Closely understanding the needs of its private equity clients has led to KPMG Luxembourg’s corporate finance team re-engineering the valuation process to make it as cost efficient as possible.
Valuation is a well-known subject but until now private equity firms have never really entertained the idea of outsourcing the task. After all, they are the ones with intimate knowledge of their portfolio companies and many use bespoke calculations to price their book. “We have engaged in a number of discussions with private equity houses to explore how we could improve their valuation reporting either for internal purposes or for investor/regulator reporting purposes,” says Yves Courtois (pictured), partner at KPMG in Luxembourg.
“This has led to us this year developing a solution that automates valuation using Visual Basic Excel programming as well as external financial data sources which can plug in to it. The approach we take is to tailor the model according to the existing cash flow streams that each GP receives.”
What this means is that instead of managers spending 80 per cent of the time building reports and only 20 per cent of the time analysing the results – as is the case when reliant on a cookie cutter approach used by software vendors – the opposite is true. A minimum amount of time is spent formatting or extracting information leaving more time to analyse the outcome of the valuation process.
Several private equity clients have started to use KPMG’s automated solution and the feedback so far has been favourable.: “They appreciate the time and cost savings,” says Courtois.
“In the light of AIFMD, managers will come under more stringent rules with respect to the valuation process, but at the same time they don’t want to incur additional layers of cost for outsourcing the valuation process. We’ve taken this into consideration and worked with clients to improve efficiency and help them achieve the goal of effectively segregating the valuation process from day-to-day portfolio management,” says Courtois.
Commenting on the fact that every private equity firm has a unique approach to valuing its portfolio, Courtois says that what KPMG’s solution aims to do is bring consistency to the approach; standardising the valuation process is just too difficult for private equity funds.
“Every manager is different and we try to accommodate this fact. We work with them to understand, in terms of output, what type of value drivers they want to use, what type of information they want to release. It’s important to be consistent across the entire portfolio when implementing the approach.”
Any solution that is able to bring greater operational efficiency without compromising on quality is likely to be welcomed by private equity managers who, in this new regulatory era, are having to think about adjusting their mindset to meet the demands of enhanced transparency.
But KPMG’s solution does not only bring efficiency to private equity funds, as Courtois notes: it can also be leveraged to explore how the business models of the underlying companies in the portfolio can be enhanced.
“It can serve as a platform for investment directors to have discussions with portfolio companies and implement change by showing what the outcomes can be.
“The approach that we have developed is therefore a bit more holistic. It starts from the GP’s perspective and then seeks to achieve efficiencies in the valuation process and improve the quality of valuation reporting to investors and regulators.
“Once we have demonstrated that we can actually bring that automation and efficiency to the table, then we can talk about how to share those efficiencies and how they can translate into real cost reductions,” asserts Courtois.