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Welcome back to the Raw Selection Private Equity Podcast. Joining us today is Jeffery Raju, the Founder & CEO of Stonehill Business Services, partnering with private equity and venture capital funds to build scalable financial infrastructure. Let's dive in. Jeffery, if you can share with us a brief insight into you.
Absolutely. Thanks for having me on, Alex. Basically, my name is Jeff Raju. I'm the Founder & CEO of Stonehill Business Services. Across the last 15 years, I've spent—
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—time in the private equity and venture capital space across fund administration and controller and CFO roles for various emerging managers and fund managers, ranging from $10 million or less in AUM all the way up to multiple billions in AUM. So I've kind of seen all different types of strategies and fund structures.
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My mission with Stonehill Business Services is to support emerging fund managers to build the financial infrastructure that they need before they need it.
Marvellous. So what's one mistake you see private equity firms or portfolio companies making, and what would you suggest to correct it?
Sure. I think that, from my experience working with a lot of emerging managers, they come from the types of investments and strategies that they're working with. But when they step into raising capital and pooling that—
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—capital and putting that to work, you're actually building an investment management business. So one of the mistakes that I see is treating it just as an investment shop and focusing on the investments and kind of forgetting about the business itself, and treating it more as a vehicle than it is actually a business.
So, building it as a business and treating the finances as a key component of that, building the processes and infrastructure around that—
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—versus just treating it as a compliance exercise to file your taxes and not leveraging that information.
And when we say treating it with the respect it's due in order to drive growth and seeing it as a business enablement tool rather than just a function that needs to be done, can you give me an example? Because everyone will be like, "Well, we value it. It's important." But I'm sure everybody says that. What does valuing it and treating it as important actually look like? What separates the guys that are treating it like a compliance tool and—
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—the guys that are executing on it at the highest level to help scale their private equity firm?
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Sure. Yeah. So I think that firms that are more mature operationally, they've matured into that state over a long time, right? So they've gone through a bunch of fund cycles. They've experienced the pain of not having these things in place already in various ways.
But one example would just be the quarterly reporting process. Every quarter, typically investors want to see the financial statements, and we'll send those out and—
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—just wait again until the next quarter. Other layers to the process, to really institutionalise and professionalise this, are to take that financial data, compare it to what you projected for that same period, and see what the forecast looks like for the future so you can actually improve the decision-making process.
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The outcome is better decisions, right? So that, on top of the audit and tax processes. Taxes have to be filed once a year, you have to pay your taxes, and an audit occurs once a year. But the more operationally mature a firm is, the more they'll have these processes in place to support these audit and tax requirements throughout the course of the year. That means projecting out taxes, avoiding surprises at the GP or the management company level—
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—and for the investors, and then at the same time building out the support and making sure that the audit can go smoothly and that the processes are being managed effectively to leverage their decision-making and support these things so they go smoothly.
And essentially, that's going to preserve the time for these founders to focus on their investments and building relationships with their investors, which is ultimately their goal.
Absolutely.
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So talk to us about the kind of gaps between a $50 million fund and a $1 billion fund from the finance perspective.
Absolutely. Typically, with a sub-$50 million fund, it depends. Everything depends on the investment strategy itself, the volume of the transactions, the size of the checks they're writing, and all of those things as well. But typically, they're operating—
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—with a much leaner team. Usually, it's maybe one or two GPs and maybe one or two people on the investment team, maybe an investor relations person, something like that. But generally, they're very lean teams and they have a fund admin, which is a very important piece of the structure. But that's basically as far as the financial leadership side goes for these types of firms.
For a billion-dollar platform—
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—these platforms have already gone through multiple fund cycles. They might have started with a $100 million fund, the next one $300 million, the next one $400 million, and now they're managing over a billion dollars of AUM.
And so, over these cycles, they've learned the pitfalls and the structure and the type of investors that they're going after, and the type of questions they'll have. And so they've already kind of built out these processes internally. Either they have the CFO themselves and the full—
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—finance support team that can support all these things that a leaner team might not be able to do.
So if you're a $50 million fund and you're getting about $2 million in management fees every year, it doesn't leave that much room to have the headcount that you want to build out these things. And that's where our CFO services are a fractionally delivered package of the main tools and processes that you need—
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—to operate like one of these billion-dollar platforms.
Makes sense. So what are the mistakes you see around the professionalisation of the finance function and the impact of the finance function from a fundraising perspective? Obviously, fundraising is a big challenge for firms at the moment, alongside the challenge of deploying capital.
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From a fundraising perspective, I think it's about knowing which type of LP you're going after. Whether it's a high-net-worth individual, someone with a high income, these people might be writing $100,000 or $200,000 checks, maybe up to $500,000, but you're going to need a lot of those.
