Every year, private equity (PE) and venture capital (VC) firms invest billions of dollars in businesses across the world. According to a report released in February 2021, fundraising by PE firms in Asia alone amounted to USD90bn from 2011 to 2018; likewise, in the US, it amounted to USD345bn from 2010 to 2017.
As market conditions and realities keep shifting, the demand for effective monitoring of portfolio investments in real time has also grown. Known as portfolio monitoring, this is an extremely important aspect of PE and VC firms.
Benefits Of Portfolio Monitoring
PE firms often invest in underperforming or undervalued businesses with potential, while VC firms invest in highly scalable or specialised businesses. Monitoring the progress of these businesses comes with several advantages.
- PE and VC firms often do more than just invest in companies. Effectively monitoring the progress of their portfolio companies helps these firms ensure the success of their investments. Areas where they can offer support and expertise include business strategy, managerial expertise, product technology interventions and distribution
- Portfolio monitoring helps in tracking the financial performance of businesses, including cash flow, profit and loss and expense and revenue. Doing so on a regular basis gives the firm a bird’s-eye view of all investments and their success rates
- PE and VC firms are always on the lookout for new investment opportunities, and the performance of existing portfolio companies can help direct them on future investment opportunities and needs.
A Specialised Approach To Portfolio Monitoring
Until a few years ago, asset managers used spreadsheets and manual processes to track and analyse the performance of their assets. Manual efforts tend to compromise both speed and efficiency, not to mention the absence of real-time data.
Effective portfolio monitoring is emerging as a specialised vertical, where access to strategic market research and best practices in terms of operations play a key role in decision-making in a dynamic market.
Specialists in the field, such as Acuity Knowledge Partners (Acuity), offer industry expertise along with state-of-the-art portfolio monitoring tools. By approaching these providers, PE and VC firms can benefit from access to superior portfolio and risk analytics, efficient investment operations, enhanced reporting solutions, robust data integration and management, and bespoke applications, tools and dashboards.
Technology Powering Effective Portfolio Monitoring
The introduction of technology-driven solutions has brought in more efficiency to portfolio monitoring. It offers quick access to a portfolio’s entire life cycle within the click of a few buttons. The more intuitive and flexible the tool, the more value it creates for all stakeholders. Here are some core features of portfolio monitoring tools:
- End-to-end cloud-based portfolio-monitoring tools make data and insights accessible to asset managers anytime and anywhere via smartphones, laptops, tablets and other devices that support the software
- They can be integrated seamlessly into existing tech stack and processes
- A robust cash flow engine makes it easy to calculate investment values, multiples and internal rates of return (IRRs)
- Tracking across sectors and sub-sectors is made possible
- Automated data extraction allows users to easily get data from reports in PDF format to Excel files, significantly improving turnaround time
- Dashboard charts and analytics can be customised and modified within a brief time period as per requirements
- Bespoke reports can be generated periodically to be shared for internal consumption. Metrics and reports can be customised and generated in the desired format
- Portfolio monitoring tools such as FolioSure offered by Acuity also enable their PE and VC portfolio monitoring experts to liaise with multiple stakeholders for data sourcing, consistency and accuracy
Key Metrics To Be Monitored
Key metrics that need to be monitored can vary based on an asset manager’s objectives. However, private equity managers leverage some key performance metrics or indicators as a measure of a portfolio company’s success:
Gross and net IRR: The IRR is a critical metric that PE managers use to measure and compare the returns on their investments. Managers track all investment cash flow over a predefined period to determine the gross and net IRRs
TVPI multiple calculation: The total value to paid-in (TVPI) multiple estimates a PE fund’s overall performance. It requires two figures to arrive at the correct result – the fund’s cumulative distributions and the paid-in capital’s residual value. It calculates the amount investors would get after the fund’s unrealised assets are sold and are added to distributions already received by the manager. Portfolio monitoring tools, such as FolioSure, provide the input required to calculate these metrics so that users can benchmark the performance
As their portfolios keep growing, PE and VC firms will need to leverage technology and industry expertise to be able to monitor their portfolios efficiently and in real time. Centralising portfolio company data makes it accessible to multiple stakeholders, creates transparency and ensures continuity, particularly when portfolio managers change. Embracing contemporary approaches to portfolio monitoring can help firms focus on their primary objective, which is to maximise value while meeting business targets.