environment.
Against this backdrop. I'm delighted to be joined by
Jeremy Slade who heads up Amir and Asia.
Business of Hazel tree to find out how private funds CFO is,
are evolving their approach to liquidity management.
Hi Jeremy. Hi Alice.
Thanks for having me on this podcast, my absolute pleasure.
Okay? So let's click off and start
thinking about how private equities private Equity firms.
Approaches to liquidity management has changed in recent
years. Yeah, I suppose well the obvious
is the fact that all the businesses are scaling
massively. We're seeing increased number of
funds increased assets, Etc. I'm sure you have better, you
have good measures around that in the drawer in the drawdown.
But but I think we're also seeing because of that.
You're seeing significant increase in Risk in the
processes there in. And you know then that's causing
yet strange on the human capital human capital in these
organizations can't keep up you know that and that's driven by
the fact they may be doing more mundane.
Just and they probably signed up for when they became a fund
accountant. And then I suppose, you know,
maybe going back back to the beginning of that.
We've we see in a lot of organization we go into where
they have very siloed parts of the business which really should
be joined together. Things like yo, the treasury
process, that matches. The cash management process is
often run by a different team of people than people managing the
the the credit line side of the business.
And maybe there's other people doing the distributions Etc.
And these are not all joined up into one place into what we
would term as liquidity management and because you
managed very different to looking at just cash or debt is
bring the two together. Really to say how do we had
about how do these firms optimize that in the most
efficient way? And then you know, obviously
most recently what we've got is you know, with interest rates
going out, yeah, we've had more calls in the last two months, we
have in the last year. So as you would imagine, it's a
lot of people worrying about. Well, I've got this cash lying
around somewhere. Is it in my being efficient?
And that's really a big area of concern for a lot of managers we
dealing with. Yeah, and can we just dig in, on
specifically why interest rates have caused this explosion in
people, picking up the phone and wanting to speak to you?
Well, I suppose, probably most people would be listening to
this, and probably stating the obvious, but I'll say it anyway,
but you've got obviously, you've got a lot of inefficiency around
people, people typically are when they're managing their bank
accounts. And cash is moving around.
They're not necessarily really staying on top of it every day
because they generally put buffers in place because they
don't have timely information feeding internally into their
into a spreadsheet they're running or there's potentially a
system they're looking at plus also that that's on the cash
side. So that means there's some
inefficiency is being left on the table there and then the
flip side of that is really on the on the credit lines here.
Obviously there was a essentially, an Arbitrage play
for the for the internal rate of return you looking at Lines.
But the reality is that's diminishing, but it means it's
becoming almost a cost now. So so a lot of firms are really
looking at how they can make sure that they optimize all
their, their revolving, credit facility has some lines, and so
forth. Excellent.
Okay. So that's very much kind of how
the managers are seeing the world.
But what about LPS, what about their expectations in terms of
liquidity management from GPS and has that been changing at
all? Well, I suppose, It's a is a
downstream effect, Upstream effect.
Maybe it's probably better way of putting it in the sense that
it's reputational risk. I think is a big part of the
issue that GPS could have with their LPS and so forth.
So you know if if distributions are not paid on time or pay to
the wrong accounts or this, you know this there's friction in
the timeliness of processing things.
It's is having an effect on the LPS view of how they do due
diligence on all the Piece of that partnering with and I think
other areas are things like a big thing.
At least, I'm getting questionable times around audit
Trail around transactions, and having a clear, audio on exactly
what who is whose approved, what where, and, when within within
one system or in one processes. Mm-hmm.
Yeah. Something that we've been
hearing about from CFOs. Is there liquid?
LPS just needing better communication better.
Ending of how cash he's moving in but I think predominantly
when it's moving. So yeah, can absolutely see how
that how that ties in. Okay, and what about complexity
so yeah, I mean complexity is Is is I suppose our friend Hazel
tree, but essentially we have a lot of firms are launching more
funds. They have more sleeves within
the fund. Sometimes we have, they have
lots of different legal entities, with them within their
investment structure and to be able to have a clear view across
the whole structure. They really need to have a legal
entity structure within their within their liquidity
management process. So they understand the other
cross Holdings between the different TVs and tax problems,
Etc. So so be able to that that
complexity just grows. Every time they had a fund.
It means they have to add another revolving credit line.
They have to, you know, add or bank accounts and sometimes
those bank accounts are with different banks.
So now you end up with multiple Banks where different internal
people are going on two different banking portals to put
in wire transactions and approvals, Etc.
In many cases, we find people also potentially Outsourcing
part of these process to their fundamental.
Actors, which is fine, but often often the fund administrator.
