This article is sponsored by TMF Group
This year’s Private Funds CFO Insights Survey, conducted in partnership with TMF Group, reveals a generally buoyant market, with more firms raising funds and fund sizes increasing. The flip side is more pressure on the back office, especially since investors are expecting increasingly detailed information from their fund managers.
Mike Gorman, TMF Group’s co-head of fund services in North America, shares his reflections on the results. He highlights how investor diligence on firms’ valuation processes is imposing new requirements for firms to collect and present data, while he expects technology to play a greater role in a range of areas from valuations to cybersecurity.
What trends were particularly notable for you in the Private Funds CFO Insights Survey?
The consistent theme that I see is investors asking the GPs for more information. This means that the collection of data is becoming much more important – whether it’s for compliance, whether it’s for ESG, whether it’s simply to collect it and then visualize it back to the LPs. In response to the demands from investors, our clients, the GPs, are asking: ‘How do we show this data?’
Valuations are increasingly at the forefront of this. Historically, the work around valuations has been more compliance-driven – as funds went to raise new money, the compliance agencies wanted to make sure procedures were being followed and they weren’t overstating things. But now, the investors want to understand: ‘How are you valuing this and what tools are you using to value it?’ For years and years and years, Excel was the animal that helped do that. Now we’re seeing other tools being developed. I think there’s going to be a bigger push in that market.
Amid these changes, firms need some type of leader who is going to take ownership of data visualization and I think they’re going to look to the CFO to do that. We’ve seen a trend where more and more firms are adding CFOs or upgrading their CFOs, in spite of having a fund administrator. The reason is that the fund administrator becomes the arms and legs, but the CFO is the visionary and the point of contact with the investors.
The survey indicates that managers face more detailed due diligence and reporting requirements from LPs. What are the most important factors for GPs to consider?
One of the key points we’re seeing is the underlying investors, or the groups that are performing the due diligence, want to spend time looking at the technology that the GP is using and the cybersecurity protections that they have in place. They want to make sure there is a solid foundation and a good road-map for the firm’s technology.
A lot of complexity comes from the number of deals that get carried out in a typical fund structure. Firms rely on a variety of advisers during the deal process, each with their own processes and methodology.
So, to build a system that processes valuations, rather than rely on Excel, is a challenge. But the systems are getting smarter and new tools are being developed. The key is to have workflows and processes if you are going to use Excel and to be able to fact check the results.
But the survey presents a mixed picture in terms of the take-up of tech solutions in the industry. Does it surprise you that more firms are not prioritizing tech initiatives?
Not really. The industry has always lagged behind tech versus other sectors. That’s partly because if you think about a company that’s processing thousands of transactions, having great tech so that you can operate more efficiently is important. But private fund managers don’t have thousands of transactions, generally. Repetition leads itself to automation, bespoke transactions are thus more difficult to automate. A lot of firms throw up their hands and say, ‘How do I do this?’ And that’s where firms like ours step in and provide guidance.
I think you’ll see technology playing a greater role, it’s just lagging a little bit. Today on valuations, I know three or four platforms that are being developed and there are a couple already out there. It’ll take some time, but as technology continues to advance, we’ll see more and more firms investing in tech solutions.
Cybersecurity is clearly a major concern. What can managers do in practical terms to satisfy investors that cybersecurity is up to scratch?
The cyber-crooks that are out there, the bad guys, are getting increasingly smart. So, it’s something that every firm is viewing as important and continuing to invest in. At every annual meeting I’ve been to, there’s been a slide with the firm saying, ‘Here’s what we’re doing on cybersecurity.’ Investors are definitely asking about cybersecurity – if you’re an investor and you’re supposed to get a distribution and you don’t get it, that’s frustrating and it does create exposure.
GPs need to invest. They can’t just assume that the technology they’ve relied upon up to now is fit for purpose into the future. There are more technologies that are becoming available. We’re seeing investment dollars flow into these technologies, which will then come to market. We are currently working with a couple of those technologies, principally around wire security – that’s the point of failure in most of these firms. Firms also need to make sure they carry cyber-insurance and have a thorough understanding of the risks those policies cover.
The survey showed that more firms are planning to expand their back office teams – how can firms win the competition for resources?
It doesn’t surprise me in the survey results to see firms planning to expand their teams, given the increase in reporting expectations. What will be challenging for these firms, is the current finance/accounting labor market, which has a 2 percent unemployment rate and a 40 percent turnover. Firms will need to be creative with their team engagement, work flexibility and compensation packages to not only attract new staff but also retain their existing team. To be successful, firms must differentiate themselves in the market.
We are seeing firms being proactive with their teams, encouraging them to think outside the box and how they can better utilize outside service providers to extend team capacities and provide better job satisfaction.