During recent years, lower interest rates during COVID have stimulated the buyout industry, leading to an increase in private capital investment. Investment analyses are typically conducted by private equity associates.
On a typical day, a PE associate may review confidential information memorandums (CIMs) and other company materials, generate new deal ideas, build financial models and analyses, and conduct market research. They provide essential support throughout the deal process, from initial evaluation to completion (Private Equity Associate: Careers, Salary, Jobs and Recruiting).
The role of a private equity associate does not necessarily need to be in-house. Those responsibilities can be filled through either direct hiring in the job market or by engaging an outsourced firm. At Sapling, we have observed that the demand for outsourced PE associates has been rising, for both independent sponsors who need the expertise as well as large institutional investors that would like to leverage the additional support on specific asks.
The Development of Financial Models
The development of financial model to validate the investment case is a key ask from a PE associate. Experience and speed are both of dire importance when building a model. Financial models are core tools to show the economics of deal. This generally include return calculations and a variety of stress testing scenarios. An ideal model needs to be cleanly built and optimally designed. A dynamic design will aid communication and understanding with investors. Such models must also reflect the insights that show the understanding of the business model and key levers.
A deal model should be able to adapt flexibly to the changing deal terms as well as new inputs from the seller. In addition to the entry assumptions, the exit assumptions are equally important as different GP terms might tilt LP returns either way. This might make a material difference on investment decisions. In live deal situations, an ever-changing transaction environment creates the need to build models quickly. While these models may not be the most complex given time constraints, they must be effective and allow results to be tested efficiently.
Exhibit 1: Financial Modelling is a core ask of the daily jobs of PE associates and is arguably the most crucial aspect of the financial analysis and pre-deal due diligence process.
The Additional Values Outsourced PE Associate in the Deal Team
1. FDD Experience meets Modelling Expertise
At Sapling, an outsourced PE Associate might also have Financial Due Diligence (FDD) or Quality of Earnings (QoE) experience, which can prove as vital skills towards the PE investment process. These types of backgrounds enable professionals to support the diligence process with enhanced rigor and efficiency in terms of deal evaluation. The skills that these experts have accumulated from analyzing financial statements help them to identify potential adjustments or spot key negotiation and deal risks.
Additionally, this unique experience helps to bridge the gap between QoE and deal modelling. These professionals are typically better equipped to analyze findings from the QoE analysis and are able to incorporate them into financial models. The closing of this gap tends to lead to more seamless modelling and better-supported investment decisions.
Outsourced PE Associates will leverage prior deal experience via benchmarking margins, growth rates, staffing levels and pricing, adding strategic and operational context to the investment analysis process. This perspective enables them to recognize key performance indicators (KPI) inconsistencies and point out any strategic or operational red flags throughout the diligence process. These skills also go hand in hand with being able to offer micro-industry insights that add nuance to the deal thesis.
Beyond diligence, outsourced PE Associates can aid in deal sourcing and the preparation of investment memorandums if required, which contributes value within the broader investment process.
2. Post Deal Support
Another area where value can be added would be post-deal support. Professionals assist in the evaluation and tracking of KPI,s along with monitoring ongoing business performance relative to the initial deal thesis. Enhancing and refining reporting packages for portfolio companies is a common function of outsourced PE associates as well. At Sapling, the outsourced PE associate has worked on multiple FP&A engagements, which can be utilized to improve the quality and consistency of financial reporting. The outsourced PE associate can offer continuous support once the deal is closed.
The outsourced PE associate can also be aware of the key considerations in the post-deal phase when they are preparing the pre-deal material. A common pitfall in the deal execution process is the failure to align between the deal and value creation teams at most PE funds. The involvement of an outsourced PE associate that doesn’t have skin in the game and also has experience with the post-deal process can help reduce the friction during transition. For example, the development of the deal model can be more considerate and built upon actionable and trackable KPIs. This can smooth out the transitional difficulties between the pre-deal team and the post-deal value creation team.
The Strategic Value of Outsourced Private Equity Associates
In summation, outsourced PE associates are effectively the crossroad between strong technical capabilities and deal judgement. This enables teams to move quickly and think clearly throughout the duration of the deal process.
Translating prior experience from QoE engagements and financial modelling directly into the investment processes adds immediate value. In addition, the involvement of an outsourced PE associate can facilitate the smoothness of the transition from pre-deal to post-deal. Such a breadth of expertise is particularly beneficial for general partners, especially small funds which may lack internal resources.
Exhibit 2: Outsourced PE associates blend financial modelling, financial due diligence and FP&A technical expertise to move transactions faster and support both pre- and post-deal execution.
