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Virtual data rooms – a tool for private equity firms
throughout the fund lifecycle
| by dan r. bradbary
P
rivate equity executives and administrators must coordinate the
communication of confidential documents during all phases of fund
management. Historically this communication has been handled through
email, fax and overnight delivery. Virtual data rooms (VDRs), however,
provide a multi-functional tool in making the exchange of documents
quicker, simpler and more secure throughout the entire fund lifecycle, not
just the sell-side phase.
For example, in the fundraising phase, certain key information may
be shared via a VDR by investors receiving and responding to a private
placement memorandum. This is followed by the ability to issue buyside VDRs, with pre-loaded due diligence checklists, to companies
targeted for acquisition as funds add to their portfolios. Once investments
are made in these portfolio companies, investor reporting, especially
important in today’s regulatory environment, is a crucial function that
can be streamlined with VDRs.
Fundraising
With today’s challenging financial markets, fund managers are able to
employ VDR technology to more efficiently raise money for new funds.
Using this technology they are able to distribute confidential information
and electronically deliver Private Placement Memoranda (PPM) to their
potential investors. This approach provides significant administrative
cost savings relative to printing, numbering, shipping and tracking.
With electronic delivery of PPMs, administrators are able to email
accredited investors, providing them with a ‘general information’ username
and password, which will allow them to view the non-confidential
executive summary. If the investors are interested, they are then issued
a specific username and password which allows them to accept delivery
of their copy of the PPM. Audit reports that track the delivery of these
documents are then held on file to support any regulatory compliance
requirements.
Buy-side
Historically, fund evaluation teams have received collections of business
plans, photographs, documents, projections, agreements, presentations,
etc., in a hard copy format. It has been difficult and time consuming to
distribute this information to team members for evaluation.
Another innovative use of VDRs is to utilise them as buy-side due
diligence rooms. As fund managers look to add companies to their
portfolios, they are able to issue VDRs which have been pre-loaded with
due diligence checklist folder structures. The target companies are then
required to upload the information for review by the fund’s evaluation
team. For the fund managers, it is essential that due diligence information
be quickly disseminated to various internal departments, as well as
numerous external advisers who may be geographically dispersed, in
order to make a ‘go or no-go’ decision.
There are several reasons why fund administrators, not the target
companies, should control the VDR. The first of which is that the
information will be uploaded by the target company according to the
administrator’s standard checklists and not in some haphazard fashion that
makes evaluation difficult. Secondly, fund management is able to assign
VDR access to its staff, consultants and advisers and track who on their
evaluation team has reviewed their respective portions of the information.
Also, the evaluation team members will be automatically notified by email
alerts when new information is added by the target companies. Using this
internally auditable approach assures that important information is not
inadvertently overlooked. Additionally, due diligence travel logistics and
expenses are considerably reduced and deals are able to be closed faster.
Investor reporting
For fund managers, VDRs provide an economical, regulatory compliant
system for retrieving information from their portfolio companies, and then
securely delivering financial details and reports to their limited partners.
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With this tool, fund administrators are able to create a central, secure
online repository which is updated by the portfolio companies. Fund
administrators are then able to filter that information for distribution to
investors, making it available via a secure Internet Limited Partner Portal
to investors with around-the-clock, worldwide access to that information
through a controlled and auditable platform.
Managers are able to respond to requests from investors by directing
them to their Limited Partner Portal within the VDR, rather than extracting
information and responding by email or fax. Instead of printing, copying,
collating and mailing reports, investors are simply provided notification
of new information via email alerts. Most importantly, the managers are
able to then confirm receipt of the information through the program’s
compliance and tracking reports.
Summary
From the above examples, it is apparent that VDR usage has expanded well
beyond merely sell-side engagements, where they were first employed.
The ongoing flow of communications, in a secure online environment,
is even more essential now that fund administrators, investors, portfolio
companies and management teams operate on a truly global basis.
Dan R. Bradbary is the CEO of Due Diligence Online, LLC at V-Rooms Virtual Data Rooms. He
can be contacted on +1 (800) 731 6379 or by email: DBradbary@V-Rooms.com.
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