Investor demands regarding portfolio performance, operations and cybersecurity, continue to grow, and technology is seen as the key to meeting those needs, Intertrust Group’s Fund CFO Focus 2022 survey found.
The survey, conducted in January, took the responses from 320 CFOs or their direct reports in the US, UK, China and Western Europe, and, in a parallel survey, 110 private capital investors mostly in the US, UK and China.
It found that CFOs expect investors to ask for data updates more frequently, whether live on demand or daily, for information regarding portfolio performance and cybersecurity. However, most investors are expected to be satisfied with less frequent reporting in ESG or diversity and inclusion.
Explaining investors’ expectations regarding live access to data, Jonathan White, global head of fund sales at Intertrust Group, told Private Funds CFO: “Clearly, investors are reaching out to managers and asking for live updates or expecting responses in near real time. However, they’re not actually looking for real-time data, but they’re looking for more instantaneous responses to their requests for the data.”
To meet investors’ needs for frequent and reliable data, CFOs said that further investment in technology is needed to meet these needs. More than 70 percent of CFOs said they expect to expand the skill sets of their in-house finance team to include technology know-how.
Additionally, a majority of respondents, 61 percent, plan to complement their in-house technology expertise through outsourcing.
On the importance of technology, White said pressures from LPs and regulators to organize data and provide better reporting are driving the need for further technology investments.
“The data requests are coming faster and more furious, and you’re seeing this trend of increased transparency that is driving the need for more technology,” White noted. “Private equity managers are not in the business of tech development, but they are recognizing the need to be more responsive and to provide more data, and they are thinking about what they can do in-house and what they can outsource to leverage expertise and systems developed elsewhere.”
Regarding the increasing reliance on outsourcing, White stated he believes that third-party administration in the private equity industry is evolving similarly to that of the hedge fund industry, which embraced outsourcing as a way to build scalability in their own operations.
“Private equity managers are looking at what they want to do as they try to scale, whether it’s building out functions and teams internally or leverage outsourcing,” White added. “Managers are far more accepting of outsourcing now, and not trying to hire and build teams around accounting and operations. They really want their internal people to focus on value-centric activities.”
Coupled with investor demands for more transparency is a greater demand for managers to monitor and report on the ESG performance of their portfolio.
Fifty-eight percent of private equity managers said they recognize that ESG is very important to their LPs, with 38 percent saying their investors thought ESG was moderately important.
According to Antonello Argenziano, ESG product director at Intertrust, “Besides regulation, there is an increasing demand by LPs for managers to monitor and report on the ESG performance of their portfolio. The pressure is building up for all managers, including those of traditional funds without any stated ESG ambition. And technology will play a key role in that.”
Knowledge and expertise on ESG integration and timely ESG data are crucial to comply with investor demand and sustainability legislation. A framework to collect, monitor and report ESG data is key in this and, in turn, technology, scalable processes and expertise will be necessary in addressing those requirements.
While investors are focusing more on private equity managers’ ESG efforts, it is also more important to the managers in making investment decisions. CFOs see gender diversity, racial/ethnic diversity, and carbon footprint considerations as either crucial or important in their own assessment of potential investment opportunities.
ESG remains an area where firm policies are still in development, with almost 85 percent of CFOs saying their firms have an ESG policy in place.
When identifying the challenges to integrating ESG integration, 24 percent of managers cited cost and resource constraints as the main obstacles, followed by 22 percent who cited the complexity and variety of ESG data and data sources. Other challenges include the complexity of managing multiple sources of ESG data, quantifying and monitoring the ESG implementation process, and the shortage of knowledge and expertise at both the GP level and the portfolio company level.