Next generation operating model for private market funds
Updated: Mar 12
Given their size (>$7.4T AUM), sophistication, and transaction volume (>$1.2T in deal value per annum), private market funds’ current unstructured transaction execution, post-deal investment structure management, and portfolio exit processes are a large and growing pain point.
There are no existing solutions that connect the dots in a tailored fashion from deal execution, through the holding period, all the way to portfolio exits.
Given the complexity of private market fund structures, they need a tailored solution that recognises their needs and complexity of their business. For a start, private market funds face a dual challenge of having to build efficiencies in their deal execution processes, while ensuring value creation during the investment holding period.
For example, at the portfolio level, transacting at speed and maximising deal value requires keeping the portfolios ‘transaction ready’. This is hugely important as it ultimately drives the speed, cost, and value preservation (or erosion) in a transaction process that directly impacts a fund’s IRR. On the other hand, at the fund level, the key drivers will be having strong compliance and controls and being able to share the required data with your LPs.
A solution for private market funds must be tailored for the use case at each level – fund, holding companies, and portfolio. Such a solution will enable the following:
Standardise & automate deal closings. Current deal closing processes in private markets are highly unstructured and inefficient. By digitising deal closings, private market funds can standardise and automate deal closing processes and deliverables. A system that can achieve this will bring speed and efficiency to deal execution, post-deal onboarding, and act as a long-term store of value.
Create a single ‘source of truth’. A solution tailored for private market funds should be able to create ‘single source of truth’ across the fund, holding companies, and portfolio level, while allowing for the different use cases at each level. Such a solution can be extremely powerful when you consider the number of entities that a typical private market fund has at each level, the complexity of the structures involved, and the amount of time wasted by cross functional teams trying to find the right information at the right time.
Meet the needs for each user group. The solution must be tailored for the different user groups at each level – e.g. fund, in-house legal, tax, finance, asset management teams, external advisors, and portfolio management teams. Role-based-access and security must be a core feature of such a solution.
Not just be a legal entity management solution but be an investment structure management solution. Private market fund structures consist of multiple investment structures at each level. Legal entities are components within each investment structure. A solution designed for private market funds allows each investment structure to be managed individually, while creating a single source of truth across them.
Connect the dots across the key components of an investment structure. Every investment structure, whether at the fund or portfolio level, will have four key components to it:
legal entity details and the corporate structure – a robust legal entity solution not only allows you to store, manage, and view all the details on a legal entity, but it does so in an intuitive and user-friendly – e.g. through dynamic and interactive structure charts.
capital structure information – the legal entity management solution must contain a robust cap table management component that allows for easy tracking and managing of capital structure information – instruments in issue and holders for each instrument. This can be valuable both at the portfolio level (e.g. when it comes to being ‘transaction ready’), and at the fund level (e.g. to share with LPs).
compliance obligations – the legal entities across fund and portfolio structures will have compliance obligations across multiple areas – financial, tax, regulatory. In addition, events within a structure will trigger event-based compliance obligations. Furthermore, as compliance obligations are often outsourced to multiple external parties across many geographies. A legal entity solution should be able to track, monitor, and capture both ongoing compliance filings and event-based compliance obligations. In addition, it should allow role-based access to external compliance service providers.
document repository – by embedding a data room for the underlying legal documents that is grouped by investment structure, a powerful legal entity management solution enables the users not only have easy access to all the underlying, but it also reduces the time and cost in a transaction process or during year end audits.
Keep your structures ‘transaction ready’. Most private market fund transactions take time to execute and are complex. Further, it is common for diligence findings to arise during exit that are a result of compliance lapses during the holding period. This can directly erode value. A legal entity solution tailored for private market funds not only saves time and cost in a transaction process, but also helps mitigate diligence findings that go to value. This has a direct positive effect on a funds IRR.
If you are part of the finance, legal, tax, asset management, or deal team at a private market fund, ask yourself the following questions:
Do you have a ‘single source of truth’ across your fund and investment structures?
Can you easily track and monitor the compliance obligations for all the legal entities in your ecosystem?
Are your investment structures ‘transaction ready’?
If you are not sure of the answer, it may be time to evaluate a legal entity management solution.
At DealsPlus we are building the next generation platform specifically tailored for private market funds – private equity, real estate, infrastructure, credit. By combining a deal execution platform with a legal entity management solution, we are creating a one-of-a-kind solution for private market funds all the way from deal execution to portfolio exit.
Feel free to reach out to me at email@example.com if you would like to know more.