June 2, 2020
Last year, PWC’s Working Capital Report 2019/20 analysed the largest global listed companies of the past five years to assess trends in the approach to working capital management. According to PWC, there is €1.2tr excess working capital tied up on balance sheets, and they concluded that improved working capital management is one of the most effective ways in which value can be created.
Evaluation challenges at the pre-funding stage
However, as anyone who has been involved in the evaluation and structuring phase of a working capital programme will attest, one of the most frustrating components of this early stage can be the amount of time it can take to get the programme over the line. In the modern-day world of compliance, and with the ever-present risks of portfolio non-performance and potential fraud, every effort needs be made to understand the underlying assets so that all parties to these transactions are protected.
With receivables-backed programmes, it is vital to gain a full understanding of sellers and their accounts processes, to see how they manage collections performance and elements such as aged debt and dilutions. It is also critical to be able to understand their clients, analysing patterns of trade and behaviour and seeing clearly the concentrations and risk within the portfolio.
Even today, in our technology-rich world, we see so much of this being done manually. Funders take files of data and reports, with headline statistics compiled by the seller themselves, to be validated and scrutinised by analysts using models in Excel. This data is then verified and audited, and the outputs used to provide the initial pricing for these programmes. All of this takes a huge amount of time, and it can be several months before anyone can move on to structuring the programme and putting the documents in place.
It’s not just a matter of the inertia caused by these delays. Relying on reports created by the seller and a single cut of receivables data can lead to broad-brush structures with additional layers of protection built in. Often the reserves may be higher than actually required, with lower-than-optimal advance rates added for protection. This though compounds the problem and may make your offer uncompetitive.
With greater demand in the sector, more and more organisations are deploying technology to help them during the pre-funding stage. Those using advanced analytics for the process are able to dramatically reduce the time spent on some of these critical elements, as well as gaining insights that are nearly impossible using traditional methods.
An attractive asset class
Aronova have been helping banks, asset managers, private equity companies and insurers to analyse portfolios since 2003. Almost every programme we see has several potential suitors as receivables, as an asset class, are becoming more and more desirable. Receivables are large programmes with nicely diversified risk, and long-term investments with a good, stable return, and not only are we seeing a lot of activity from the traditional banks but a growing appetite from the capital markets and investment funds.
At this early stage there is the greatest risk of losing the opportunity to a competitor, but the ability to automate the process and use advanced analytics can reduce this.
How the technology works
A single upload of current and past data – the kind of standard data recorded in any accounts system – can be a real game-changer in these scenarios, providing instant, comprehensive analysis of the portfolio:
- Smart-matching to DUNS validates every obligor and flags those of concern
- Enriching the data shows concentrations of obligor, group, sector and geography
- Analysis shows performance over time and key areas of risk
- Proprietary behavioural analysis algorithms spot trends in behaviour and identify potential fraud
- Clear visibility supports simple go/no-go decision making
This all not only dramatically reduces the time needed to analyse the portfolio but enables organisations to provide tailored, competitive programmes which fulfil the borrower’s specific requirements. In addition, it effectively protects all counterparties to the transaction, significantly improving the likelihood of being selected to fund the programme.
By improving the accuracy of analysis at the pre-funding stage of a working capital programme, all parties involved in the transaction can evaluate, simplify and unlock the benefits more quickly. Digital technology is now more accessible and flexible to use, and should be a standard tool for accelerating working capital improvement.
Tags: Fraud | Working Capital | Banks | Asset Management | Insurers | Private Equity
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