The Private Capital Talent Series Episode 9: Cross-functional efficiencies and streamlining the investment closing process for deal teams

Mark Feirman of Cross Rapids Capital answers questions on cross-functional efficiencies, specifically streamlining the investment closing process for deal teams, LP onboarding and client communications, as well as data and performance analysis for the firm and portfolio companies. How does that work at large firms, and what is the right process for growth firms?

Chris Gale  00:03

Welcome to the private capital talent series. We have Mark Feirman from Cross Rapids Capital. We have Ryan from PFA Solutions. I’m Chris Gale. At the bottom of your screen, you should see a Q&A button you can hit to ask questions. We’ll answer those at the end. If you have something particularly salient, we can jump on it as we’re chatting. I’d like to kick it off by inviting Mark to introduce himself.

Mark Feirman  00:36

Thanks, Chris. My name is Mark Feirman. I am CFO and partner at Cross Rapids Capital. Cross Rapids is a new, mid-market private equity fund focused on industrials and related services. Prior to joining Cross Rapids, I spent 13 years at KKR. I joined KKR initially to help out with the IPO. Following the IPO, I ran the management company’s financials for nine years. After nine years, KKR evolved a lot. We were reassessing the processes and controls, and we ended up launching a middle-office operations team focused on the private equity business, really focused on processes and efficiencies in closing private equity transactions as well as portfolio company reporting and investor services. So that’s a little background about myself, and where I’ve been the past 15 years or so.

Chris Gale  01:48

If I oversimplify, you’ve been on the growth and the innovative side of things Is there some comparing and contrasting you can do in terms of what’s different on both ends of that spectrum?

Mark Feirman  02:00

I joined KKR around when they went public. I think it was 2008-ish. They were really a private equity firm. They were in the US, Europe and just kicking off their Asia franchise. Then, over the next few years, it really just exploded in growth, went into every asset class you can think of plus more, which increased complexities. At that time, there was a lot of scrutiny from our stakeholders – not just the public shareholders. The SEC, who started doing sweep exams of private equity firms, as well as our LPs, started asking a lot more questions about transparency and reporting. In my position, I got to see a lot of the interconnectivity between the different operational groups. It wasn’t just focused on finance. I got a good understanding of how finance affects compliance, affects IT, and so forth across the firm. That’s what really enticed me to go more on an entrepreneurial move in my career and join Cross Rapids. I was now able to use all the knowledge that I gained at KKR, a very complex organization, and apply that to a smaller firm that was just getting started and kicked off. I’ve been able to build what I saw could be best-in-class processes from the ground up.

Chris Gale  03:43

You mentioned IT and compliance. What about, especially at Cross Rapids, the fundraising and the deal-sourcing side? Because from what I’ve heard, it’s a tough environment right now. You need to innovate and come up with new approaches to things. If you’re on the opposite side, you’re in the position where you’re forced to say, ‘No, please don’t do that.’

Mark Feirman  04:14

You know, one thing I was very conscious about was to get a seat at the table very early on and have constant meetings and talks with the managing partner and the other deal professionals to really give me an idea of what was in their heads. Where did they envision capital to have come from? Where were they going to? What kind of deals are we going to do? Was it we’re going to be strictly PE?

I made sure to get as much information out of their heads as possible for me to then understand, ‘Okay, what do I need to be successful at to build this firm?” I know I was brought in as a CFO. You’ve got the blocking and tackling of getting financials out the door. But I want to build processes that are scalable. Being at a startup and being very cash conscious, you don’t have the money necessary to bring on a big staff. So asking a lot of questions and bringing in experts in the field where necessary became very important. When I thought about the fundraising and that part of the business, trying to align my third-party service providers in all areas, especially in compliance and operations, I would say the middle-office operations would make sure I was going be able to support the compliance side depending on our path forward to registering with the SEC on the business side. For example, are we going to be doing any trading of public securities and can my fund admin support that?

So it’s not just private equity that’s going to be in the picture but other products that are going to be out there. I was very conscious of speaking to a lot of people and interviewing a lot of fund admins, to understand what their competencies were, and to make sure I had the right partner, not just today, but for three, five, or 10 years down the road. We had business plans and an understanding of the direction that we thought Cross Rapids was going to go. We probably pivoted 10 times from there, being able to adjust as we went along.

