What is a Corporate Model?

At 3E Management (“3E”), we develop Corporate Models as part of our Fund-Level services. A Corporate Model shows the fees and investment returns the corporate entity is expected to receive from their investments (in either Joint Ventures or Funds), along with expenses related to sourcing deals, placing capital, and operating the corporate entity. Any Corporate Model should also include a projection component, which will allow Managers to project growth and future investments. A Corporate Model will show the returns for the firm, along with expected returns from each investment.

How to Create a Corporate Model

There are multiple key components that must be included to effectively analyze the future of a corporation. The first important component to include is the Partner Summary along with the Partner Cashflows. The Partner Summary should contain the Promote Projections and Total Projections from the existing investments and funds. A Corporate Model should also include a Cashflows tab, which rolls up the entire income and expense activity of the Firm and its Investments.

A Budget tab is needed to clearly outline the expenses and fees incurred for each investment and funds. The Assumptions tab will outline the Investment and Fund economics, as well as house projection assumptions for future capital. Live Projections are a handy tool which allow Managers to easily change projections for deals already held by the Firm. Finally, the Totals tab will show the Sales and Net Cash Flows for the entire portfolio and give expected returns for the entire portfolio along with a similar tab for each investment.

Budgets

We devote at least two tabs to calculate the budget within the Corporate Model: a Detailed Budget and an Annual Budget. The Detailed Budget is divided into three main sections:

Income, Salaries, and Expenses

INCOME:

Within the Income section of the Detailed Budget, one can see the various fees generated by each of the investments and Funds. Important fees include Asset Management Fees, Acquisition Fees, Property Management Fees, Construction Management Fees, and Disposition Fees. It is important to not only understand the amount of fee income generated by the Firm’s investments, but also the timing.

SALARIES:

Next, the Detailed Budget considers the salaries of each of the employees, along with bonuses. It is important to denote in the Corporate Model whether Bonuses are distributed on a Quarterly or Annual basis as this will ultimately affect the total budget and timing of payments. Additionally, this employee salary section can assist the Firm in understanding staffing requirements as the firm scales and additional investments are made.

EXPENSES:

Finally, Expenses must be considered to achieve the Total Budget. These items can be divided into Office, Travel, and General expenses. The Salaries and Expenses are then subtracted from Income items to reach Total Cashflows. The budget tab is among the most important in any corporate model, as it will allow the Firm to make decisions around selling assets and deploying capital. Fee income is critical in meeting the salary and expense requirements of running an Investment Firm, so managers must understand the implication of holding or selling assets as it relates to the underlying Firm.

Investment Assumptions

The General Fund Assumptions tab will outline all assumptions needed when calculating the returns and cashflows for each of the Funds of the corporate entity, including the Co-invest. The assumptions will show the initial investment expected from both Limited Partners and General Partners of each Fund. The assumptions will include waterfall economics, fee structures, target returns, and business plan projections such as hold period. Future Investment Assumptions are one of the most important part of a Corporate model, due to their ability to project growth and scalability within a corporation.

By projecting future Investments, a Corporate Investment Manager can understand the capital deployment requirements needed to grow a Firm’s fee income base. Without modelling future investments, virtually no corporation will appear profitable beyond the hold period of their existing investments. Additionally, this will inform Partners of their capital contribution requirements as the Firm raises more capital. Realistic capital deployment timelines and return assumptions are critical to accurately modelling the future of a Corporate Investment Firm.

Conclusion

A Corporate Investment Firm is a complex business that requires a detailed and capable model. Managers must not only consider their underlying investments when making decisions, but also must understand the implications to the Corporate entity as a whole. TSM’s Corporate Models give Managers the tools to quickly understand where their business stands, and easily project the future of the Firm under multiple scenarios. Schedule a model Demo today through our website www.tsmfinancialmodels.com to discuss your Firm’s Corporate modelling needs.

Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.