Today’s private markets CFOs are tasked with navigating their firms through an increasingly uncertain macroeconomic and regulatory environment.
The confluence of the denominator effect and liquidity pressures is making fundraising extremely difficult, and many firms are facing tough decisions about extending timelines or delaying launches while moderating their fundraising ambitions. At the same time, CFOs are navigating a turbulent fund finance market in the wake of the US regional banking crisis while grappling with a fresh round of regulations, including the US Securities and Exchange Commission’s recent marketing rule and the newly introduced Private Fund Adviser rules.
This boom in regulation is forcing CFOs to strengthen their back-office operations and revisit their strategy around outsourcing, especially as LPs increase their scrutiny into both.
However, it seems that the general feeling among CFOs is that the private funds industry will still experience growth, in spite of such obstacles. The potential of artificial intelligence is also a reason for optimism, according to many.
The Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, explores CFOs’ latest thinking on the future of the industry; here are seven charts that paint a picture of the challenges and opportunities faced by CFOs today.
1Outsourcing remains in favour
The trend toward outsourcing fund administration continues unabated, with almost three-quarters of respondents currently employing an outsourced model. Advantages cited by this year’s respondents include having access to both skills and expertise and technology, in part driven by increased regulatory complexity and enhanced LP reporting requests. The minority that chooses not to outsource, meanwhile, attribute their hesitation to concerns around service continuity in light on ongoing consolidation in the space.
2Evasive action needed on fundraising
CFOs are facing one of the most challenging fundraising markets in recent history, as decreased distributions – coupled with the denominator effect – make it difficult for LPs to re-up, even to their favored managers. Firms are exploring several options as they attempt to navigate this new environment, including extending fundraising periods, adjusting fund sizes and delaying fund launches. However, the majority of CFOs remain bullish on their prospects, with 61 percent reporting that they anticipate growth in income and headcount over the course of the next two years, while just 4 percent predict a contraction.
3Exploring use cases for AI in private funds
There has been undeniable excitement around artificial intelligence’s ability to transform myriad aspects of private funds’ operations across both the front and back offices. However, AI technology and its associated use cases are in their nascency, and many CFOs are still only tentatively exploring its potential applications. Half of those surveyed are currently evaluating the use of AI in their firms, while only 11 percent are actively implementing AI within their workflows. A further quarter of respondents have yet to review the potential benefits and risks of AI within their firms.
4LP scrutiny intensifies
Close to two-thirds of respondents to this year’s survey note that LPs have been showing increased levels of interest toward managers’ back-office operating models. Key areas of focus have included business continuity planning, organization-wide cash management and cyberattack readiness models. CFOs are now finding themselves in a critical position when it comes to LP due diligence processes, with the majority of investors expecting direct interaction with the CFO before they will commit to a fund.
5Don’t bank on it
The collapse of a few key players in the US subscription finance arena, including Silicon Valley Bank, Signature Bank and First Republic Bank, has caused uncertainty across the fund finance market. Over half of respondents to this year’s survey report they had moved money because of the banking crisis, with a further 12 percent expressing plans to do so in the future. Securing subscription finance has become markedly more difficult, though there is hope that the situation will ease as the trio of banks rebuild in new forms.
6Measuring AI’s effectiveness
Early movers on artificial intelligence are experiencing mixed results in private markets. Over half of CFO respondents describe the effectiveness of their AI efforts thus far as limited in the fields of deal due diligence, risk management, investor relations and sourcing investment targets. The use of AI in portfolio monitoring fared significantly better, with 60 percent of respondents describing its effectiveness as either ‘moderate’ or ‘high.’ Performance analysis and back-office management processes are also exhibiting some modest early gains from AI adoption.
7Getting a good report
LP reporting requests are intensifying, as is an increasingly strong desire among the investor community for more varied reporting formats, despite efforts from the Institutional Limited Partners Association to streamline such processes. Just under half of this year’s survey respondents are experiencing requests for more detail and analysis behind the information they share with LPs, while 43 percent are experiencing requests that are more prescriptive on format. There has been greater emphasis on disclosures relating to environmental, social and corporate governance factors.