Over the last 12 months, we have heard in pfm from CFOs who have co-ordinated office moves, provided tech support for colleagues and even been in charge of the stationery cupboard, so we predicted that this CFO survey, conducted in conjunction with EisnerAmper, would show finance chiefs taking on new responsibilities.
But even we were surprised by the results detailed here showing just how far the modern CFO has moved outside the back office to handle everything from investor concerns, both pre- and post-commitment, through to tech issues.
One key finding is that regulatory pressures and other demands really are heaping pressure on the back office. Unsurprisingly, given the increased compliance demands they are under, almost two-thirds of managers surveyed have increased the size of their operations/back-office teams over the past three years, and a good proportion intend to further boost their headcount in the next 12 months.
Accounting skills are most likely to be added, with more than one-third of respondents planning to make at least one addition to their accountancy teams. Around 15 percent expect to boost their in-house tax and compliance expertise.
But irritations remain. “CFOs are being asked to do more with less,” said the CFO at one US mid-market firm. Regulatory demands are a clear concern. “The frustrating part is the actual lack of guidance provided by the SEC in certain areas such as broker dealer status,” said another CFO.
LP due diligence requests are also taking up more of a CFO’s time, with US institutional and foreign investors the two groups most likely to place demands on the back office, according to the survey.
That’s another trend that we have followed with interest at pfm over the last year, amid evidence of more pre-deal requests from LPs. At a conference hosted by pfm’s sister title Private Equity International earlier this year, investor relations professionals said that a growing number of prospective LPs wanted to perform due diligence on the firm’s back office.
Another investment manager said it had taken the initiative to arrange a meeting between its finance and legal team and investors. “It was considered great customer service and investors said they felt more confident in us as a new manager,” the advisor told pfm. Once they have invested, their growing appetite for information means many LPs have a direct line to their fund’s CFO who is required to provide more data in a variety of different formats, and with increased frequency.
As one of our survey respondents said: “The back office is under more scrutiny from the SEC and investors alike and must respond to the reporting requirements accordingly.” Another – a CFO at a US buyout firm who also acts as the CCO – said investor reporting and the use of templates was accounting for a greater proportion of the workload.
Investors are not the only ones demanding more in the way of information. CFOs are also interacting more with people closer to home: their colleagues in the front office. More than two-thirds of respondents to the survey agreed the front and back office work together more cohesively now than three years ago.
Increased demand for data is one of the drivers, while other factors include the steady rise in digitization and the need for new systems to work for all members of the team. There is a need for CFOs to be “more technologically savvy,” one of our CFO respondents said.
The results also back the notion that CFOs are getting more involved in the investment process, with 46 percent saying this was because of increased regulatory oversight.
A strong sense emerges in the survey of a shift to a more strategic position. “The role has become more operational and strategic driven than financial,” a CFO at a leading US private equity firm said when asked how the job has changed.
“Over the last year I have spent a significant portion of my time on such tasks as fundraising, managing investor relationships, office build-outs, technology platform selections and implementations and advising our managing partner on a variety issues.”
Compliance-wise, a number of issues are pinpointed, including the Foreign Account Tax Compliance Act, or FATCA, and the attempts by the OECD to clamp down on tax avoidance via its BEPS project.
Nearly half of the firms have had or are going through an SEC exam, compared with just one in four in 2016. Today’s finance professionals have to have a stronger focus on SEC guidelines, one CFO told the survey.
As the workload increases, one answer is outsourcing. US fund managers have been less keen to outsource than their European peers but there are signs this is slowly changing. More than one-third of survey participants said they had increased their level of outsourcing over the past three years.
“Simple and routine works need to be outsourced further,” said one. Or as another respondent put it: “It’s become cost effective for some tasks especially where labour costs can be arbitraged without the loss of control or effectiveness. Politically, it’s easier to get budget for a contractor than an employee and you don’t have to deal with the HR issues.”
The other hot-button issue raised was cybersecurity. As one CFO said: “I am very concerned about phishing emails, and other possible intrusions into our systems. We have ongoing IT security assessments by an outside firm, employee training and education and thorough policy and procedures, but you are dealing with human nature and that is out of our control.”
Worryingly less than half of CFOs and operational executives said they felt “very well prepared” to handle a variety of cyber-threats ranging from the theft of personal information to ransomware and malware.
The conclusion? The job and the nature of the duties really have changed fundamentally. CFO 2.0 doesn’t just have to be adept at number-crunching but something of a strategic superhero facing “pressure to do more with the same or less,” as one respondent said. A tough task, maybe, but one which judging by our responses, the modern CFO has all the skills to handle.
For the survey, PEI emailed CFOs at the leading private fund management firms in the US. We targeted CFOs because they are the most informed of the practices under scrutiny. Indeed, 60 percent of the more than 150 respondents acted as their firm’s CFO. If the CFOs were unavailable, we asked for responses from other professionals, including CCOs, COOs and controllers, provided they were aware of their firm’s practices. The survey was conducted in August and September 2016 and again in May and June 2017. The survey was confidential. The emphasis is on private equity but firms managing mezzanine debt, real estate and infrastructure funds were included too. Many of the challenges facing private equity firms are just as relevant to managers of other closed-ended alternative asset classes funds.