5 minutes with… Charlie Jolly, RSM
The Drawdown (TDD): What does RSM do and in what ways does it service private equity?
Charlie Jolly (CJ): RSM provides private equity firms with accounting, audit, tax, consulting and corporate finance services. We provide a holistic offering across three areas: fund services, transaction services and portfolio services.
Our fund services business works with the finance function of PE funds. We audit funds, help with valuations, do tax structuring, modelling work and fund administration. On the transactions side, we do lead advisory work as well as financial, tax, IT and other forms of due diligence for PE firms. We often buy and sell companies for PE firms, as well as for entrepreneurs and shareholders wanting a PE buyer. This means regular negotiations with or alongside PE investment teams on terms, structures and pricing. Our portfolio services include audit and tax as well as corporate finance and consulting work. This includes tech consulting as we do ERP implementations, which might include analytics work for companies.
Splitting these into three different areas helps us to organise what we do and ensures we’re working consistently across the fund and its portfolio. We structured it this way to make the CFO’s life easier. Since they’re purchasing different services in different areas, a holistic view makes us more user friendly and means we can offer more tailored advice.
TDD: What do you do around fund restructuring?
CJ: Lots of the work we do with the finance function of a PE fund is around ensuring everything is done correctly, fairly and as simply as possible.
As there’s so much money in the secondary market, fund restructurings have become quite normal. Either because the fund is nearing the end of its life and some assets need to be moved on, or because of issues related to Brexit, or similar.
We have a dedicated team who look at fund structures themselves, with a particular focus on the tax element for individuals, the LPs and the GP. First, we ensure the administration is all in line so it can go through an orderly process. We also check a process is fair and considers elements such as the GP resetting carry hurdles and the valuations which underpin that. The key to fund valuations is ensuring the GP has gone through a rigorous process and that process is logical, based on how they valued the business when they bought it and how the trading and market has developed. A fair valuation isn’t necessarily what the business ends up being sold for though. That can often be very different.
Once these tasks have been completed, restructurings are much easier to do.
TDD: PE firms are increasingly looking towards fund restructuring as a way to offer LPs liquidity - has this trend accelerated over the past 12 months?
CJ: I couldn’t say for sure if they’ve accelerated because of Covid but we have seen more of them. I would say, however, Brexit has probably been more of a factor than Covid.
Brexit has made UK-based GPs slightly higher risk for European investors. For example, the EIF is not making new commitments to UK based funds anymore. Although most European investors can and will continue to invest in UK-based funds, I think there will be those marginal cases where an LP compares a European fund to a UK fund and might opt for the former, due to the additional risk around Brexit.
TDD: What are the latest innovations you’re seeing when it comes to fund restructuring?
CJ: I think there’s more flexibility from the incoming investor and there is a greater availability of capital. Fund restructurings 15 or 20 years ago were something a GP did when it had to because it was effectively distressed.
The secondary market has now grown enormously and is a very attractive market. We increasingly see fund restructurings, or rather GP-led secondaries as they’re often called, where the assets are at a premium to their valuations. This is because the market has more capital, it’s more familiar with this process and LPs now use the secondary market as a way to manage their portfolios, rather than just a last attempt to get capital back from a distressed situation. It’s far more liquid.
TDD: Valuations are so important to restructurings. What are your thoughts on this right now?
CJ: Our transactions side of the business is seeing very high valuations for good businesses across the market.
In terms of valuations of a PE fund, the key is having the data, processes and systems to support the thinking.
For GPs valuing their unsold portfolio, those valuations get a lot of scrutiny. However, there is less challenge from investors when the GP provides commentary supplemented by a process which has involved multiple parties - including the investment team, investment committee and valuations committee. This shows a strong, rigorous process has been consistently applied.
It’s our job to ensure we can see what’s happened and can confidently sign off that the firm has gone through a good process.
TDD: What are your key focuses over the next six to 12 months?
CJ: Helping our clients with data. A good idea will attract capital but only if the idea and the strategy can be soundly backed up with data. If the data supports it, the money is there and valuations will likely be high. However, if you can’t substantiate your idea, it won’t get funded.
Our focus is to understand what our clients are trying to do and ensure they’ve got all of the relevant supporting information to go through a funding process quickly and efficiently. It’s a very exciting time because there’s so much capital available, but no one is signing off on an investment unless they fully understand how the numbers work.
Many of our clients are mid and lower-mid market funds. They don’t have resources dedicated to ESG but LPs still need to know how they’re improving their companies. We’re currently developing a software product which enables firms to measure ESG KPIs, such as gender balance, at a portfolio level in real time, so that’s another exciting project.