Due diligence is an essential, if unexciting, element of effective dealmaking.
As a resource for private equity and venture capital funds, Chris MacLaren’s goal at Winbridge is to offer administrative support, providing investors with meaningful data and sophisticated reporting, allowing fund administrators to focus on raising capital, managing investments and sourcing deals.
“I wanted to create a service firm that could support the robust local private equity community in Cleveland,” says MacLaren, director of fund administration and accounting. “Well-planned and well-executed deals are critical to our clients and so, in turn, they’re critical to our business.”
PE/VC investment volume set a new record in the recently closed third quarter of 2019, at $16.4 billion across 289 deals, according to a report in Business Today. So while rumors of a pending recession continue to spark concern, the pace of dealmaking activity remains strong.
In this Dealmaker Strategies feature, MacLaren talks about his role at Winbridge and his keys to minimizing mistakes when making investments.
Winbridge works with both buy-side and sell-side clients providing back office accounting, tax and investor reporting services. The firm also provides customized accounting, financial reporting, bill pay and tax services for management companies, operating companies and family offices.
“Typically with funds on the buy side, we’re brought in to provide insight into tax considerations, funding the deal and ultimately accounting for the deal,” MacLaren says. “We’ve seen funds that haven’t taken care in properly recording platform and follow-on investments. This can cause a significant loss of time and resources upon their exits to unwind the transaction to properly account for the tax consequences of the sale.”
Alternatively, when funds are looking to exit an investment, MacLaren works with fund managers to discuss exit strategy and the tax implications of a sale.
“Ultimately we’re also responsible for recording the sale and providing accurate and meaningful information to our funds’ investors,” MacLaren says.
MacLaren strives to ensure that decisions made today don’t lead to headaches tomorrow. PE/VC firms focused on finding the next big thing in a particular industry may not always think to analyze the benefits and potential pitfalls of related tax provisions or things such as qualified small business stock, qualified opportunity zones or other similar variables.
“It’s really thinking through tax considerations of their specific strategies and ensuring that if they have investors that are concerned about unrelated business taxable income and effectively connected income, that we’re structuring the deal accordingly,” he says. “So we’re typically brought in on the earlier side of the acquisition process to ensure that we have the structure in place to find a result that they’re looking for from a tax perspective.”
Does it make sense?
Dealmaking activity continues to lean toward sellers, providing an opportunity for high multiples.
“If you’re a buyer, it’s a matter of trying to figure out where to best utilize your dry powder to make wise investments,” MacLaren says. “On the flip side, if you’re a seller looking to exit some of your portfolio companies, we’ve seen great success with some of those high multiple sells.”
Buyer or seller, the key to minimizing your risk when engaged in dealmaking activity is to embrace the importance of effective due diligence.
“The companies with the most successful deals, it really does come down to making sure that not only the economics make sense, but do the people make sense,” MacLaren says. “Understand the processes and the controls that are in place and try to get a general understanding of what the culture is from the top down to understand if it fits into your portfolio. Is it something that you feel comfortable with investing your resources, your capital and your investors’ capital to help build that company in the future?”