How financial investors learn about companies they invest in

By John L. Guerra

Editor, GRC & Fraud Software Journal
Ever wonder how sophisticated financial investors learn about the companies they invest in?

Spencer Hoffman, Lovell Minnick Partners LLC

Spencer Hoffman, Lovell Minnick Partners LLC

GRC & Fraud Software Journal recently caught up with Spencer Hoffman, a Partner at Lovell Minnick Partners, LLC to get his thoughts on what he’s seeing on the GRC and supporting services circuit. Along with investing in companies that provide outsourced administration and related services to financial services businesses, Lovell Minnick is a private equity firm that invests in asset management, financial planning, financial product distribution, and other business services companies.

Hoffman says Lovell Minnick spends a lot of time getting to know a particular market and its unique characteristics. Then, the firm’s professionals get to know the people, solutions, and management style associated with a company that, may be profitable or breaking even – among other things – before it decides to invest its capital.

Researching market data, regulatory direction

“First, we do our own research into the trends of a particular sub-sector of a market, the outsourced services sub-sector for GRC, for instance,” Hoffman says. “We source and evaluate relevant market data, develop a perspective on the regulatory direction for the industry, and identify broad industry trends that we believe support long-dated, strong demand for a range of solutions.

Then, we develop specific concepts that we try to validate, such as, ‘is there a tailwind for a particular company, or are there a group of companies offering the kinds of solutions that address these pain points arising from regulatory or compliance issues?’ for example.”

Once the firm identifies a company with potential, Lovell Minnick’s senior investment team members spend years getting more familiar with the company and its management.

A case in point is Foreside Financial Group, a Portland, Maine-based company that provides a variety of regulatory compliance and distribution solutions to clients in the investment management industry. Lovell Minnick signed an agreement to buy a majority stake in the company in February, eight years after getting to know the company and its people.

Building relationships with company individuals

“We start to build relationships with the management of these companies,” Hoffman says. “Typically of many of the relationships we maintain, we connect at industry events, mingle at events for industry executives, and get together in other venues to discuss the trends we’re seeing in the marketplace, sharing notes both on what we and what the management teams see developing.

Over time, we find that the company we’re getting to know comes to realize we’re bringing more than financial capital to the table. Such long-term research, combined with the investment in the relationships with the management teams, gives us the ability to understand the nuances of their market.”

The idea is simple, but it often leads to meaningful relationships. “It is due diligence both ways,” Hoffman says. “We look for management teams that want more than our capital investment, and this gives them an opportunity to understand us and what we’d be like as their partner going forward.”

Foreside delivers outsourced compliance and distribution services to investment advisers and broker dealers, including the financial products they manage or distribute. Servicing more than $800 billion of fund products, Foreside offers outsourced solutions for legal underwriting, FINRA licensing compliance consulting, fund officer services and trust governance.

GRC and support services

Lovell Minnick is “very interested” in companies across the GRC spectrum, including anti-money laundering and Know Your Customer solutions, he says. The rules and regulations governing the financial services industry are always changing, forcing companies to find new ways to comply. Larger corporations might use a third-party, internal solution, but often the smaller- to medium-sized firms want the same technology but want it as a less-expensive, outsourced solution, Hoffman says.

The financial services support market is fertile because banks and financial professionals need help avoiding regulatory headaches, while also seeking market best practices. Companies also need regulatory and compliance support solutions that dynamically address the ever changing rules and regulations.

In Washington, D.C., the administration is signaling that it will be rolling back regulations, but it is not saying there won’t be any regulations, Hoffman says. “Regulations will always be in play, always changing. Whether GRC technology or technology-driven solutions, the decisions that are made are not binary.

Regulators rarely say that all of the market must do this. It’s typically a mix; while 80 percent of a particular subset of financial services companies may have to meet a certain regulation, the other 20 percent may have to comply with a separate regulation.

It leaves a lot of people scratching their heads and wondering: which bucket are we in now?  Regulations require compliance expertise, which is hard to keep current.  Outsourcing these services or the support for these services makes a lot of sense.”

Companies need help with setting up

Hoffman offered some other thoughts for companies:

  • In addition to AML and KYC solutions, financial services companies need help “just managing the process” of complying with federal regulations. In terms of governance, “companies aren’t sure if they are setting things up in the right way.”
  • “Financial services companies often wonder, ‘Do we have policies in place to address these regulations?’”
  • Companies need help with risk mitigation. If a GRC provider can provide pre-governance solutions that reduce risk, then that provider will be a valuable partner to the client.
  • “Workflow management companies that five years ago were not deemed terribly exciting or having a compelling solution are now being repurposed into compliance solutions,” Hoffman says.
  • Workflow management solutions can also provide important reporting functions that allow you to demonstrate compliance with regulations, including one’s own stated policies and procedures.
  • Companies are increasing their pricing by offering solutions in modules or as individualized GRC solutions.


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