Using technology to support portfolio monitoring

An investment in a business is typically preceded by a thorough assessment of the target business in the form of a detailed financial due diligence (FDD) exercise. Once the deal is completed the investment team or in some cases a dedicated portfolio team would be responsible for monitoring the ongoing financial performance of the acquired business.

The value of financial due diligence surely arises from its depth, rigour and completeness or as some would put it “leaving no stone unturned”. The highly ‘methodical’ approach taken by FDD helps maximise the likelihood of spotting issues and adverse trends. It is widely recognised that a methodical and structured approach applied by a subject matter expert is more effective at identifying issues than an ad-hoc process. After all, how many of us would happily board a flight where the pilots failed to run through their pre-flight checklists or to go into surgery if the medical team overlooked its surgical safety checks?

Many industries understand and apply this principle, including space exploration, engineering and medicine. Yet as professional investors and lenders we often choose to monitor business portfolios on a 'selective basis', using knowledge and experience to guide our monitoring activity. In the past anything more rigorous would have required a small army of analysts collating, shaping and analysing data across an investment portfolio. A 'selective' monitoring process was therefore completely justified as in any case investors and lenders should not be spending valuable time blindly searching for a needle in a haystack. However, the irony is that sometimes the needle in the haystack is something worth spending time to find, particularly where it could save £000s, avert a crisis, help reverse an adverse trend or reveal an opportunity to improve performance.

Recent advances in data connectivity and business intelligence technology mean that time and cost are no longer barriers to the deployment of a structured analytics process that will search for those needles. Automated tools can review and report on numerous financial signals, consistently and accurately on a regular basis. These tools use algorithms to analyse a wide range of financial performance metrics and their speed and accuracy equates to a significant time saving for portfolio managers. Portfolio managers can also minimise the time spent on low-value number-crunching, and allocate more time to supporting portfolio companies and dealing with high priority issues. As one very experienced investor pointed out, “if you could have such a system in place then why would you choose not to have it?”.

As the UK moves into a more uncertain yet exciting future, embracing portfolio monitoring innovation may be one way to ensure we remain sharp and competitive come what may.