We thought, “Are we just going to raise a fund on day one or do we want to bring in a seed partner? Do we want and do we think we can go raise the money ourselves?” The path that we ended up on was operating as a fundless sponsor, building our own track record, and proving that we have great people here that can put capital to work very successfully and provide great returns for our investors. I had my hands in every little pocket and, at the same time, I was trying to educate the deal professionals who historically have done a lot of investing and doing great investing. But bridging that back office and middle office operational gap is important to making sure that we keep the train on the tracks, and that we have the resources we need to support the business that they want to be getting into.

Chris Gale  07:55

So it sounds like the front of the process is focused on communications. Are you setting the table in a particular way to make sure that you’re getting the information you most need? How do you do that? Do you have a special way of doing that?

Mark Feirman  08:24

I had standing meetings with the managing partner every week, giving them updates on the types of people I’m talking to and why I’m talking to them. I also brought him into some of the meetings, especially with fund admins. I explained to him that there’s a broad range of fund admins. You’ve got small guys who are very customer focused, really trying to grow their business, and can hold your hand and provide good service. But maybe they’re not going to be able to support complex settlements of debt trading. Then we have to the big guys, where we might be a small fish in a big sea. I was also showing examples of the work product that we received from different fund admins and explained the costs associated with the big guys versus the small guys. I’m giving him an edge, giving the whole team an education of what you get at the different levels. I spent months interviewing fund admins before we finally made a selection. I asked a lot of questions and talked to a lot of customers of the different fund admins. I got comfortable with a provider that would be able to support me in the long run.

Chris Gale  09:56

On the fundraising of the deal side, how do you set the table?

Mark Feirman  10:08

Timing of everything. The amount of time it takes to get everything set up to close a deal is sometimes very eye-opening to an investment professional. They’re very focused on building their models and figuring out what the returns are and structuring that transaction. But do they know, they might need a month to open up a bank account? You know, we’ve got to create entities and register with the state that we’re opening it in. All this takes a lot of time. A lot of different people’s hands are in the pot. The coordination between the lawyers and the accountants and everybody else who’s involved in every little piece is eye-opening to them. I am trying to make sure I have the time that I need to get a call out in time to have the information I need to close the transaction. I think it’s very eye-opening when you get these investment professionals who are from bigger firms and have had a huge support system in the back. There it’s almost blind to them. Now, suddenly, they’re taking the front seat because they’re in this entrepreneurial endeavor where they have to do everything from soup to nuts.

Chris Gale  11:38

How about reducing the time to close a fund? I think that’s something that you worked on in KKR. Can you talk about how those conversations resulted in faster close times and why that’s important?

Mark Feirman  12:02

Currently, the funds that we are opening are really like single investment SPVs, which causes complexity and a lot of stress on the deal-closing process because not only are you negotiating a deal with the company that you’re buying, but you’re also negotiating with LPs coming in and structuring not just the transaction but also the fund. What’s the carry waterfall like? What expenses are we going to be incurring and so forth? You’re trying to make sure your LPs get the information that they need. Very early on in the process, when it looks like we’re going to win the deal, we start that structuring process. We start talking to the LPs about what they expect. LPs have a loud voice here because they’re providing that equity. We have to provide the reporting that they need because then they have to provide reporting. It’s a big downstream effect.

Chris Gale  13:05

I’ve seen Brian’s mouth open a few times. How much are you thinking about it or working on it in a spreadsheet? How much of that do you want to see migrating over to what I would call software. Spreadsheets feel warm and comfortable. You’ve spent a few decades of your career working out macros and such. But it also seems like there are a lot of problems that can occur with the complexity that you’re describing.

Mark Feirman  13:55

Spreadsheets help create what you’re looking to do. You can prove out what you’re trying to do. But staying on those spreadsheets long-term is hard. What I noticed, especially at KKR, was that they start falling apart when there’s an exception here or there. And there’s going to be an exception here and there, and another one here, and another one there. Suddenly, the controls around that spreadsheet start to get very questionable. We need a system to handle this, that’s scalable, that can work with us as things change. As complexities come in, that’s when those spreadsheets start to fall apart. So they seem comfortable and easy to work with from day one. But I’m very conscious to get everything into more of a database structure where I can run reports and have controls that I can rely on. Because I know three years down the road. I’m going to want to know what went on three years ago and be able to push a button and run a report and get the information without worrying about anything. Was it the final version of the spreadsheet? Or was there one, you know, that someone emailed that I didn’t save?

Chris Gale  15:10

Ryan, you’ve gone from a large organization to a growth organization. What Mark just described is something I wanted to hear from you about. You’ve got one exception, and then another and another one, and then the performance of the Excel sheet starts declining. You start having issues. Does software, Ryan, potentially allow someone in Marc’s position to facilitate the deal or the fundraising team?

