The treasury function is evolving quickly as private capital looks to optimize cash deployments while mitigating counterparty risk.
The days of passive treasury management are over. Private capital funds are increasingly aware of the role of proactive cash and liquidity management in maximizing returns and creating significant incremental revenue.
Optimizing treasury operations can provide funds with the liquidity they need to make the next deal, especially at a time when exit activity is subdued, and investment capital is locked in for prolonged periods.
And active treasury management is on the agenda for another reason. The unforeseen collapses of key fund finance institutions such as Silicon Valley Bank and Signature Bank, have brought the evaluation and management of counterparty risk front and center.
For these reasons, the teams that track cashflows and calculate liquidity have taken on new importance. Their role in driving funds forward has never been more apparent.
What are the basics of effective treasury management?
Treasury management has always been about knowing what cash is coming in, what cash is going out, and aligning the two.
But as private markets have become more complex, so have their treasury operations. Quite simply, the function has a major role to play in allowing funds to make fast and effective investment decisions.
Effective treasury departments track how much cash funds have now and forecast how much they might have in five, 10 or 30 days’ time. They keep an accurate record of where the cash is stored, how easy it is to access, and what other forms of finance might be readily accessible.
Once that information is known, an active treasury management team can answer other questions: most obviously, if the fund is sitting on surplus cash, how best can it be put to work?
Funds are unlikely to hold on to excess cash for long. If investors have provided funds for a deal that won’t be completed for 30 or 60 days, there’s an opportunity to invest it in short-term money market funds to generate interest. An active treasury management team will know exactly where to put the money for the best returns in the allocated time.
Filling the financing gap
But what if cashflow forecasts show a shortage rather than a surplus? Perhaps there’s a deal to be done but getting the cash in from investors via a capital call will take too long and put the transaction at risk.
Again, this is where an active treasury management team steps up. It may already have a line of credit. It will certainly know where it can find the best terms on a short-term loan.
In the past, that might well have been from a bank, but banks have recently become more cautious, lending smaller amounts to fewer firms. Treasury teams, therefore, also need to be well informed about alternative sources of capital and financing tools, such as net asset value (NAV) financing.
These teams will know which private capital direct lenders serve their segments of the market and the terms and conditions associated with any potential loans.
Non-bank lending is now common in private markets, and funds will model its use to balance risk and return. It’s up to treasury departments to scan the market continually for new financing options at potentially better rates.
Facilitating active treasury management
The transition from passive to active treasury management creates complexity. A modern private market treasury function plays a significant role in facilitating agile deal-making and generating incremental returns, while also investigating the strength of potential counterparties. These responsibilities demand a new speed of thought and action.
Technology is the key to this. Specialized technology platforms can automate the aggregation and presentation of data from many diverse sources, creating the cash board—the foundation of a fund’s day-to-day financial forecasting—in a fraction of the time it would otherwise take.
Modern software can also perform trend analysis and modeling and free up human time for higher-value tasks. When technology is supplied by a specialist outsourcing partner, funds can also tap into scalable assistance with cash and liquidity management.
That could be a cost-effective move. Asset managers of any size can benefit from active treasury management solutions and the ability to optimize cash deployment while mitigating risk.
Why CSC?
- CSC offers a global solution for fund strategies, subsidiary governance, and capital markets transactions, with tools to help fund managers navigate the ever-changing compliance and regulatory environment they face.
- For more detail on fund finance liquidity solutions, watch our webinar.
About CSC
CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.
This document is provided by CSC for information purposes only and does not constitute an offer, invitation, or inducement to contract. The information herein does not constitute legal, tax, regulatory, accounting, or other professional advice and therefore, one should seek appropriate professional advice before considering a transaction as described in this document. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document.