Private Equity – unlocking value in treasury and risk management

Post-acquisition by private equity (PE) most enterprises go through a review and streamlining process of their operating model.  PE will often appoint a management consultancy firm such as McKinnsey or Accenture to run this process.

An often overlooked area ripe for efficiency gains and margin protection/enhancement is contained within the treasury and risk management function.

The areas for potential improvement can be best summarised in the following key areas:

  1. Misaligned risk identification and hedging policies
  2. Communication of market risk between sales/procurement functions and treasury
  3. Liquidity, credit facility and cash management
  4. Hedge transaction costs
  5. Treasury outsourcing opportunities
  6. Treasury management systems and processes

It’s important to note that both the process to remedy these treasury inefficiencies and the subsequent bottom line impact can be achieved relatively rapidly without incurring large costs.

1. Misaligned risk identification and hedge policies
Often hedging policies are a list of prudent intentions and accounting standard compliance, as opposed to specifically targeted to the economic risks faced by the business. A good hedging policy should be prescriptive and aligned to the economic and cash flow cycle of the business. It should also serve to smooth the impact of external shocks on the business so that the achievement of longer term strategic objectives is not compromised.

2. Communication of market risk
Often significant market risk can be entered into by the procurement or sales functions without the knowledge of the treasury/finance function. An example of this would be a tendering process where a pricing commitment is made, these ‘pre-transactional’ exposures can potentially have a material impact on realised margins.

3. Liquidity, credit facility and cash management
Liquidity and cash management efficiencies can be gained quickly through improved cash flow reporting, interest rate product utilisation (swaps and deposit structures), netting and other avenues. Improved credit facility management can also unlock value by consolidation of facilities, and centralisation. This will often require an under-staffed or inexperienced treasury function to challenge the business status quo, a task that may not be readily undertaken without specialist external encouragement.

4. Hedge transaction costs
Transactional savings can be achieved through a number of different avenues:

  • Aggregation
  • Counterparty management
  • Netting/centralisation
  • Automation
  • Multibank execution platforms

5. Outsourcing
With the right process in place, front, middle and back office treasury functions can be outsourced. Often treasury falls under the remit of the finance function, which may not have the time, resources or experience to effectively manage treasury risks. Rochford provides outsourced solutions to clients with material exposure to treasury risks through access to a dedicated team of treasury professionals.

6. Treasury management systems and processes
Robust systems and processes can ensure that risk is identified, quantified and managed effectively whilst reducing key man risk and strains on human capital.

In Rochford’s experience a comprehensive review and improvement process of the treasury function can unlock anywhere between 1% and 5% of the notional sums under management. In a low margin business the gearing impact of such a project is hugely compelling.

Thomas Averill, ‘Managing Director’ at Rochford, the leading treasury advisory house in Australia advising on in excess of AU$20 billion in financial market risk. 

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