Modern automation and computer systems, particularly in sensitive national industries like financial services, need accurate time to function efficiently and they depend heavily on satellite systems to provide it. Simon Kenny, CEO of Hoptroff, shares his insight on the importance of time as part of modern financial infrastructure.

Satellite Navigation Systems are today’s under-acknowledged global good. Knowing where you are appears to be yesterday’s problem; whip your phone out, and you can establish where you are and find where you need to go very easily using the GPS. However, the UK does not own or control a satellite timing and location system, we rely on the systems built by others, such as the USA, Russia, and the EU, to give us time and location.

We rely on them for our vital financial services industry to accurately execute transactions. If those systems were to be suddenly unavailable either because of accident, deliberate spoofing/jamming or because the provision policy of the owners were to change, then time accuracy would be heavily disrupted in the UK and so would the performance of automated systems that need accurate time to function. Financial services rely on stable time feeds to verify thousands of transactions a second and most of those time feeds are satellite derived, so in the absence of our own UK owned and operated system, we cannot take the risk of it suddenly being unavailable. This is why the UK Government is investing in the National Timing Centre, which will develop a system for distributing time across the UK that is independent of GPS and which would enable the tracking of transactions to continue should the satellite connections be lost.

Software – the efficient, reliable solution

A pound of butter is a pound of butter; it is part of a measurement of weight that it should not change suddenly. It is fixed, but time is cumulative, it is part of its nature that it should change. So, to know what the time is, you care about the total number of seconds that have elapsed and as even tiny errors happen, they quickly become noticeable and clocks begin to disagree. To correct this disagreement the only option is to reach a consensus between national standards bodies about what the time is and then share it freely. This consensus is UTC (Universal Time), the standard to which everybody regulates their clocks.

Financial services rely on stable time feeds to verify thousands of transactions a second and most of those time feeds are satellite derived, so in the absence of our own UK owned and operated system, we cannot take the risk of it suddenly being unavailable.

The importance of highly accurate and synchronised time across different points in a distributed process was made clear at the end of last year when the Bank of England discovered early access to Bank announcements was being sold as a service. An audio feed, set up to provide a resilient back up to the video stream, was received eight seconds earlier at key co-locations than the video. Eight seconds providing a clear window in which to arbitrage any market sensitive announcement by the bank.

To effectively release sensitive market information, it is necessary not just to release the information at the same time to everyone, but to also manage the delivery of that information vis different media so that it arrives simultaneously at sensitive market venues or Co-Locations. When early access to data can be leveraged into a trading advantage, accurate synchronization of devices is required to correct the distortion and allow markets to operate transparently.

The science of real time data can only be coherent if that time consensus can be distributed ubiquitously at low cost, and at greater accuracy than the speed with which machines make decisions and take actions. If the accuracy is not good enough, or access to reference source is lost altogether, then systems will be disrupted and records of what a machine has done will be unreliable. That sweet spot is around twenty microseconds today: the time is accurate enough to measure and monitor server activity, but it can be delivered through software and existing connectivity without the need for expensive timing infrastructure to be installed.  If synchronized time is to become ubiquitous, then it needs to be cost effective and easy to manage.

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Software timestamping is a great solution to help financial institutions comply with MiFID II and CAT timestamping requirements not only because it is very cost effective, but because it can accept a time feed from different sources; a satellite or via a network cable feed, if the satellite becomes unavailable. It has been tested and verified that existing telecoms networks can distribute accurate time to any major data centre reliably and at scale. It is not necessary to have satellite antennae at each data centre location to connect to GPS. Resilient network connections, plus a local “Armageddon clock”, which can take over timing in the event of an interruption in connectivity, are less expensive and easier to maintain. The National Timing Centre will serve to expand the availability of a UTC time signal via multiple fibre networks, so the UK finance industry will have a cost-effective and resilient alternative to satellite available for all financial services companies.

The potential of nationally distributed timing infrastructure

If all the devices in a distributed process don’t share the same time to sufficient accuracy, then the records they produce will put events in the wrong sequence and with incorrect intervals.  However, if the UK finance industry had cheap, ubiquitous, accurate time coming from a reference source, then UK market participants would be able to enjoy the benefits of a unique “Time Fabric” where all timestamps, in any application, would be verified and capable of acting as reference data in any analysis. Time intervals could be used to authenticate proper execution and identify early when a process is not performing as intended. A national timing infrastructure offers the potential to improve the quality and utility of market data not just in financial services, but in any industry using automated systems that chooses to adopt it.

