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The Private Funds CFO Insights Survey is one of the most comprehensive compilations of chief financial officer perspectives across private markets today, writes Victoria Robson. The 2019 survey reveals plenty to be optimistic about. Fund sizes continue to grow and North American investors in particular are flush with capital.
On the other hand, the survey shines a light on the growing complexities of managing the finance function in the private equity industry. Firms are facing an increasingly onerous compliance landscape, with investors demanding information on everything from ESG to cybersecurity. LPs’ traditional focus on valuation also remains intense. Outsourcing is still increasing in popularity and some CFOs are starting to use technology to help manage the expanding workload. But there’s a long way to go before AI fulfils its promise to streamline routine tasks and revolutionize the industry.
We detail the results of the survey over the following pages, beginning with the seven key trends CFOs have told us are shaping their role.
1 Bearing the burden
Given the volume of LP capital targeted at private markets, it’s no surprise that 65 percent of respondents report that they plan to increase the size of their next vehicle. But managers are faced with a number of inevitable new challenges. Building internal structures and processes (such as risk management and analytical tools) to help firms manage growth is a testing process, with a third of respondents identifying this as a major challenge (up from 21 percent last year). Similarly, 45 percent say coping with more investor requests/reporting is a major challenge, compared with 33 percent in 2018. The reason is simple: a bigger fund means more LPs and more due diligence questionnaires to complete, at a time when LPs are demanding more information than ever.
2 Born in the USA
Our survey reveals more than half of managers expect to see a greater proportion of US investors in their next vehicle. Why? American managers dominate the industry and many see no reason to go to the trouble of marketing overseas if their capital needs can be met at home. Thanks to bullish US stock markets, US pension plans have more cash to hand as a percentage of allocations to invest in private markets. Conversely, for political risk reasons, LPs in other jurisdictions like China and Russia do not look so enticing, and for some, bureaucratic hurdles presented by the AIFM directive are a disincentive to go to Europe.
3 To change or not to change?
Private equity’s appetite for acquiring technology assets remains vigorous. But managers’ enthusiasm for adopting new technologies in-house, like artificial intelligence, robotic process automation and machine learning tools, is muted to say the least. Only 2 percent of respondents have adopted any AI, while a huge 70 percent have yet to even review its application. Much of this apparent reluctance to engage with technology can be explained by the established practice of outsourcing IT to external providers. But as technological innovations continue apace, managers will have to ditch their immunity to change if they want to keep up with the pack.
SoftBank’s over-valuation and subsequent write-down of its investment in co-working space business WeWork has shone a spotlight on both asset pricing and valuation methodologies. LPs have always been sensitive to this topic. Now their focus is sharpening. The vast majority of survey respondents (70 percent) note valuations is an area where LPs ask detailed questions during due diligence, up from 63 percent last year, and far ahead of compliance, which ranks second in detailed scrutiny.
5 Not so fast
This year we’ve seen a slowing down in the rapid pace of back office hiring. This may surprise understaffed CFOs who are grappling with increased LP and regulator demands and are desperate to hire additional team members. However, the results point to an underlying trend of CFOs outsourcing to external providers who pick up the slack across tax, fund administration and technology functions. That said, as more funds come to market, recruitment is expected to stay “above trend,” says one CFO.
6 Building a track record
Contending with a variety of information requests from disparate LPs weighs heavy on the back office. “Unless everyone is willing to say a specific template is ‘perfect,’ investment managers will always be completing specific investor/consultant templates,” says one CFO. This lack of standardization puts upward pressure on costs and restricts the scope for automation. However, in the provision of track record data – a core metric requested during fundraising by LPs and one in which most are taking a more granular interest – information demands may be getting easier to manage. The survey reveals a sharp rise in the number of CFOs receiving standardized track record templates – up from 21 percent in 2018 to 30 percent this year.
7 The key questions
As custodians of their beneficiaries’ money, LPs have a duty to quiz their investment managers – and they do. Roughly a third of respondents report investors always ask about know your customer and anti-money laundering policies, cash management oversight and readiness for a cyberattack. Demonstrating good governance is clearly key. Should a manager fail at this, the cost will be not only financial and operational, but reputational too. A perfect storm any manager and LP would wish to avoid.