The requirements are a little bit lower for these types of investors because they're not as sophisticated. They don't necessarily know which questions to ask. They don't—
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—ultimately have a lot of questions about your controls or your processes and things like that.
Once you start going into more sophisticated investors and you're trying to raise more than, say, a million dollars per investor, for somebody to trust you with their capital and that size of capital investment, there's going to be a lot more scrutiny involved.
So a lot of the mistakes that I see are when you're a fund manager and you've been working with—
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—a smaller friends-and-family network of investors, and then you're trying to move upstream and move into investors that are more sophisticated. In order to be successful, you need to also have the firm be able to support that level of investor, right?
So there's that maturity level that they're expecting in terms of the operational due diligence. Do you guys have—
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—financial controls and processes? Do you have an investment committee process? Do you have regular reporting? How is that done? Is it done by somebody who knows it's being done correctly? Is there an audit taking place?
All of these things you really have to think through before you go and approach these types of investors. So the mistake I see is not really thinking through those items before approaching those types of investors and then ultimately wasting time because you're not going to end up closing those investors.
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One of my clients in the past was a successful real estate operator. They did multiple individual syndications and had crazy returns on some of these investments, like two to three times and 50% IRR and things like that for the LPs, which is great.
And you want to talk about those things with investors. But then, when it gets to the next layer of questions about your processes and about your operational maturity—
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—they start asking questions about the next deal and where these projections are coming from. And they see these models, and they're simple spreadsheets and things like that. They don't feel that the firm is mature enough and reliable enough in the long term to be treated as an institutional investment manager.
So those types of things—preparing for the type of investor that you're looking for, the type of LP, and being realistic about what you need on your side—
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—to be able to close one of those investors—is probably one of the biggest things I've seen with emerging managers.
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And if we look at the scaling of a private equity firm and we think about that financial infrastructure, at what point should a firm build, for lack of a better term, an institutional-level finance function? When should a firm start thinking about that in its lifecycle?
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Yeah, absolutely. I think for smaller firms, they're more kind of operating as deal shops with individual syndications. Of course, there's still some level of SEC scrutiny and things like that, but really, they're kind of fine with operating on a "good enough" type of basis, right?
A lot of times, there's another thought process that says, "We're going to raise capital one time—
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—we're going to make all these investments, we're going to have great returns, and then we're going to raise the next fund, we're going to get institutional capital, and then we're going to become institutional."
I don't think it actually works that way in practice. You don't become institutional when you get a bit bigger and when you scale. You become institutional, and then you're able to scale and get bigger.
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I'd say, timing-wise, one point is when complexity starts growing to the point that the investment leadership is spending more time dealing with the financial problems and aspects of the firm in an area that they're not comfortable with. And that is happening more often than not.
Once that is occurring, that's usually a good sign that you need—
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—some additional help in that financial leadership space, kind of filling those gaps between what the fund admins do and all the other service providers in the ecosystem.
But on top of that, a couple of the other inflection points where we've come in are when firms are transitioning from multiple syndications to their first fund. We're able to help build projections and models that are going to be more supportable and more understandable, and more institutional-level—
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—which is what those types of investors want to see. More sophisticated investors want to see a full thought process around what the lifecycle of the fund looks like.
And then the other side of it is when you're transitioning from high-net-worth individuals and high-income individual investors to more sophisticated $1 million-plus check writers. Then you need that sophistication and institutionalisation of the information and the processes.
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What do you read or listen to that you'd recommend others should check out?
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Yeah, honestly, I should probably read a lot more than I do, but I do leverage it, especially for any type of business topic that you want to learn. I try to find a good book about that.
But some books that have influenced me in the entrepreneurial journey—more than 10 or 15 years ago, I read Think and Grow Rich, which is by Napoleon Hill. It's an old book, very famous, a great book, and I've recommended it to a lot of friends.
I'm also a fan of Ray Dalio and Principles—
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—and that whole framework that he has about finding the patterns and the principles that you use to lead your life and in business. Those are two books that I really enjoy.
And if anybody wishes to reach out to you post this podcast, what's the best way to get in touch?
You can reach me on LinkedIn. My name's Jeffery Raju. I'm on LinkedIn as Founder & CEO of Stonehill Business Services. You can also find us on our website at Stonehillcfo.com.
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And there's a contact page that you can reach out to us directly from there, and someone will definitely get back to you. But if you're an emerging fund manager, a service provider in the space, or anybody that I could add value to my network or provide value to that person's network, I'd love to talk to them.
Well, thank you very much for coming on to the Private Equity Podcast.
Thanks so much. It was great meeting you and great talking to you.
And as always, thank you very much to all our listeners—
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—for tuning in to the Private Equity Podcast. Until next time, keep smashing it.
