Part 2: Does the way you manage your liquidity affect your LP’s?

PE firms have grown in complexity over the last 10 years. An abundance of liquidity has allowed firms to look the other way when predicting future cashflows;  the sheer accessibility of liquidity in today’s markets has made liquidity forecasting errors a less critical concern. At some point the tide will shift and firms will be forced to tighten their books and provide additional transparency to their LPs.

“When LPs do not have a clear understanding of how much capital will be called and when, they may struggle to balance their liquid and illiquid assets in order to ensure sufficient liquidity to meet the demands of future capital calls” (Quote from ILPA article titled “Recommended Disclosures Regarding Exposure, Capital Calls and Performance Impacts”).

The introduction of subscription lines gave firms the ability to smooth out their cashflows and help with liquidity management, but that is only one piece of the puzzle. Sub lines provide a short term “cushion” to help manage liquidity, but the more complex the firm, the harder it is to manage. Today, 85% of Private Equity organizations monitor their liquidity on multiple excel spreadsheets. Does the below sound like your firm?

  1. Manually gather bank balances and populate cash excel spreadsheet
  2. Manage drawdowns, paydowns and maturity dates via another spreadsheet
  3. Manually consolidate future projections and add to cash excel spreadsheet
  4. Manually log into multiple banks to facilitate daily cash movements and record in excel
  5. Somehow tie all this information together to predict the future

Thus, why the treasury department was born. The burden of navigating through the complexity of liquidity and disparate systems forced firms to hire a dedicated Treasurer to manage liquidity and help with the organization’s transparency, both in and outside the organization. Many firms are using this new department concept to market to new LP’s by highlighting the strength of their liquidity management, which could directly affect the funds investors. Ask yourself one question, do you manage your liquidity in the best way possible?