Key takeaways
  • It is a best practice to implement a treasury management system (TMS). Any size firm can benefit.
  • A TMS protects against serious risks, such as fraud and lapsed debt covenants.
  • These systems automate tasks, add visibility, and control, and help companies scale cost-effectively.

Introduction

Private equity (PE) and venture (VC) firms that close a relatively small number of deals in a year often think that because they don’t move cash frequently, it’s not worth investing in technology solutions to address risk and inefficiencies related to treasury management activities. That view can be shortsighted, however. In my nearly 25 years of experience selecting and setting up treasury management systems as both a head of treasury and operations and as a consultant, I’ve found that PE/VC firms often wait until they face serious challenges caused by inefficient, manual processes for dealing with their cash and credit position before they decide to take action.

The challenges can run the gamut from inconvenient to existential:

  • An email is hacked and wire instructions get changed, leading to a payment or funds flow being redirected fraudulently. A variety of assets can wind up subject to this type of fraud, from management company expenses to limited partner distributions or even funds flows themselves.
  • CFOs, partners and other high-value fund employees spend an inordinate amount of their time reviewing and approving wires because they don’t trust the process.
  • A lack of transparency into the fund’s credit picture creates a lapse in debt covenants in a volatile market.
  • Inefficiencies make it impossible to scale the fund with the resources available. Manual processes based on emails and spreadsheets can easily end up including incomplete or poorly standardized data, especially when different groups use the same tools in different ways.
  • Potential risk associated with financial intermediaries goes undetected and instability emerges unexpectedly, leaving funds behind the curve as they work to solve the problem reactively. This type of risk can extend into portfolio companies’ banking relationships, which are rarely monitored as part of a fund’s total risk exposure.
  • Funds often struggle to manage liquidity quickly and accurately, in large part because they lack reporting and dashboards that consolidate all sources of capital and threats to it. This type of reporting can help ensure that funds can project and prepare for cash positions at any point in the near future. Conversely, if periods of idle cash emerge either at the fund or management company level, a lack of proper reporting tools can cause funds to identify opportunities to optimize their cash position late in the game—or miss those opportunities entirely.

In my experience, PE/VC teams enjoy a significant uptick in scalability and control after they implement a TMS. The higher the transaction volume and the more complexity in their operations, the bigger that impact tends to be.

 

A TMS provides real-time visibility into a fund’s cash and credit position, which can help PE/VC firms reduce risk, improve resource allocation and ease growing pains as operations scale.

 

Such an implementation also offers an opportunity to revisit a few key controls and assess whether it makes sense to centralize key activities. Fraud is a particularly fertile area for attention, especially as fraudsters deploy new technologies that make a firm’s cybersecurity posture even more critical. A TMS provides real-time visibility into a fund’s cash and credit position, which can help PE/VC firms reduce risk, improve resource allocation and ease growing pains as operations scale.

Five reasons to invest in a treasury management system (TMS)

A TMS is a technology platform that offers many benefits to a treasury operation. It connects all your cash and credit accounts on a single platform so you can monitor all of your fund’s activity.

I’ve found that this capability yields five key benefits:

1. Increased visibility across the portfolio.

At its most basic, a TMS offers a consolidated overview of your liquidity and credit situation without requiring you to log onto banking and lending portals individually or track them manually. This overview offers a complete picture of your exposure to your banking and lending partners at a glance. As a result, you can better protect yourself from potential issues and respond more quickly if they arise. Implementations typically save time fund accountants and other operationally focused professionals would otherwise spend on menial tasks. They can also save hard costs by reducing bank fees.

2. Better reporting and portfolio management.

Dynamic connectivity with general ledgers improves accuracy and makes it possible to accomplish multiple tasks across functions with a single action in the TMS. By analyzing market data alongside counterparty exposures, the TMS can also flag when you’re reaching the limits on your credit agreements. Having all this information in one place facilitates reporting on a fund’s borrowing base. It also consolidates liabilities for analysis and fast execution of drawdowns or paydowns.

A TMS can provide tools that help manage a portfolio more efficiently. For example, I’ve seen funds use a TMS to facilitate activities such as foreign exchange or hedging. A TMS can also help manage collateral or margin for firms using derivatives as a hedge or to obtain synthetic exposure to a company, since funds typically construct advanced liquidity reporting to optimize usage of cash while ensuring the right amount of cash is available at the right time.

