The chief revenue officer at the provider of treasury and liquidity tools for investment management firms discusses how Hazeltree is helping private equity clients manage today’s complex economic environment and the importance of liquidity management for the industry.

How are your private equity clients adjusting their operations to reflect the now more complex economic environment?

In private markets in general we are seeing complex legal entities, in various geographies and regulatory/tax jurisdictions, all with different rules for dealing with investors.
Investment managers are also facing requirements to work with more data and make better use of it, to ingest it, integrate it and ensure its quality. Then there are increased security and compliance issues – investors want to know definitively that a firm is managing these areas.

In terms of private equity firm operations specifically, we are seeing automation of payments processes, increased use of visualisation and decision-support tools, and greater front, middle and back office alignment. GPs are realising that their operations are a major potential source of increased business value.

But, most importantly, liquidity management is a critical new imperative. Rising interest rates have made this a new businesses discipline that must be mastered. The opportunity cost of failing has risen enormously. Private equity firms are realising that they can, or must, gain increased returns and better financial management by optimising liquidity, predict or model and manage liquidity over multiple timescales, use liquidity management to demonstrate strong governance to LPs and investors, and use liquidity tools to help their firm to grow.

Liquidity management is not just a back office tracking function anymore.

What is distinct about liquidity management in alternative asset management?

Liquidity management in alternative asset management is very different from equivalent processes in other industries. It cannot be retrofitted into current corporate products. Tools need to be built for our industry from the ground up.

For corporates, it is important to get what is called “Treasury” right, but it is not usually a fundamental driver of returns as it can be in private equity. Another difference is in the number and complexity of parties and counterparties we deal with in alternative asset management. A third difference is that in our industry we are much more exposed than the typical corporate to rising interest rates and the revaluation of investment assets.

In private equity specifically, debt optimisation has become a particularly critical liquidity management issue. The default assumptions that “debt is cheap” and that firms should “draw from investors last” are no longer necessarily true. Capital calls from investors could now be the best option and could be more frequent and larger in size. Holding all debts for 120 days or longer may now not be optimal.

Can private equity learn from other asset classes in relation to liquidity management? How do you work with clients in this area?

Hedge funds have been through the transition from attempting to manage their operations on “spreadsheets and swivel chairs” to exploring whether generic corporate treasury solutions might work, to adopting purpose-built treasury platforms like Hazeltree’s. These tools, suitably adapted, are now needed by private equity firms. Hazeltree’s heritage in hedge funds and experience with private equity enables us to see what can be transferred across sectors and what needs to be unique.

Our clients value learning from us and our help in adopting practices that have been pioneered and honed across alternative asset management. They enjoy working with us because our solutions are easy to adopt and implement, connecting with their existing systems and those of the external parties that they work with.

What do you think the next 12-18 months hold for private equity?

We have entered a new era for private equity where liquidity management will be critical, a vital management discipline for years to come. As this becomes increasingly recognised in private equity, we expect to see much more attention paid to the technologies needed to build this into the fabric of private equity.

The industry will follow the path of hedge funds to more complete approaches to liquidity management, and the leading firms will become increasingly sophisticated in this area. They will focus on improving in the following areas: debt optimisation, knowledge of how credit lines can improve IRR and other measures of business return, security and compliance, debt-related decision-making, and the usability of debt management technologies. Hazeltree is equipped to assist with all of these – for example, we have partnered with LexisNexis to help clients address transaction compliance and sanctions screening, while our “low-code” environment helps clients develop their own decision-making tools.

Liquidity management is a major business value lever. Over the next 12-18 months, those private equity firms that maximise the effectiveness and efficiency of their liquidity management will be the most successful.