Combining an internal and external focus for improved private market investing

In this article, we’re going to show how you can blend an internal focus (cash flow projections) with an external focus (fund-level benchmarking) to optimise your investment decisions and arrive at more robust and fine-tuned portfolio constructions.

Success in private market investing often comes down to your ability to analyse and understand the wider market dynamics that are at play in your chosen asset class, and then to make smart risk-adjusted decisions aligned to that reality and to your own individual constraints. Achieving this requires a careful blend of micro-considerations and macro-considerations – both of which offer a perspective on what portfolio you should be building and how it’s going to perform over time.

In this article, we’re going to show how you can blend an internal focus (cash flow projections) with an external focus (fund-level benchmarking) to optimise your investment decisions and arrive at more robust and fine-tuned portfolio constructions.

Cashflow projections

The internal focus: cash flow projections

Projecting cash flow is a core competency for any investor because it acts as a roadmap for the journey ahead. Understanding the current projections in terms of real cash outcomes (and not merely paper returns) helps an investor assess the strengths of a potential investment and the downside risks that need to be managed. It’s the underlying mechanism on which all investment management is built which makes getting it right crucially important.

Of course, you’re never going to have perfect foresight, especially in the typically illiquid private market landscape, but a robust and sophisticated cash flow projection model helps to identify key gaps in your strategy and manage the expectations of your partners and other stakeholders. Built with a driver-based planning framework, you might be surprised at how accurate your forecasts can become as long as you’re thoughtful and considered when setting your forecasting assumptions.

It’s also a good idea to approach your cash-flow projections with scenario planning in mind. By adjusting drivers and running through different macroeconomic impacts, you can see how your portfolio would respond to anomalous outcomes (both good and bad). This helps to ensure that your risks are well managed both in terms of liquidity and long-term returns. The best investment managers are the ones who make the most of these tools to construct a portfolio that is robust to the rollercoasters that the markets can provide.

We’ve written a comprehensive guide to making this work for you here, so for more on cash flow projections, be sure to check it out.

The external focus: fund-level benchmarking

It’s also important to evaluate how your investments are performing compared to other relevant benchmarks to understand whether your strategy is working or not. These comparisons can be to other funds within your stable, to other investors altogether, or even to wider market indices that often serve as the baseline that any investment is looking to improve upon.

Comparing your performance against these external measures also is a key component of winning repeat business because you want to be able to show a strong track record to potential new investors. There is nowhere to hide in private market investing, the numbers don’t lie. That’s why having strong benchmarking capabilities within your technology stack helps to bring those insights to the forefront so that you can adjust your thinking and strategy accordingly.

Of course, your responses to this information should be aligned with the time scale of your investment – you don’t want to be overreacting to short-term movements – but keeping your finger on the pulse of where you are compared to benchmarks goes a long way to staying agile and within your stated risk mandate. It also helps to manage expectations when you can put your own investment performance into the wider context of the market, showing the full circumstances that are at play.

Combining the internal and external for a holistic perspective

Now that we’ve briefly explained how an internal and external focus can be helpful, it’s worth reiterating that the combination of these methodologies is where the magic truly is. When you can examine your portfolio from both angles and draw insights accordingly, you end up with a truly holistic view that can inform improved decision-making. You’ll have to choose how you weigh these considerations, and that will depend on your circumstances, but no matter where you place them on the spectrum, they should be a key input to how you’re running your organisation.

Putting this into action means leveraging your reporting technology to capture, analyse, and visualise the data in a meaningful way that carries its context and helps you to find the signal in the noise. Here at Apliqo, we’ve built LP Portfolio Management for this exact purpose. The software combines these different perspectives and builds a single source of truth that can be configured in a way that works for you. You can change assumptions on the fly, monitor performance against key benchmarks, and build nuanced cash flow forecasts that illustrate the ideal future of your portfolio and the individual funds themselves.

To get a glimpse into what is possible, we’ve prepared a short product demonstration that can show you just how powerful this can be. Be sure to check it out and if it looks like something that would add value to your operations, get in touch, and let’s see how we can help!

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