Many institutional investors, including private equity, funds, REITs and other investment companies, were long known for less transparency while offering better returns in exchange for higher risk. Meanwhile, today's environment, characterized by higher competition and lower margins, makes transparency more important as investors demonstrate a higher interest in gaining better visibility on invested assets.
On the other side of the spectrum, regulators impose more demanding transparency standards on financial markets to protect investors and prevent money laundering. Such standards raise the bar for KYC and due diligence and create additional pressure on M&A teams. Below we go into more detail on how corporate visibility affects KYC, due diligence and M&A and what changes are needed for asset management firms to stay current.
The Importance of Corporate Visibility
Most investment firms manage highly-diversified portfolios across various jurisdictions with multiple entities and complex ownership structures. When these firms engage in investing or transactions, they need to communicate their corporate identity to partners, investors and other stakeholders. Their teams need to document and find correct relationships between their entities, track all data on their investors and investments and share the required information with their counterparties.
Challenges for the KYC Checks
Most investment companies are institutional investors and thus are often viewed as lower-risk parties. Many of them are well-known and trusted organizations. Still, all investment firms have to go through the KYC/AML processes before they are accepted as investors.
In many situations, such checks can be complicated due to diversified ownership structures and individual risk factors, for example, having funds based in higher-risk third countries, trust arrangements and other circumstances. When the relationship between the entities is poorly documented and entity data are disorganized, the identification of AML risks is complicated, which leads to increased costs, delays, inefficiencies and potential non-compliance.
Transparency for Due Diligence and Mergers and Acquisitions
Even though deal-making cooled down at the end of 2022 due to existing macroeconomic issues and a potential recessionary environment, the asset management industry continues to view mergers as the key to survival in the market characterized by higher costs and competitive pressures. Under these circumstances, investment companies look into ways to improve their deal-readiness in an attempt to cut down costs and get a better offer.
A recent study by Deloitte has demonstrated the increasing importance of entity management on M&A deals, including the price, timing and associated costs. Many respondents noted that teams running due diligence and those who extrapolate from the obtained data are often distracted when someone sells a business with poorly organized records.
In particular, a lack of corporate visibility can inflate the professional fees associated with due diligence while driving the deal price down. When an asset management firm does not have a system to manage all of its investments and investors, the deal will slow down or can even get canceled.
Changes Needed for Asset Management Firms to Stay Investment and Deal-Ready
Meanwhile, improved entity management and better corporate visibility would not only help to avoid negative consequences but also result in better opportunities for deal-making. Similarly, when investment firms run well-maintained portfolios or legal entities and track all their corporate records, they will have fewer issues and pose fewer risks from KYC/AML perspective.
Creating a Central Repository for Corporate Data
Any investment management company can only have full control of its portfolio when it has a central source of truth for all corporate records. Asset management firms need a central database which allows all stakeholders to access and grab information as needed while enabling controlled access across departments.
When asset managers leverage a modern entity management system, they can track all their data and push those data into documents and reports with just a few clicks. Instead of keeping corporate data in disconnected Excel spreadsheets, asset management firms need well-organized records, making counterparties more comfortable during due diligence and M&A stages, resulting in a better offer. It also helps to curb professional fees, which can otherwise skyrocket in the presence of deficiencies in entity management and compliance work.
Visualizing Relationships Between Entities
When asset management firms manage highly-diversified portfolios, their teams often struggle to document and find the correct relationships between their entities required for KYC, due diligence and M&A transactions. Meanwhile, investment firms need to have a clear visualization of their organizational structure to know what they are dealing with and to create more transparency for investors.
If the investment firms can have a full overview of their organizational structure at any moment, they can identify delinquent entities which can cause issues during due diligence. Meanwhile, when asset managers can automatically generate org charts down to the entity level, they can demonstrate the ownership connections between the entities and provide investors with comprehensive insight into their portfolio.
Automating Entity Management
When the investment portfolio includes multiple legal entities, manual processes lead to human error, inconsistencies and inefficiencies, making corporate records unmanageable as the structure grows. As a result, subpar entity management leads to gaps incorporate visibility, negatively impacting the organization's deal readiness.
Instead, investment firms need to automate their entity management to streamline their reporting and compliance. When investors and buyers see that an investment company has a strong compliance program and leverages best-of-breed technology, it conveys an understanding that management is on top of their company and adds value to the organization
Learn More About Improving Your Corporate Visibility with Athennian
Efficient entity management creates trust in business by helping investment firms be transaction-, audit- and compliance-ready. For more information about how entity management software can improve your corporate visibility for KYC, due diligence and M&A, please contact the Athennian team for a customized demo.