Ryan Burger  15:48

Absolutely. I acknowledge your point about going from a big company to a small company. I appreciate Mark’s experience going from KKR to Cross Rapids, which is a startup. I was at a Big Four firm when I went to start a technology company. There’s a world of difference. There are a lot of resources at the big, big companies. You can find people that know everything – subject matter experts on tax, on compliance, on accounting. At a small company, you are limited to the resources at your farm, and then your network. So I think it’s been interesting seeing Mark go from KKR to Cross Rapids and myself going from Ernst and Young to PFA. I think we’ve shared some of the same experiences. Also, in small companies, there’s the removal of some of the red tape that you have at the big, big companies to get things done quickly. So there are a lot of benefits to working at a small company.

In terms of the question on the software versus spreadsheets, we’re seeing the same thing. We’re seeing clients use Excel spreadsheets for analytics. We use it. I probably have seven spreadsheets open right now on my computer. We use it to load client data. Every page within our software application can be exported to Excel. So we allow that flexibility to use the tool for analytics. But where we see it breaking down is overtime, when you have those exceptions. We have clients that have 30 or 40 different tabs to create employee statements where all these formulas are connected to a single tab. If you make a mistake there, or if somebody rolls a formula incorrectly, then you have a mistake in all these different statements. We’ve seen clients distribute the incorrect amount of funds on the GP carry side because there was some mistake and a spreadsheet or vesting schedule wasn’t updated from a legal doc to the spreadsheet. It’s a great tool. We love Excel. But a lot of firms outgrow it, especially once they had their two or three funds. They start to have employees coming and going on the carrier side where you just can’t manage an Excel sheet long-term. We do demos of our software product. The first thing people say is, ‘We have seven Excel spreadsheets. Four of them were done by a person that’s no longer here. We need to get this into a controlled state in a platform and then be able to use indicators for those exceptions.’ There are the nuances that Mark was mentioning. Then they need to get the reporting out. It’s not always like pressing a button, either. Getting software implemented is not always an easy task. But, from a long-term perspective, it is a more controlled framework.

Mark Feirman  18:45

To add a good example, I called Ryan probably a few weeks after I started at the firm and I was talking about carry programs. We didn’t have a fund. We didn’t have an investment. We didn’t have people. We were three people sitting in a WeWork office and there I was talking about software solutions to allocate carry to something that doesn’t exist.

Ryan Burger  19:15

It’s interesting seeing Mark jump right into that position and say, ‘Okay, we want to think about software from the start and understand what the capabilities are because, down the road, we don’t want to have this hairy Excel spreadsheet or seven Excel spreadsheets or spend the time building the models in Excel when we could potentially use some sort of platform or service provider out there if it already exists.’ He’s come in with that fresh set of eyes, a blank slate. He can we do things better from the start versus having to repair mistakes made down the road, rehash everything, and get it all into a platform?

Chris Gale  20:00

How does that connect to having a faster close? Or how does that link back to the conversations you had with the leaders of the firm or on the fundraising side to set the table?

Mark Feirman  20:15

Employee compensation is obviously very important in our business. Trying to align compensation with people’s efforts is a top priority of our leadership. But trying to match that with a hairy program that isn’t overly complex, that’s going to cause crazy tax issues and a lot of operational pain when people come and people go is hard. We were trying to figure out how could we create a scalable program that’s still going to compensate people for the effort that they’re putting in. Everybody’s natural tendency is to say, ‘I want to pay them based on exactly what they do,’ or what investments they make, or so forth. And everybody knows reallocating carry causes tax issues because there’s paying. So, like I said, speaking to them early on and explaining, ‘I get what’s in your head and how you want to handle this. But here’s the issue operationally, and from a tax perspective. So let’s think about another way we can skin that cat.’ And then I need to get it out of Excel and into a system that can help me track that much better.

Chris Gale  21:43

The conversation early on sets the stage for what the requirements are. In addition to that, it allows you to have these conversations with fund administrators and to see the work product and see if they understand what you’re doing. You’re also implementing technology that allows you to be nimble.

Mark Feirman  22:02

You’re learning a lot about what’s on the market, too. The market seems to change all the time. People have new ideas, a new tax code comes out, everything. I talked to a lot of fund admins. I spoke to a lot of compliance providers. But I looked at compensation as a big part of that and reached out to Ryan to understand what he’s seeing in the marketplace.

