Entity management can be a minefield for any organization especially private equity firms managing multiple companies across several jurisdictions. There can be so many moving parts, so many different regulations to bear in mind, and so many different processes and stakeholders to keep track of, that just keeping on top of the status quo is a challenge.
If that scenario is causing heart palpitations for your entity manager, let’s step it up a notch: Put them in the seat of an entity manager for a private equity firm, and ask them to handle entity management 101 for an entire portfolio.
What is private equity?
“The simplest definition of private equity (PE) is that it is equity – that is, shares representing ownership of or an interest in an entity – that is not publicly listed or traded,” according to Investopedia. “A source of investment capital, private equity actually derives from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to take them private, eventually delisting them from public stock exchanges.”
Private equity can be injected into a company, group or organization in many ways, but most of the industry comprises large institutional investors such as pension funds, and large private equity firms funded by a group of accredited investors. These private equity firms often buy a company or group for a short term through either a leveraged buyout or venture capital investment, and inject cash for fast growth with the aim of selling the investment for a profit (known as an “exit”).
How private equity firms drive growth for their targets
The ability of private equity firms to achieve high returns is typically attributed to a number of factors, write Felix Barber and Michael Goold in the Harvard Business Review. The buy-to-sell approach differs from that of a public company, which acquires businesses with the intention of holding onto them and integrating them into their own operations for sustainable long-term growth. On the other hand, private equity firms drive aggressive growth by making the most of their:
- High-powered incentives, both for private equity portfolio managers and for the operating managers of businesses in the portfolio.
- Aggressive use of debt, which provides financing and tax advantages.
- Determined focus on cash flow and margin improvement.
- Freedom from restrictive company regulations.
Further to that final point: While private equity firms do not have to comply with the restrictions brought by the corporate governance codes of the various listing exchanges around the world, they are still expected to comply with the increasing push for transparency and exchanges of information sought by global regulators. This, in turn, brings compliance challenges for private equity firms.
Adding to that is the questionable reputation that private equity firms gained in the early 21st century as the industry grew exponentially, and some firms had an eye only on a big exit whatever the cost. This, plus the turbulent impact of the global financial crisis, brought greater and more intense scrutiny on their operations, and compliance.
Private equity firms need to focus on entity management 101
By their very definition, a private equity firm is a portfolio company. This means that there are multiple, unconnected group and subsidiary structures under their control at any given moment. Without close attention to corporate governance and robust entity management practices within those groups, that portfolio can quickly get out of control. One small issue in a far-flung part of a structure can spread throughout and beyond, and begin to cause major issues for the private equity firm’s reputation and its ability to operate flexibly.
So let’s consider entity management 101 for private equity firms. A target is acquired, and brought into the private equity firm’s portfolio. A team is deployed with the express task of making this organization efficient, lean and profitable within a set time period. What’s the first thing they should look at?
Among the early tasks should be a review of the organizational structure so the new managers know exactly what they’re dealing with. This will help to identify any underperforming entities, any compliance risks and any missing information that might not go down well come audit time.
Once the entity review has taken place, the private equity firm can move to looking for its operational efficiencies. This could include introducing roles such as legal operations and risk management to keep a closer eye on challenges, and to free up the company secretary and the general counsel and allow them to focus more on a proactive, strategic view of where the organization is going and how it can get there.
Of course, a greater and more laser-focused oversight on all things corporate governance can help to bolster entity management 101 for private equity firms. Paying attention to company culture, leading from the top, and ensuring the right processes and frameworks are in place for optimal performance should be a bare minimum for private equity firms looking to improve an investment.
Technology can ease the entity management burden for private equity firms
But let’s go back to that initial point: Private equity firms aren’t just taking care of entity management for a single entity, nor a single subsidiary structure. There will be multiple structures in the private equity firm’s portfolio, and though multiple teams will be looking after these, it can become quite unwieldy to manage.
Equally, there should be a uniform approach to handling entity management within that private equity firm so the firm’s board can rest assured that at any point in time, each of their investments is under the same compliance scrutiny and operating with the same intense oversight to ensure no risk and no challenge go unmet. A central overview from the top, with local teams handling entity management 101 for each subsidiary structure, can prove essential for private equity firms.
It is here that technology can step in to ease the entity management burden for private equity firms. By deploying entity management software, the private equity firm can install that uniform approach, ensuring the in-house corporate governance framework is in place across the whole portfolio and within each entity under its control.
This technology – such as Diligent Entities – enables organizations to centralize and manage their corporate subsidiary data management to simplify entity governance throughout the entire organization, improving compliance and mitigating risk.
Entity management 101 enables more streamlined and efficient operations by allowing entity managers to:
- Store entity information, documents and organizational charts in a highly secure format to create a single source of truth.
- Manage the ongoing accuracy of the corporate record using compliance calendars, reminders and workflows for better data.
- Report on governance and compliance requirements and electronically file statutory forms into global regulatory bodies.
To bring greater efficiencies, Diligent Entities also seamlessly integrates with Diligent’s board portal and secure file sharing service to create a Governance Cloud, an all-in-one, highly secure system to handle all corporate governance in one central repository.
Get in touch and schedule a demo to see how Diligent Entities can help private equity firms create robust entity management 101 processes, and to surface the right information to the right people at the right time for efficient operations.