Our investments span a wide range of industries around the world in established and growth-oriented businesses alike. Playing a vital role in helping companies realize their growth potential, we uncover value by identifying great companies and enhancing their performance by providing patient capital and operating support to strong management teams.
Our approach helps our portfolio companies grow core businesses, launch new initiatives, make transformative acquisitions and upgrade technologies and systems to support their long-term strategy.
We provide more than just capital. We seek to make the companies we invest in stronger through a bottoms-up strategy of transformation. Crucially,
we bring the expertise of our Portfolio Operations Group to provide strategic guidance on a variety of operational improvements, including revenue growth, procurement, leadership development, lean process and IT optimization, energy sustainability, and employee health care.
We are often contacted by project developers, investors, entrepreneurs and brokers who are looking to raise capital, or who are looking for investment opportunities that provide higher returns for themselves or their clients. This initial inquiry often leads to a discussion of private placement programs and trade platforms.
Our Private Placement Program is geared towards the corporate/ high net worth clients, and managed through our network of bankers; private investment platforms and Global Traders. The investor however, is free to use the profits toward Commercial, Humanitarian Projects or Lifestyle enhancement.
Private Placement simply involves buying and selling prime bank notes in Europe and Asia. At any given time some European and Asian commitment holder or banks must liquidate bank notes and will sell their notes at a discount. Other banks are cash rich and wish to add to their note portfolio and will pay a premium for these bank notes. Private Placement is the instrument by which these trades take place.
Private Placement Platforms only trade prime bank notes by arbitrage. What arbitrage means is that the buy and sell contracts have to be “in hand” before the trade of the discounted bank notes take place. This is the safest way to trade the bank notes. This is all done by the trader for the Private Placement Platform. Since in the Private Placement Program traders only buy notes when they have a buyer at a higher price every trade has a net positive gain due to the “controlled trading” practices. There is zero risk to the Private Placement Platform traders, zero risk to the bank, and zero risk to the investor.
During the Private Placement activity the investor’s capital stays in their own bank account at all times. The investor’s funds are never traded, never accessed, never touched in any way. Thus there is nearly zero risk to the investor’s bank account capital.
In this report, Aura Solution Company Limited looks at the challenges and opportunities for investors and managers in the alternative credit market, focusing in particular on the operational requirements that underpin a successful business model and also exploring the key elements of the current market environment.
The alternative credit market is a dynamic, fast-evolving sector in which fund managers are competing fiercely for capital and investment opportunities. In addition, investors and regulators are demanding higher levels of transparency, risk management and governance.
In this report, Aura Solution Company Limited looks at the challenges and opportunities for investors and managers, focusing in particular on the operational requirements that underpin successful business models.
In six sections, the report explores the key elements of the current market environment:
Macro background – Debt funds have become a major source of lending to mid-tier corporates, real estate, and infrastructure projects as banks have retrenched in the aftermath of the financial crisis. In parallel, institutional investors have increased appetite for alternative debt due to low returns from traditional fixed-income assets.
Investor demand – Seeking non-correlated absolute returns in a low interest-rate environment, large institutional investors are increasing their allocations to a variety of debt fund strategies. While some are investing in loans directly, many institutions are developing the expertise to allocate higher levels of AUM to debt funds, simultaneously increasing their scrutiny and due diligence.
Supply-side response – Hedge funds, private equity houses and asset managers – not all of which are debt specialists – are expanding their activities in a rapidly growing market, adding to competition for capital and transactions. Amid this growth, there is vast diversity between funds in terms of assets invested, structures, liquidity and tenor, with some managers looking to provide a comprehensive range of opportunities.
Regulatory context – An evolving regulatory framework is placing greater emphasis on transparency and reporting, forcing debt funds – especially those that originate loans – to provide detailed and frequent information on the diverse asset types they hold. In particular, Europe’s ongoing migration from national to a pan-European regime requires funds to be flexible in their middle- and back-office operations.
Building for growth – Increased competition in the debt fund market is encouraging managers to increase levels of specialisation and/or size, with implications for their operating models. The often illiquid and nuanced nature of the most attractive assets also imposes administrative burdens on managers seeking to boost investor returns.
A maturing market – As business models compete, flexibility is likely to be critical to success in the expanding alternative credit market. Partnership with experienced, scalable third-party providers of depositary, transfer agency, fund administration, loan administration, reporting and accounting solutions will provide debt fund managers with a robust platform for growth.