Keeping the momentum going has never been easy, however. Historically, heavy competition pushes deal multiples to new highs, while the growing fears of an impending recession affect decision-making ranging from conducting diligence to exit planning.

For general partners (GPs), investing huge amounts of capital now comes with heightened risks. They are paying extra costs and looking to capture value that may not materialise post-close. To address this, Rosanna Woods, UK Managing Director at Drooms, suggests that the most effective GPs are scaling up their strategies by investing in diligence. 

Familiar challenges, more resilience

With heavy pressure to do deals, the global private equity market saw another rise in investment value last year. Increasing asset prices and competition continued to reduce deal count – the number of individual transactions in 2018 fell 13% versus 2017 to 2,936 globally. However, the total buyout value jumped 10% to over US$500 bn, marking the strongest five-year run in the industry’s history.

2018 was indeed a notable year for most GPs because of the resilience and strength in the current investment cycle, albeit with levels of instability. Since 2014, the market has seen higher annual deal values than in previous years, except for 2006 and 2007. Throughout this time, the PE industry has also benefitted from an unexpected wave of investor interest, low-interest rates and, mostly in the US and Europe, steady growth.

The number of individual transactions in 2018 fell 13% versus 2017 to 2,936 globally.

Investing in diligence

Yet PE executives are currently questioning how long the good times can last. While GDP growth in the US remains strong, Brexit uncertainties, global trade tensions and volatile markets are all fuelling worries that the cycle may soon end.

For PE firms, the main goal is to navigate the next economic downturn and profit from it when it occurs. With memories of the global financial crisis still fresh in their minds, firms are focusing their diligence on problem scenarios more than ever. They learned valuable lessons from the crisis about what lasts throughout the cycle and are looking to react accordingly.

Deal constraints

For most GPs, finding the right asset at the right price was the biggest challenge last year. They often faced high deal multiples, a lack of attractive targets and stiff competition. They are keen to do more deals, but when they do find attractive assets, they are faced by aggressive corporate buyers that increase prices for firms with synergies similar to their own. These strategic buyers often look for growth through acquisition of companies that fit their core strategy rather than financial metrics alone.

Inefficiency and costs also contribute to the challenges faced by GPs, particularly in sponsor-to-sponsor deals. These deals invoke high transaction fees and routes to value creation are less evident. Nevertheless, PE firms continue to find them attractive as they carry less risk and perform equally well as primary buyouts.

For sellers, it makes sense to optimise and smooth the due diligence phase with the help of virtual data rooms (VDRs). These are essential tools to help impress and attract a range of buyers, which can increase deal value and prevent unwanted surprises. For first-time sellers, VDRs give the advantage of increasing the accuracy of historical and financial data and fixing existing discrepancies before negotiations start. It is also true that PE firms depend largely on sell-side due diligence because it makes the process of the transaction simpler and helps them understand how the target assets could be integrated into their own.

For sellers, it makes sense to optimise and smooth the due diligence phase with the help of virtual data rooms (VDRs).

The calm before the storm

But the challenges for PE firms, as mentioned above, are not only limited to cut-throat competition or rising asset prices. The increasing pressure to do deals, economic uncertainties and an abundance of capital all represent end-of-cycle warning signs that concern firms. Experienced GPs are adjusting their strategies to win more deals within budget while preparing against a likely recession. They target sectors in which they have the most confidence, choosing carefully the auctions in which to participate or avoid, and which teams to assign to covering them.

By conducting diligence earlier, GPs can make more intelligent judgements while also creating contingency plans and implementing suitable actions when the next downturn occurs. This gives GPs a better understanding of where the attractive targets are in an asset class or industry and moving in swiftly as the cycle slows down.

Preparation is key

But common deal mistakes, despite the lessons of historical examples, can still happen. A common reason is that some firms may not see much value in carrying out due diligence. Although its relevance may depend on asset class, target company size and industry, performing due diligence remains an essential requirement for most GPs. This is especially true for acquirers and sellers with an aggressive sales strategy.

It is crucial for PE firms to be as prepared before a deal closes as they are after assuming ownership. Conducting the required due diligence and considering the necessary factors for a successful merger integration, such as identifying and capturing synergies, resolving leadership issues and evaluating merging systems and processes, are all key to success. This is even more so during a downturn. Effective GPs and winning firms will invest in thorough preparation and think about integration as soon as due diligence begins, focusing on how a firm can operate independently during the holding period, thereby converting time into value.

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Sky's Technology correspondent Tom Cheshire reports.