As essential as it may be, investment is also extremely difficult, as it requires a multitude of checks and knowledge about various sectors. Some would argue that in portfolio management, portfolio monitoring is an equally difficult aspect. While monitoring would be somewhat easy in a portfolio consisting of public equity, it becomes a whole different story when it comes to private equity portfolios. Private equity has been growing rapidly, with its net asset value being 700% more than what it was in 2002. Given this, the monitoring of private equity portfolios has become a key focus area for both general partners and investors.
Portfolio monitoring – general partner perspective
One of the challenges in monitoring a private equity portfolio is the non-availability of sufficient data. General partners need to monitor portfolios to enable them to provide relevant data to potential investors regarding investments in private equity firms. This data can be used for the preparation of a fund factsheet, which in turn may be used for fund marketing and presentation.
Portfolio monitoring – investor perspective
From an investor’s perspective, portfolio monitoring gives them access to information on the performance of their portfolio vis-à-vis other funds or forms of investment. This allows them to understand the diversification achieved by investing in a private equity fund as well as the risk that they may have taken on. Through portfolio monitoring, investors can get information on returns and other data, such as the beta of a portfolio and maximum drawdowns; they can also calculate value at risk if the monitoring is done efficiently. However, such data would require access to multiple sources of information, which more often than not, is unavailable to common investors. As a result, they would need to either outsource such portfolio monitoring to a third party or pay for such data from various sources.
How is the outsourcing of portfolio monitoring beneficial?
The outsourcing of portfolio monitoring allows investors to rely on a third-party service provider’s research expertise and resources. Using the information provided, investors can not only make informed decisions regarding their investments, but also decide when such investments are to be divested or sold off.
How is such monitoring undertaken?
Data on private equity funds can be obtained from sources such as regulatory authorities, which require the funds to present their financial statements and other details as per regulatory norms. Third-party service providers collect, collate and present this data, and it can then be used by investors or general partners.
For instance, Acuity Knowledge Partners (Acuity) has developed a proprietary suite of Business Excellence and Automation Tools (BEAT) that allows it to collect such data and generate reports based on them. The software allows for the collection, storage and integration of data on thousands of portfolio companies. The data is presented on an easy-to-view and understandable interface; users can also easily switch between different modules and data formats. In addition, BEAT allows easy mobile access to data. Besides, it provides information on the source of the data, using which the reports were prepared, enhancing transparency for managers and users of the fund. The users can make better and informed decisions whereas the fund managers can focus on their main tasks.
With a record number of private equity funds now operating in the market – estimated at a substantial 3,968 – it has become necessary for portfolio monitoring to be handed over to specialists who can leverage technology and provide fact-driven analyses to private equity funds and their investors.