Are you a private market deal closer, investment manager, or an advisor? Then you have most likely encountered the chaotic nature of a deal closing process. Wouldn’t it be great to bring order to this chaos, and create long-term value in the process?
Deal execution for private market funds – the big picture
Most private market fund deals – whether private equity, real estate, infrastructure, or credit – involve three components:
- Acquisition or investment in an asset – this can be shares in a company, acquisition of an asset (e.g. real estate), or investment in an instrument (e.g. debt).
- Cost of making the acquisition – payments made to the sellers, deal costs incurred, and any taxes or duties triggered as part of the acquisition.
- Funds needed for the acquisition – drawdown from the fund’s LPs, third party borrowings, investment from JV partners, co-investors, or target’s management team.
The investment team (also known as the deal team) at the fund typically drive the key decisions on the above components. It is the job of the funds external advisors, and other in-house support teams (e.g. in-house closing, tax, and legal teams) to document the three components above, get the deal closed efficiently, and create a record that is useful for both onboarding and tracking the investment post close. This is achieved through a combination of paperwork – e.g. myriads of legal documents from SPAs, steps papers, facility agreements and others – and a document called the Funds Flow.
The Funds Flow
The Funds Flow is an important document because it connects the dots across three components discussed above and provides what is required to get the legal documentation done, deal closed, and onboarded. The better the quality and process involved in producing the Funds Flow, the less chaos during closing and onboarding. The poorer the Funds Flow, the higher the chance of chaos during the closing process and post-close.
A good quality Funds Flow helps all the teams working towards closing and beyond get clarity on the different components of the deal and move forward efficiently. The lawyers get the information they need to prepare the legal docs, the deal and closing teams get the information they need to ensure funding and other practical details are in place for closing, and the post-deal teams get what they need to onboard the investment (e.g. into accounting and other investment management systems used by the fund and its portfolio teams).
What is a quality Funds Flow?
We believe that a quality Funds Flow is a document that delivers the following five outputs:
- The acquisition structure at closing: What is the corporate structure for the acquisition and how does it look at closing? This is effectively a detailed structure chart at closing showing all legal entities and financing positions.
- Sources and Uses: All the cash sources of funding and cash uses for the deal broken down in detail.
- Legal entity cap tables: This is effectively the balance sheet at closing of each legal entity involved in the acquisition. A quality Funds Flow will have this in sufficient detail to be fed into legal documents and used for accounting purposes.
- Legal steps / notional funds flow: A sequential list of all the steps that lead to closing and effectively create each company’s balance sheet at closing. This output helps document all the steps and provides the basis for the journal entries for accounting purposes.
- Closing wires: All the cash wires that need to be executed at closing. Experienced private market deal closers will know that cash wires can be very different to the notional funds flow. This output must come with the level of detail that allows it to be used for processing closing payments – e.g. with full bank details of recipients, steps and dates of wires etc.
Excel as a tool for building Funds Flow
At present excel is the primary tool used in the industry to produce a Funds Flow. Excel is a great tool, and in the right hands it delivers what is required to get the deal done. But excel Funds Flows come with their drawbacks:
- It is a static document that doesn’t create long term value – e.g. compared to a database of all closed deals that can be queried and/or searched, creating a valuable knowledgebase for a fund.
- Relies on the preparer to efficiently connect the dots across the different components of the Funds Flow. This human element can lead to errors and difficulty in tracking where the errors are buried – one missed link or update can produce the wrong result.
- Not all excel Funds Flows end up having all the five outputs listed above that make up a quality Funds Flow – e.g. some are just glorified closing wire schedules without the detail required for accounting and legal docs.
- Excel funds flows are often not standard. Format, layout, and information can depend on the preparer. This makes the job of looking back at any given funds flow a highly time consuming and inefficient process. This is a major pain point for people onboarding the deal post-closing or looking back for a specific piece of information down the line.
- Excel funds flows are not directly linked to the underlying documents. Users still need to navigate to and from underlying documents to the funds flow to connect the dots and get the full picture. We have also seen cases of the documents not matching the excel funds flow.
Digitised Funds Flow
We believe that closing Funds Flows can be standardised. And if it can be standardised, it can be digitised. Such a digitised funds flow can have efficient workflows and processes built into it, reducing human error, bringing order to the chaos, and creating a long-term store of value. A digitised Funds Flow would not only provide what a good quality excel Funds Flow provides, but do a lot more:
- Create a digitised closing bible that provides the full picture on the transaction in an intuitive manner. Imagine being able to seamlessly navigate between the different components of a Funds Flow and underlying legal docs. How about a interactive closing bible where information can be accessed simply by right-clicking legal entities in closing structure chart?
- Simplify the legal documentation for closing and reduce errors. A digitised Funds Flow can directly feed data into the legal docs, removing the possibility of the legal docs not matching the Funds Flow.
- Make post-close onboarding and financial accounting for new deals easy by giving the post-closing teams exactly what they need. A digitised Funds Flow can also be connected to accounting and other internal systems, making onboarding of new deals seamless and automatic.
- Create a database of all closed deals. Such a database can be extremely valuable in the long run. Imagine being able to search all the closed deals of a fund for valuable insights – e.g. average closing costs across category, useful ratios, financing structures used etc.
- Allow the ability to create efficient processes and checklists around deal execution.
- Improve security and data quality – e.g. the way bank details are captured, validated, and stored.
DealsPlus Close, a digitised closing module for private market funds
At DealsPlus we are building such a digitised funds flow with our deal closing module, DealsPlus Close. Since June 2021, well over fifty private market transactions have been closed using our deal closing module, creating tremendous efficiencies and long-term value.
Moreover, DealsPlus Close is linked to our post-deal investment structure management module, DealsPlus Track. This allows all deals closed on DealsPlus to be tracked and managed efficiently throughout the holding period, resulting in ‘transaction ready’ portfolios, and value creation on future exit.
If you would like to take DealsPlus Close for a test drive, we would be happy to show it to you and help digitise your deal closings.