Is it becomes a manual process for them to plus also, when they
Outsource things, they don't actually have transparency on,
what current what cash is left in the account at any given
time. So that that complexity is that
is sort of a compounded by the fact that they're trying to make
their world efficient by Outsourcing certain functions
under a survey with a with another service provider like
the fundamental traitor but they actually then don't have
transparency or where they stand themselves.
Now you overlay that if you put a, if you overlay that with
interest rates where they are today, that becomes a bigger
problem because if they don't know where cash is, they tend to
leave buffers in place which means there's cash.
Some people use the word lazy cash lying around.
There's not actually generating a return because sat in a
banking account not bearing interest.
So so you end up with efficiencies coming out of this
even though there's a lot of firms are trying to make the
world more efficient by utilizing outside service
providers. I mean, That's just one of many
examples. Yeah, yeah not having that good
data flow. Not being able to get that full
picture that single source of truth.
It's your favorite friend. I think is the industry's
favorite. I'm now you mentioned before how
human capital plays the part into this and in some cases it's
about, you know either trying to throw more bodies at something
or battling against a lot. Turn that we've been seeing in
the industry. Can you talk to me about how
that's affecting the quality management?
Well, I suppose, you know, as opposed to talking about the
system, we represent his, we have, we have the ability to be
able to see see the systems of Portland portals.
So be able to see if if a if a IG P can see all of their bank
accounts and know what all the caches in their accounts and
what interested they're paying receiving on that all the
forecast cash to know. Well, what they could is they
need in the future, they can see all of their credit lines will
In the same place to see, where all the airport, where all their
lines are and what interests are paying and be able to then
calculate what is the best way and most effective way of
managing my liquidity. That that's, that's great
because that's all normalized into one place.
So, what we do find is that we find a lot of firms.
They spend a lot of time, they have highly trained, highly
qualified fund accountants that are doing quite mundane tasks.
Just getting data organized in a way to, so they can protect
their work. So often has 80% of the time
they do. Young workers, really organizing
the datum. 20% of the time, actually doing the high-value
work, they were really hard to do.
So I think the idea is that we can deliver an understanding of
all of the data. All have a transparency across
all of their data, both both cash and and the debt side and
then be able to look at it from a purely quality perspective and
understand what is the most effective way and do some
modeling around cash flows to see what is the most effective
way of actually. Expressing their internal
liquidity policy, this drives much more efficiency through the
process, so they don't need as many people.
The people are not doing one, take tossing, or they're
actually just doing the high-value tasks which means you
have more engaged staff in these people don't want necessarily
want to keep leaving and so forth.
Yeah. And we often hear of people
where they literally all day long just doing posting wires
into banking portals and then doing the approval process and
then keying that into another system, like a general ledger
system to keep things all in step, Up.
Well this can be completely automating this day and age and
I think firms are as they are growing in complexity of
realizing they can't. It's not sustainable to add
another spreadsheet and another team of people, it just doesn't
work that well, they're really doing is adding more risk into
the equation. At the same time, is actually
not inhibiting themselves to scale Beyond keeping employees
engaged. Boosting retention levels.
What does the future of liquidity management?
Look like It's only increase in complexity of the business which
means that there's any even more need for the quality management
and better systems and process around it.
I think you know, we are seeing an exponent, there's still an
exponential growth in the private Equity space.
And I'm not just private Equity is probably Dead.
Real estate, the seeing across the board in it at all the
private markets. And in fact, what's interesting,
is that we actually seeing a lot of conversations around the
hybrid structures. So we're starting to see where
you are. The equity is it is going into
the more public space and we're seeing we actually have a large
number of Prior public clients hedge funds, alternative
managers that are starting to head into the private space.
So these areas are kind of merging into one, will turn out
of industry. And having one system that can
then service, all of those needs is really what people are
looking for. So be able to solve for future
needs, they may or may not need today, but definitely a
neighbor, but enables them to a deficiency in to the process.
I think, I think obviously if you had notwithstanding the
fact, Science and Ops teams they need to have higher value
activities. You know, a lot of this mundane
tasks that a lot of people performing and yeah.
And I think there's there are people that are Building Systems
internally and some some processes internally, But
ultimately, to get to where they really want to, they really need
to put something that's going to give them scale across the board
and actors, as one ecosystem, that their Partners can come
come into and commissioned and Leo.
And obviously, under very strict It's a security measures things
like fund. Administrator is performing
tasks within one environment. So that so that everyone is on
the same page and they're all sings the same song sheet.
I think this is a phrase. You want to use around this as
man single Source. Yeah, read my mind.
Yeah, absolutely. Kind of, yeah, creating
something that's unified and flexible enough to enable firms
to tackle or take opportunity of whatever the future holds, I
Indeed. Yeah, it's tough.
Excellent. Well, that's fascinating to do
me. Thank you so much.
Thanks for your time. We enjoyed it.
Thank you for listening.