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Beyond the immediacies of a challenging fundraising market, LP scrutiny of private funds’ back-office functions has been steadily gaining pace. Perhaps unsurprisingly in the wake of the covid pandemic, business continuity plans have become a priority for investors, according to the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group. Other key areas of focus include organisation-wide cash management processes and cyberattack readiness, as well as compliance issues including know-your-customer and anti-money-laundering, the survey found.
“Operational due diligence by limited partners has clearly increased with more in-depth analysis being done to understand how GPs operate,” says Béla Schwartz, chief financial officer at The Riverside Company.
“There are many more questions being asked around how firms manage their operations. Who signs off on wires? What’s the review process before releasing funds? What are the security measures to ensure wire transfers aren’t sent incorrectly? Who is your administrator and how do you manage them? Do you keep shadow books? I am certainly finding myself on many more due diligence calls than in the past.”
Riverside is not alone in this. The Insights survey shows that it is now the norm for investors to engage directly with the CFO before committing to a fund.
Meanwhile, it appears that questions around compliance have also gathered pace.
“Compliance requirements have evolved over the course of my career,” says Jason Snider, CFO at Gauge Capital. “Investors are looking for third-party audits on compliance programmes, including reviews over AML, as well as cybersecurity. They also want to know how we are adjusting to the various changes introduced by the US Securities and Exchange Commission. That entire aspect of due diligence is a lot more involved.”
The CFO of one mid-market firm, who insisted on anonymity as a regulatory precaution while his firm is in active fundraising mode, agreed that IT security remains an important issue for LPs. “A few years ago, the hot topic was blocking all thumb drives. Now, the focus is on blocking the use of personal emails. IT security is something that is always going to be a priority for investors.”
The CFO adds that he is also seeing an enhanced focus on cash controls. “That has always been important, of course, but now LPs really want to get into the nitty-gritty of our banking setup. That whole area of back-office due diligence used to be wrapped up in a 10-minute call. Now it is a far more detailed process.”
“Compliance requirements have evolved over the course of my career”
When it comes to reporting, meanwhile, more than 40 percent of respondents say they have experienced an increase in requests for a more prescriptive format of reports, as well as enhanced detail and analysis.
“I have definitely seen greater attention paid to back-office functions over the course of my career, with a particular focus today on reporting,” says Snider.
Schwartz adds: “We have always provided a fairly detailed quarterly report, not only in terms of partner statement information, but also more detailed information summarizing capital calls, expenses and distributions. But although we offer to provide the ILPA Level 1 template to those who want it, and some large institutions do, we still receive a lot of bespoke requests.”