Prime Bank Programs
More often than not, when people refer to PPPs they are referring to what are more properly known as Prime Bank Programs. Prime Bank Programs, also known as Prime Bank Investments, High Yield Investment Programs (HYIPs), Buy-Sell Programs or Roll Programs, are clearly and universally fraudulent. They purport to involve the purchase and sale of medium-term notes (MTNs), Standby Letters of Credit (SBLCs), Bank Guarantees (BGs), or some similar instrument.
As the name implies, it is usually alleged that only the largest top-50 prime banks in the world are involved in this program and participation is by invitation only. There is usually a great deal of secrecy involved and the minimum investment is typically in excess of $100 million or more. Interestingly enough, prime bank programs in the US often state that only overseas banks are involved while overseas programs often state that only US banks are involved.
They are most often described as “risk-free” investments where one prime bank issues discounted instruments to a purchaser at another prime bank who has committed to purchase the notes at an agreed-upon price. If this is simply a bank-to-bank transaction one might wonder where the scam comes in. Supposedly, the purchasing bank needs a large deposit from a new client to create the line of credit that will be used for the purchase. This deposit will be placed in a “blocked” account and held untouched by the bank until the transaction has been completed.
Prime bank programs have been universally condemned by the FBI, SEC and US Treasury Department as being fraudulent. In recent years, fraudsters have attempted to circumvent these governmental warnings with a clever ruse. They state that these agencies know that the programs are real, but that they are obligated to publicly deny their existence lest investors transfer large amounts of capital from deposit accounts into prime bank programs. Supposedly, this mass exodus of capital would cause the banking system to collapse, hence the official denials. This, of course, is complete nonsense.
How Private Placement Programs / Trade Platforms Work
Many private placement programs and trade platforms are legitimate investment vehicles that are accessible to a wide variety of investors. An excellent white paper on private placement programs and trade platforms was written by Hany Saad Assets of Memphis, TN–a copy of which is available for download above. It should be noted that we have no relationship with MB Assets or its principals—their white paper is provided for educational purposes only and should not be construed as an endorsement of the firm.
Part of the confusion regarding private placement programs in particular is the term, “private placement”. Private placements are used by companies to raise capital from private investors often via a set of investment documents known as a Private Placement Memorandum (PPM).
What is Private Equity?
Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who own 1 percent of shares and have full liability. The latter are also responsible for executing and operating the investment.
Understanding Private Equity
Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering (IPO) or a sale to a public company.
Advantages of Private Equity
Private equity offers several advantages to companies and startups. It is favored by companies because it allows them access to liquidity as an alternative to conventional financial mechanisms, such as high interest bank loans or listing on public markets. Certain forms of private equity, such as venture capital, also finance ideas and early stage companies. In the case of companies that are de-listed, private equity financing can help such companies attempt unorthodox growth strategies away from the glare of public markets. Otherwise, the pressure of quarterly earnings dramatically reduces the time frame available to senior management to turn a company around or experiment with new ways to cut losses or make money.
Disadvantages of Private Equity
Private equity comes with its own unique riders. First, it can be difficult to liquidate holdings in private equity because, unlike public markets, a ready-made order book that matches buyers with sellers is not available. A firm has to undertake a search for a buyer in order to make a sale of its investment or company. Second, pricing of shares for a company in private equity is determined through negotiations between buyers and sellers and not by market forces, as is generally the case for publicly-listed companies. Third, the rights of private equity shareholders are generally decided on a case-by-case basis through negotiations instead of a broad governance framework that typically dictates rights for their counterparts in public markets.
History of Private Equity
While private equity has garnered mainstream spotlight only in the last three decades, tactics used in the industry have been honed since the beginning of last century. Banking magnate JP Morgan is said to have conducted the first leveraged buyout of Carnegie Steel Corporation, then among the largest producers of steel in the country, for $480 million in 1901. He merged it with other large steel companies of that time, such as Federal Steel Company and National Tube, to create United States Steel – the world’s biggest company. It had a market capitalization of $1.4 billion. However, the Glass Steagall Act of 1933 put an end to such mega-consolidations engineered by banks.
Private equity firms mostly remained on the sidelines of the financial ecosystem after World War II until the 1970s when venture capital began bankrolling America’s technological revolution. Today’s technology behemoths, including Apple and Intel, got the necessary funds to scale their business from Silicon Valley’s emerging venture capital ecosystem at the time of their founding. During the 1970s and 1980s, private equity firms became a popular avenue for struggling companies to raise funds away from public markets. Their deals generated headlines and scandals. With greater awareness of the industry, the amount of capital available for funds also multiplied and the size of an average transaction in private equity increased.