3. Automation of menial tasks.

A TMS can automate repetitive tasks such as audit preparation and regulatory documentation workflows, saving administrative time and freeing employees to attend to day-to-day accounting activities. With a TMS in place, it’s also easy to see whether you are trending too heavy or too light on cash. The system can provide on-demand cash forecasting at both the fund and management company levels.

4. Fraud mitigation.

By automating processes, a TMS can help codify and enforce policies and controls for high-risk activities such as authenticating wire approvals. I often see firms with manual policies for wire approvals demanding valuable time from CFOs or even partners to ensure settlement details are correct. Integrating software that manages changes to settlement details in a separate, secure process can improve protection further. This level of automation may also allow you to process wires in bulk, potentially saving on wire fees. Cost-effective technologies that work in tandem with a TMS to provide additional validation of wire instructions are also emerging rapidly.

5. Flexibility to scale.

A TMS helps PE/VC firms scale operations more efficiently and effectively. Operations that rely heavily on manual review of wires face resource constraints as they grow. Systems become unwieldy over time; eventually, funds find themselves relying on expensive full-time employees for processes that could be done more efficiently and more effectively by specialist operations staff. At that point, many funds realize they would have been better off if they had set up a treasury operation months earlier.

 

Firms that grow with inefficient legacy processes in place aren’t just using resources inefficiently. They are also increasing the risk that a fraudulent wire request will slip through the cracks, especially as their systems become more complex. Furthermore, as the volume of deals rises, it becomes increasingly difficult for funds to visualize the big picture across the portfolio.

A TMS offers a relatively low-cost and quickly implemented solution to these issues. The greater visibility, automation and risk mitigation benefits associated with these systems means firms gain tangible value from them relatively quickly as well. Firms often enjoy hard cost savings through reduced fees for wires, as well as savings in soft costs that are more difficult to quantify. I have seen TMS implementations that resulted in a 50% reduction in staff time for moving money and forecasting cash. 

In addition to these benefits, a TMS typically costs from $125,000 to $300,000 per year, making it a relatively inexpensive part of a firm’s technology ecosystem. While the majority of the cost can usually be booked as a fund expense, some firms opt not to bother due to the low cost.  

Finding the right treasury management system (TMS) for your funds

The right TMS for a given firm delivers what you actually need to operate more efficiently today and to build a foundation for growth down the road.

Before starting to look at TMS solutions, assess your current state of operations to identify your needs:

  • Assess peripheral operational needs such as hedging, collateral management, debt management, etc. to understand how all key pieces fit together.
  • Identify opportunities to complete multiple related workstreams in a single action.
  • Evaluate your growth trajectory and future objectives to ensure that a solution implemented today will stand up five to 10 years down the line as the firm evolves.
  • Measure time spent on treasury-related activities in the current state—the outcome is often surprising, and the potential for cutting that time back is usually significant.
  • Determine what existing systems need to integrate with the TMS and ensure the proper support is in place to implement those integrations.

Once you’ve determined your requirements, you can evaluate systems for best fit and assemble an implementation plan. In my experience, a typical TMS implementation can address at least 80% of a fund’s needs in its initial phase, which usually lasts about six months.

Hazel Tree and Modern Treasury top the list of TMS platforms used by private equity and venture capital firms in SVB& rsquo; s network.

Planning for a smooth implementation

Although it’s possible to vet, select and implement a TMS on your own, third-party consultants can make the process substantially smoother and faster, especially if you have a small team with relatively little TMS experience.

If you choose to use a consultant, look for one that can help you:

  • Understand the available options and match them to your existing systems and needs.
  • Decrease implementation times and achieve faster return on your investment.
  • Focus on best practices, optimize resource utilization and revisit policies to strengthen and right-size them.
  • Understand what additional value these systems can bring, including potential cost savings, risk mitigation, fraud reduction and future technological flexibility to support a fund’s growth.
  • Navigate vendor pricing to get the best value for the functionality you need.

An ounce of prevention is worth a pound of cure

The right TMS can provide the risk mitigation and scalability benefits of a full-fledged treasury operation at a much lower cost. These platforms provide greater visibility and opportunities for automation, making them a strong foundation for future growth.

As funds scale, the odds that they encounter challenges related to inefficient legacy processes rise dramatically. In my experience, the potential risks involved mean it’s better to implement a solution a few months before you think you need it than to implement one hurriedly in the wake of an unexpected and potentially preventable cash flow issue.