Making firms work better

CFOs are prioritizing operational efficiency, according to the fifth annual EY private equity survey.

As private equity fundraising hit record levels in 2017, investor demands for higher returns at lower fees and more customized portfolio analysis grew, and managers dealt with increased regulatory and compliance demands.

The way in which firms are dealing with these changes is in some ways linked to their size, with larger firms considering technology and talent development as key priorities. Midsized firms are investing in technology where they can, but largely absorbing the increased workload with their people. Smaller firms are more likely to invest in human capital than technology, and are more likely to view outsourcing as a viable alternative.

Below we take a look at the key findings of the fifth EY private equity survey.

Operational efficiency

Fees pushed lower

Almost three-quarters of firms say they have been under pressure from investors to lower their management fees, and of those, around one-third reported margin erosion after bowing to this pressure.

Half of firms have maintained their fees by demonstrating the value of their unique strategy, or through strong historical investment performance.

“Although many private equity firms have maintained their current fee levels, many also reported that they are facing increasing pressure on margins due to the costs of increased regulation, limited partner information requests, asset growth and additional market information,” the report says.

Has your firm experienced margin erosion?

Focus on value-add functions

CFOs say that they would rather their teams focused on investment portfolio analytics and investor relations because these areas help to grow revenue and are more forward looking, and not routine areas such as fund accounting, treasury and human resources.

How a firm intends to achieve operational efficiency depends on its size and maturity. Few large outfits see outsourcing as a viable option, but they are educating themselves on how outsourcing compares with more investment in advanced technologies internally.

“For smaller firms, outsourcing and headcount are the primary paths being taken to increase operational efficiency and scalability,” the report says.


Getting development up to speed

Most of the firms in the survey view their technology and other systems as in their infancy. Furthest behind the curve are reporting systems and valuation support technology, they report. Accounting systems tend to be better equipped.

“Private equity firms also viewed data integration as lacking, with more than 60 percent of CFOs reporting that their data was not at all integrated across the organization,” the report adds.

Forward-looking firms are prioritizing system integration and finding a replacement for spreadsheets, while CFOs have come to realize that manual data entry and reporting via spreadsheets are not an effective use of resources.

What areas are most challenging to implement technology systems


Almost two-thirds of firms are currently investing in, or plan to invest in emerging technologies such as digital data delivery, advanced analytics or robotics. A significant proportion of investments are likely to be driven by a desire to “catch up” with their peers in financial services, rather than being innovative.

“More than one in three firms are currently investing in digital data delivery while a similar number say they either plan to or make further investments here. Enhanced digital delivery can be achieved incrementally, and within the alternatives segment firms are moving to adapt more competitive capabilities such as self-service client reporting portals,” the survey adds.

Firms in the broader alternative segment are investing heavily in advanced/predictive analytics across the front office, whereas only 20 percent of private equity firms are currently doing so.

Talent management

Staffing levels

An average three investment professionals to one finance professional has been established as the ideal level of staffing, although many larger firms (with assets under management over $15 billion) have yet to achieve this.

“Most firms with AUMs over $2.5 billion are not fully outsourcing finance functions, and for those firms, CFOs continue to strive to build a scalable operating model that fully leverages technology while still being reliant on people,” the report says.

Talent management continues to be a high strategic priority for CFOs, and until firms find the optimal technology solution, or find outsourcing a viable solution, private fund managers will need to focus on managing talent.


Private equity firms are mostly still run by their founders, but an increasing number are seeing the next generation assume leadership roles.

Around 80 percent of the firms participating in the survey have investment professionals in place that would be able to carry on the firm’s culture and investment strategy, but CFOs across all AUM are less confident in their pipeline of future leaders.

“Approximately half of the CFOs believed they had a strong leader at their firm to replace them when the time comes. CFOs have told us that talent management is a strategic priority,” EY says.

How strong is your firm’s pipeline of tomorrow’s leaders?


Tasks to outsource

CFOs are particularly bullish on outsourcing fund accounting, tax and regulatory functions, and over the next two years they anticipate increasing demands on back office functions. Larger firms are also considering technology solutions alongside co-sourcing or outsourcing models.

“CFOs are hoping that by spending less time on back-office operations, employees will have more time to focus on client-facing and portfolio related analysis,” the survey says.

Investor relations activities were viewed as the least valuable to outsource, followed by valuations and internal management reporting.

How would a perfect third-party solution contribute to your success?

Tax operating model

The private equity industry is yet to establish an optimal tax operating model, but an overall trend to outsourcing seems to have emerged. Around 70 percent of tax functions are outsourced to third-party service providers, and those with fewer AUM tend to outsource more.

“The imbedded corporate culture of insourcing and existing internal processes may have influenced the view of larger firm CFOs that insourced or co-sourced tax operating models are easily scalable solutions,” the survey says.

Many firms either outsource or co-source both routine tax functions such as tax compliance, transaction due diligence and structuring. Key investor-facing tax functions for firms are more likely to be performed internally such as investor onboarding and answering tax questions.

What percentage of your tax function is currently outsourced, by AUM