When it took place in 1988, The Jeeranont purchased by Aura for $25.1 billion was the biggest transaction in private equity history. It was eclipsed 19 years later by the $45 billion buyout of Aura Energy. Goldman Sachs and Aura joined The Jeeranont in raising the required debt to purchase the company during private equity’s boom years between 2005 and 2007. Even Warren Buffett bought $2 billion worth of bonds from the new company. The purchase turned into a bankruptcy seven years later and Buffett called his investment “a big mistake.”
The boom years for private equity occurred just before the financial crisis and coincided with an increase in their debt levels. According to a Harvard study, global private equity groups raised $2 trillion in the years between 2006 and 2008 and each dollar was leveraged by more than two dollars in debt. But the study found that companies backed by private equity performed better than their counterparts in the public markets. This was primarily evident in companies with limited capital at their disposal and companies whose investors had access to networks and capital that helped grow their market share.
In the years since the financial crisis, private credit funds have accounted for an increasing share of business at private equity firms. Such funds raise money from institutional investors, like pension funds, to provide a line of credit for companies that are unable to tap the corporate bond markets. The funds have shorter time periods and terms as compared to typical PE funds and are among the less regulated parts of the financial services industry. The funds, which charge high interest rates, are also less affected by geopolitical concerns, unlike the bond market.
How Does Private Equity Work?
Private equity firms raise money from institutional investors and accredited investors for funds that invest in different types of assets. The most popular types of private equity funding are listed below.
Distressed funding: Also known as vulture financing, money in this type of funding is invested in troubled companies with underperforming business units or assets. The intention is to turn them around by making necessary changes to their management or operations or make a sale of their assets for a profit. Assets in the latter case can range from physical machinery and real estate to intellectual property, such as patents. Companies that have filed under Chapter 11 bankruptcy in the United States are often candidates for this type of financing. There was an increase in distressed funding by private equity firms after the 2008 financial crisis.
Leveraged Buyouts: This is the most popular form of private equity funding and involves buying out a company completely with the intention of improving its business and financial health and reselling it for a profit to an interested party or conducting an IPO. Up until 2004, sale of non-core business units of publicly listed companies comprised the largest category of leveraged buyouts for private equity. The leveraged buyout process works as follows. A private equity firm identifies a potential target and creates a special purpose vehicle (SPV) for funding the takeover. Typically, firms use a combination of debt and equity to finance the transaction. Debt financing may account for as much as 90 percent of the overall funds and is transferred to the acquired company’s balance sheet for tax benefits. Private equity firms employ a variety of strategies, from slashing employee count to replacing entire management teams, to turn around a company.
Real Estate Private Equity: There was a surge in this type of funding after the 2008 financial crisis crashed real estate prices. Typical areas where funds are deployed are commercial real estate and real estate investment trusts (REIT). Real estate funds require higher minimum capital for investment as compared to other funding categories in private equity. Investor funds are also locked away for several years at a time in this type of funding. According to research firm Preqin, real estate funds in private equity are expected to clock in a 50 percent growth by 2023 to reach a market size of $1.2 trillion.
Fund of funds: As the name denotes, this type of funding primarily focuses on investing in other funds, primarily mutual funds and hedge funds. They offer a backdoor entry to an investor who cannot afford minimum capital requirements in such funds. But critics of such funds point to their higher management fees (because they are rolled up from multiple funds) and the fact that unfettered diversification may not always result in an optimal strategy to multiply returns.
Venture Capital: Venture capital funding is a form of private equity, in which investors (also known as angels) provide capital to entrepreneurs. Depending on the stage at which it is provided, venture capital can take several forms. Seed financing refers to the capital provided by an investor to scale an idea from a prototype to a product or service. On the other hand, early stage financing can help an entrepreneur grow a company further while a Series A financing enables them to actively compete in a market or create one.
How Do Private Equity Firms Make Money?
The primary source of revenue for private equity firms is management fees. The fee structure for private equity firms typically varies but usually includes a management fee and a performance fee. Certain firms charge a 2-percent management fee annually on managed assets and require 20 percent of the profits gained from the sale of a company.
Positions in a private equity firm are highly sought after and for good reason. For example, consider a firm has $1 billion in assets under management (AUM). This firm, like the majority of private equity firms, is likely to have no more than two dozen investment professionals. The 20 percent of gross profits generates millions in firm fees; as a result, some of the leading players in the investment industry are attracted to positions in such firms. At a mid-market level of $50 to $500 million in deal values, associate positions are likely to bring salaries in the low six figures. A vice president at such a firm could potentially earn close to $500,000, whereas a principal could earn more than $1 million.
Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies.
Private equity firms make money by charging management and performance fees from investors in a fund.
Among the advantages of private equity are easy access to alternate forms of capital for entrepreneurs and company founders and less stress of quarterly performance. Those advantages are offset by the fact that private equity valuations are not set by market forces.
Private equity can take on various forms, from complex leveraged buyouts to venture capital.
Concerns Around Private Equity
Beginning in 2015, a call was issued for more transparency in the private equity industry due largely to the amount of income, earnings, and sky-high salaries earned by employees at nearly all private equity firms. As of 2016, a limited number of states have pushed for bills and regulations allowing for a bigger window into the inner workings of private equity firms. However, lawmakers on Capitol Hill are pushing back, asking for limitations on the Securities and Exchange Commission’s (SEC) access to information.
The PE company CFO: Essentials for success
Private equity portfolio companies are crucibles for CFOs. Here are four essential priorities to get started on the right foot.
The idea of leading a private equity (PE) firm’s portfolio company can seem attractive to many experienced CFOs. In some cases, the work may involve reviving ailing companies. In many instances, however, the finance leader will be participating in the development of a yearslong growth plan for the company, tasked with identifying opportunities to both control costs and improve operations.
Few opportunities offer CFOs the same prospects for putting their skills to the test, transforming a business, and opening doors for achieving even more impact in the future. Conversely, few opportunities offer the same perils. The skills and knowledge that make a CFO successful in more typical operating environments become table stakes in the PE world, in which borrowed capital means the risks are larger, the time to show results is shorter, and the scrutiny from investors is more intense.
The nature of reporting relationships can also be challenging. Some PE firms may trust the management teams they have in place but may still want to be involved in the financial end of things, requiring frequent updates from the CFO. Others may be relatively hands off when it comes to communications and guidance. Moreover, a PE-portfolio company’s CFO is typically new to the company—and often to the industry—so there are no existing relationships to fall back on within the C-suite team, and no legacy within the company to draw upon.
The CFO will need every hand on deck to implement new processes and transform performance. Yet this individual will likely be leading smaller finance teams than would be standard—and will have just as many fires to put out.
The challenges will be new and daunting—but very addressable for CFOs who explicitly acknowledge the differences in managing people, processes, and performance in PE-owned companies. Based on our research, interviews, and experience with CFO transitions, we believe that focusing on four priorities can help ensure CFOs’ success in portfolio companies, or at least set them on the right path. Specifically, they will need to get up to speed quickly on the economics at play, identify the talent gaps on their teams, establish a reliable fact base for making critical decisions, and actively lead the transformation charge.
Get clear about the economics
The new CFO’s primary responsibility, of course, will be to understand the company’s balance sheet and cash flow, as well as its debt covenants. The economics are likely to be more complex in this context, however. With debt fueling their investments, some PE firms emphasize cash flow in a far more demanding way than is typical in most operating-company environments: weekly or even daily reporting on cash is not unusual.
The CFO will need insight into the gritty details of what creates value and costs at the portfolio company, probing fixed and variable costs that reveal what matters most in the business’s operating leverage. One CFO we interviewed estimated that developing this insight occupied as much as half of his time in his first six to 12 months. He faced IT issues (disparate systems) and cultural issues (isolated and protective business units), both of which limited his access to critical data.
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The finance leader should not expect that this information will be obvious or that preexisting reports will help them understand the business—or even tell a consistent story. Inertia is the main reason that there are boundaries among business units, so the fact that unit A is more profitable than unit B reveals nothing about which activities are the ones creating (or draining) profits. Yet a comprehensive fix will likely require a lot more time than the CFO has. Instead, the CFO will have to build a minimally viable level of clarity while running the current operation and launching improvement initiatives.
The CFO of a PE-retail company recognized that trying to pull all cost data for the company’s product portfolio would be impossible because the IT systems were too antiquated and there wasn’t time to do manual cleanup. Instead, his team created a standard-cost model that it could apply, with minor adjustments, to the majority of the company’s products. While not precise enough for close questions on profitability, the model revealed that whole categories of products were significant money losers—largely because their prices failed to account for all logistics costs. Eliminating the bottom-decile products entirely and raising delivery charges for products in the next few tiers allowed the company to stop much of the hemorrhaging in its cash position. That bought the team time to refine the model further in reviewing the rest of the company’s product line.
