Why Corporate TMS Doesn’t Work for PE Shops

Today’s treasury management systems (TMS) have evolved dramatically since banks were first able to transmit data electronically. Whether facilitating centralized real-time visibility into account balances, consolidating payment approval workflows or bridging the technical gap with general ledger software, TMS solutions have become an operational necessity for the Corporate Treasurer. The emergence of cloud computing has also made the TMS landscape much more accessible to more firms, including private equity and real estate shops, and has ushered in an era of vertically centric solutions. PE shops that have bought into a horizontal TMS – generic TMS which is designed to be used by any and all industries – have learned the hard way that horizontal, corporate-focused TMS applications help with moving money between the PE firm’s banks and investors, but fall short beyond vanilla cash movements. As a result, cash, credit facility and liquidity management continue in spreadsheets, and with it all the challenges of spreadsheet-based treasury operations: inefficiencies and subpar internal controls. Fortunately, the days of PE shops tackling their unique treasury operations with a horizontal TMS are over.

While all treasury departments of consequence share similar core challenges around cash visibility and payment approval workflows, the PE sector experiences a niche set of challenges that a horizontal TMS was never designed to tackle. Three (and there are many more) prominent examples include:

Non-standard bank file formats – While the depository commercial side of banks has invested and improved in communicating with standard formats such as BAI or SWIFT, the same is not true of the information exchanged with other areas of banks leveraged by PE firms; examples include custody banks, trustees, private wealth, and derivatives desks. The back office of these institutions is typically “less advanced” and in many cases have yet to embrace universal communication formats or standards. The same can be said when sending payment/transfer instructions, most commonly exhibited by the arduous process of generating letters of authorization (LOAs). As a result, it takes a specialized, focused approach to not only facilitate the vanilla data flows of commercial banking, but to also have the expertise and functionality to integrate with the non-standard forms of communication that are required to support daily PE business processes.

Increasingly complex workflows – PE shops have numerous specialized business processes that are not ever contemplated by a horizontal TMS, and result in continued spreadsheet use unless a vertically-focused TMS system, such as Hazeltree, is employed. Niche workflows that PE firms leverage in Hazeltree include investor notices, capital calls/distributions, OTC collateral management, complex legal entity management and cascading payments, which applies robotic processing to moving cash flows through chained legal entities to maintain the integrity of the tax structure (and other). These nuances can only be found in vertically focused solutions, as the horizontal TMS market is simply incapable of being “everything for everyone.” By necessity, horizontal TMS vendors are required to point their investment and focus on developing features and functionality that are the least common denominator for the maximum number of clients.

Industry-specific best practices and service expertise – Given the number of integration points, company departments (Treasury/IT/Accounting/etc.), counterparties, etc. involved in any TMS implementation, horizontal TMS solutions must keep their implementation approach industry-agnostic. Even within this approach, however, it is rare to find any TMS implementation project that is accomplished on time, on budget, and delivering the initially expected ROI. It is also difficult to receive niche expertise and support for the nuances of a specific industry, much less the significantly more complex operations of a private equity firm. Only by working with a vendor that focuses specifically on these nuances can you expect to achieve the automation, support and ROI you deserve.

While certainly not all-inclusive, these are but three examples of why in today’s world of treasury automation, it is imperative that private equity firms align themselves with a partner that not only understands basic treasury automation, but embraces and focuses on their unique functional/cultural needs as well.