What Does ‘Cash Optimization’ Mean for a PE Manager?

PE fund managers’ cash management objectives are, generally, to call capital on a ‘just in time’ (JIT) basis as needed for new and follow-on investments, fund expenses and management fees, and to disburse capital distributions back to investors as timely as possible.  Easy enough, right?  The devil is in the details and complexity exists across many dimensions: multiple DDA banking relationships, multiple legal entities supporting a fund structure, LP banking details, special LP communication requirements, imprecise forward cash projections, multiple credit facilities, and so on.

Cash Optimization is a loaded term and for a PE manager implies:

  1. Operational Efficiency – Cash management is broader than just effecting a cash move between GP and LP bank accounts.  Many fund managers continue to use multiple banking portals and email, loosely knitted together with spreadsheets.  Countless hours are spent daily chasing and manipulating data and shepherding payments through the approval workflow rather than managing and decisioning cash at a more strategic level. 
  2. Financial Efficiency – As mentioned above, financial efficiency implies JIT cash availability and moving harvested cash back to LPs quickly.  Foundational to JIT cash management is a solid cash projection.  First and foremost, no fund manager wants to be caught short on liquidity when a deal is imminent.  Many fund managers desire to maximize the use of leverage available through subscription line (and other) financing, prior to calling capital.  While short-term, US government investment rates are near zero, fund managers are keen to put every idle dollar to work.  Traditionally, there have been structural challenges to on-boarding the sheer number of legal entities as well as the operational drag of money fund purchases and redemptions. 
  3. Risk Mitigation – Internal controls are central to every fund manager’s cash operation.  Creating a strong, consistent set of controls is challenged when using multiple bank portals which, obviously, were never designed to offer any level of consistency in the user controls experience.  Internal control issues with email and spreadsheet-based process management are many, well-understood and extensively studied and documented. 

Investors are increasingly looking for GPs to meet the challenge of all three legs of the Cash Optimization opportunity.  Some of the largest managers have built internal technology to meet most, if not all, of the requirements.  Other managers are scaled up headcount to meet the increased investor expectations as well as handle growth in launching new funds.  Many fund managers are turning to commercially available software providers where the cost/benefit analysis supports such a decision.