As private equity has become a major alternative investment strategy during the past decade, its operating model has gradually evolved from a primarily administrative back-office function to more complex financial, accounting and operational responsibilities that require increasing expertise and specialization.
This has driven the need for specialists in treasury, tax, technology, compliance and other fields. The rate and nature of this trend toward operational functionalization is unique for each firm, because it is based on the particular circumstances of the firm’s growth and history. However, nearly every firm is now faced with choosing the most effective tools, technologies and operational processes to support their people over the next several years.
As the industry has evolved, we have seen firms move through three phases in developing the finance function:
1. The first phase consists of installing the core back-office functions that are required of any investment management firm. At a minimum, all firms need individuals to carry out the accounting and reporting functions, including both fund accounting to determine investor capital and income balances, and corporate accounting to maintain the books and records and determine the profitability of the firm. Many firms at this stage also hire internal tax professionals to maximize tax benefits and oversee tax compliance.
2. The second phase of functional development sees the introduction of new activities that support key decision-making for various stakeholders of the firm. These functions include, but are not limited to, investor reporting, portfolio reporting and management reporting.
3. Because the nature of these functions is inherently data intensive, the next stage of development involves the firm’s use of a combination of external and internal technologists and information technology consultants to help manage the firm’s networks, servers and technology infrastructure so as to ensure that the firm’s professionals can communicate and perform their responsibilities efficiently, and without interruption.
Overseeing the growth and development of a sophisticated finance function has been the charge of the CFO. As the industry has evolved, the role of the private equity CFO has increased significantly in both visibility to the firm’s external stakeholders and in decision-making clout among executive management. All of these changes within the finance function reflect the gradual and healthy maturation of private equity as an asset class.
Both based in New York, Samer Ojjeh is a principal, and Manuel Villavicencio a senior manager, in the Financial Services Office of Ernst & Young. The pair can be reached at firstname.lastname@example.org and email@example.com.