Chris Gale  22:25

You were a participant in a PFA Solutions roundtable back in January. You and other participants in that roundtable were asked about the biggest challenges in 2023 with regard to carry and compensation. I don’t know how you answered, but most of your peers in that room answered, ‘complexity of allocation and sets of plans.’ Are there particular dimensions of that you would point to? I know it’s hard to see across the whole industry, but is there anything that you would point to that is pushing either the perception or the genuine complexity that we’re seeing out there?

Ryan Burger  23:21

Absolutely. We’re seeing a lot of creativity, especially on the VC side, and fund of funds. Some have nuances. A lot more firms are having high-watermark or catch-up provisions for new joiners. That adds complexity to the accounting operations staff. When we look at our clients right now, it’s pretty much split between firms that grant carry at the fund level versus deal-by-deal or investment-tranche level. I think we’re seeing more on the deal by level. I don’t know if that’s great news for Mark as he structures his carry program and what the investment professionals are looking to do. I mean, we even have one client that was doing the deal-by-deal carry allocations and then decided to change things to increase certain individuals’ allocations on deals that they were involved in, and then decrease their allocations on things that they weren’t as involved in. So they already had a model where people were aligned with the investments that they were making. They were employees that were made during their employment. Then the firm further adjusted things and the client said, ‘If we didn’t have a system to manage this, it would be impossible in Excel because all the vesting schedules changed when they made this enhancement. So we are seeing a lot of nuances.

On the co-investment side, we’re seeing a lot of firms having management fee waiver programs as well as loan programs. Some are across the entire enterprise. Some of them are fund specific. There’s cross-collateralization. So when they’re drawn, when they’re generating a cap call, it’s not just, ‘Send me the money.’ It could be netting a distribution. It could be bringing in the loan program, or the waiver. So all of these things are causing strain on the ops side. All of our clients have lean teams. There are only a few people that are trusted with this information. We’re certainly seeing activity on our side and firms wanting to do something better and use systems and service providers to help them out.

Chris Gale  25:42

Perfect. I’ve got a few questions from participants. Number one is, there’s been a lot going on with banks right now. How are you handling that?

Mark Feirman  25:54

That’s been fun. Actually, Cross Rapids is a little lucky to be a fundless sponsor. We don’t have a lot of credit lines out there. What we do have is a lot of questions coming from our LPs that are really on top of this and making sure that their money is safe – not just at the fund level, but really drilling down to the portfolio company, and who is the portfolio company’s bank? What are they doing? Are they using overnight sweeps into money markets to reduce exposure? Obviously yesterday UBS, and the Signature Bank situation, First Republic Bank going over to chase solidified up that banking relationship. But it’s questioning these single-bank relationships and do GPs have to diversify a little more, maybe go to one of the big banks as well as having a regional banking relationship. I don’t think there’s one bank that has a silver bullet that’s going to provide everything that the GP needs, from a good online banking platform to credit lines and everything for the fund and the GP. So they might be diversifying and building those relationships. Unfortunately, over the last few weeks, these banks have been just swamped with calls and requests. So everything is definitely moving a little slower than maybe in a regular environment. But I think people are waking up a little and trying to build broader banking relationships.

Chris Gale  27:39

Mark, are there particular resources out there that have helped you as a CFO?

Mark Feirman  27:46

My network has always been a great asset of mine. I recommend regularly meeting a lot of different people with different backgrounds. I joined a lot of private equity CFO groups, though it could be different CFO industry groups. Some of the banks that I’m with are heavy into the PE industry and have email chains that go around with people’s questions. Then it’s also my extended network of ex-co-workers and speaking to fund admins and their customers, introducing myself, and starting a dialogue with other CFOs of mid-market firms. I try to get out there and meet a lot of people and talk to them. You never know when their services are going to be needed. I’ll have a question, and I’ll remember that person who was in a similar predicament, and pick up the phone, and speak to them.

Chris Gale  28:50

My last question is, will PFA Solutions have another roundtable this year? How can we get an invitation?

Ryan Burger  29:03

We will be looking to do one on the West Coast. Feel free to reach out if you’re interested in doing that. I’m happy to share the results of the survey that we did at the last roundtable if you weren’t there. We had about four or five polling questions that gleaned a lot of the information that we’re talking about now – challenges, what folks are focused on over the next 12 months, and what our clients and potential clients want to see in the FirmView platform. I’m happy to share that information.

Chris Gale  29:35

Mark, Ryan, everybody, thank you so much. Look out for the next webcast. Have a good day. Thanks, everyone.

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