Capital is the lifeline for any business – not having adequate capital could create cash flow challenges for an organization. Therefore, it is always better for firms to opt for private equity financing instead of raising funds from public markets. Institutional investors, such as insurance firms, foundations and investment banks, usually invest in private equity. Investors can buy ownership in a company that is not publicly listed via private equity. Portfolio monitoring (PM) is an important process for any firm that is backed by private equity. Let’s dig deeper to learn more about the portfolio management process.
What Is Portfolio Monitoring?
Private equity investment has a defined lifecycle, and portfolio management is one of its critical tasks. A company invests in a portfolio company via private equity funding to gain significant returns. PM helps keep track of the performance of most general parameters. Various types of performance metrics associated with the partners are collected via PM.
The PM process remains the same for all types of portfolio companies irrespective of the size of the firm or fund. The results derived from portfolio management are analyzed by board members and investors. This is followed by an analysis of the overall portfolio health by the investors and board members. The active funds among the portfolio companies are also determined by monitoring the portfolios.
Performance Metrics
PM helps understand the performance metrics of associated companies. Many performance metrics can be determined and can change according to the organization. Net and gross internal rate of return (IRR) is a commonly used performance metric to derive (and compare) the return on investment (ROI). The total value to paid-in (TVPI) is another widely used performance metric in PM. TVPI helps determine the performance of a private equity fund.
The Paradigm Shift In Portfolio Monitoring
Earlier, PM was performed using spreadsheets and involved a lot of paperwork. However, new-age technologies have brought a paradigm shift in the PM process. Various portfolio management tools in the market help introduce investors to portfolio companies. Investors or limited partners are currently more demanding than ever. They often demand for more information on the performance of their funds, which requires effective data analysis. Data analytics is used to gather rich insights while monitoring the portfolio.
Can Portfolio Monitoring Be Outsourced?
The PM process can be outsourced to a reliable third party like Acuity Knowledge Partners. Outsourcing PM will help focus on the core business processes and increase the ROI. A reliable PM firm has subject experts that can aid in collecting rich insights.
Conclusion
With the help of PM, you will never miss out on any chance to increase your ROI. In addition, to meet the ever-growing needs of investors, PM has become a necessity. Outsourcing the portfolio management process to a reliable firm will also aid in ensuring proper compliance.