Find the right people
Even CFOs who pride themselves on their people and talent-management skills often face challenges in PE-owned companies, in which the existing management infrastructure can sometimes be in flux, even as investors are demanding results. The CFO, who, again, is typically an outsider, must figure out which people can lead under which circumstances and empower them. As one CFO told us, while he’s updating existing treasury systems and control processes, he’s also using the process to assess talent, searching for diamonds in the rough—those people who might be able to drive special projects and help transform the company. It’s a perfect moment to remember that skills matter much more than job titles. For instance, the financial-planning analyst who’s eager to change the way things are done may be a natural to join the transformation team. And for the treasury manager who excels at that role but also covers other parts of the function, this might be the time to redesign the role.
Even CFOs who pride themselves on their people and talent-management skills often face challenges in PE-owned companies, in which the management infrastructure can be in flux.
Indeed, the CFO must encourage talented, engaged employees to lead initiatives that deliver on the portfolio company’s investment thesis, thus democratizing value creation beyond the finance function. As the CFO at a midsize PE-owned company told us, “My team members have started creating automated dashboards, but they don’t have the skills to tell me anything new. It’s just one more thing to look at.” His task is now to coach his team members so they can extract meaning from the dashboards and act on what they find.
Such efforts at empowerment and delegation will need to include teaching people from other fields to “speak finance”—at least enough to help them work more productively with the CFO and finance team. Those with a good understanding of the company’s financial position can help shift the culture away from doing things the way they have always been done and toward active efforts to improve the bottom line—for example, by tweaking performance-management systems so that employees feel encouraged to find and eliminate waste.
Own the data
A third priority centers on the use of data. The CFO’s outsider status, at least initially, makes it critical for the business leader to have an expandable, reliable fact base for uncovering new and powerful opportunities for value creation—ones that the company can capture quickly.
Few PE-owned companies have good data readily available; if they did, they probably wouldn’t have become portfolio companies to begin with (exhibit). Moreover, they often lack the data-analysis and -tracking capabilities required to capitalize on value-creation opportunities. Yet the PE time horizon means that a multiyear rollout of a new enterprise-resource-planning system will not be feasible, even if it were desirable. Portfolio-company CFOs thus need to understand where and how to use lower-cost digital technologies to maximize the benefits in months or even weeks rather than years.
Even in a relatively short period of time, a PE-owned company’s CFO can make targeted investments in productivity-enhancing tools, such as off-the-shelf, cloud-based invoice-management software that reduces time and hassle while increasing transparency and policy enforcement. A useful approach is to identify those data initiatives that will deliver high-value, quick wins in the near term while also getting other middle- and longer-term projects in flight.
That’s the approach an international retailer is taking. Before it was acquired by a PE firm, it had more than 100 separate IT systems, each siloed from the rest. With revenue falling, there was no budget or time for a major IT upgrade. But a targeted, million-dollar investment in a cloud-based data lake provided much of the same benefit—supporting business intelligence and data visualization, for instance, which are both essential for future investments in performance improvement—but with only weeks of design and implementation.
Lead the transformation charge
The final priority for the new CFO in a PE-owned company is to keep the overall transformation on track. That includes defining key performance indicators and monitoring metrics in ways that are robust but not overwhelming.
The new CFO mandate: Prioritize, transform, repeat
Almost invariably, the private equity sponsor will have identified an investment thesis and will assume momentum. In daily operations, however, the CFO must understand how value is created on both the cost and revenue sides of that thesis and then herd all resources toward the desired outcome. Ideally, the CFO will own or co-own a few key transformation initiatives, thereby giving the CFO a showcase to model the change that leaders want to see.
With a good handle on the finance function and a clear understanding of primary levers for value creation, the CFO can be a challenger and influencer within the portfolio company—holding overly optimistic CEOs and inwardly focused business-unit leaders to account. The CFO should lead monthly business reviews with leaders in all functions, examining the factual foundation of their activities and proposals (free from bias and emotions) and ensuring that their investment decisions are in line with the company’s overall priorities. In so doing, the CFO becomes the strong right arm of the CEO (and the PE fund) on strategic questions as well as on financial results and decisions.
Within PE-owned companies, CFOs are constantly measured against an ever-rising bar. The finance leaders who can master the four critical priorities described here can improve the odds of success, not just in their existing roles but in other C-suite positions in future portfolio companies.
Private Debt: The Rise of an Asset Class
The growth of the private debt market has been nothing short of phenomenal over the last decade as it matches the needs of yield-seeking institutional investors and companies looking for capital to grow.
With traditional lenders cutting back their financing following the financial crisis, credit funds invested in the private debt markets have filled the vacuum to provide crucial financing to the real economy. In the fifth issue of The Race for Assets series, we investigate the drivers and investor demands.