Back offices are under more scrutiny from investors than ever before. Almost three-quarters of respondents to the Private Funds CFO Insights Survey 2022, conducted in partnership with TMF Group, told us that LP interest in back office functions has increased over the past three years.
Unsurprisingly, virtually all respondents believe a permanent CFO is considered a must-have, at least to some extent, by investors. But the survey illustrates how CFOs are experiencing pressure to oversee an ever-growing list of functions. Some 32 percent of firms in our survey said a robust Know Your Customer policy is now ‘to a great extent’ a must have – nearly double the level when the question was asked four years ago. Similarly, those saying an Anti-Money Laundering program is ‘to a great extent’ a must-have grew from 22 percent to 40 percent over the same period.
The overwhelming majority of firms surveyed by Private Funds CFO reported that LPs’ questioning of back office functions is ‘very detailed’ or at least ‘a little detailed’ in a wide range of areas. Nearly seven out of 10 respondents said valuations received very detailed scrutiny, with questioning on compliance and cybersecurity also driving more pressure on the back office. “Investors want more information. Compliance has gotten more robust,” says the CFO of a technology investment firm. “The operations side of a business needs to grow significantly as a result.”
The CFO points out, however, that “there’s a natural lag after fundraising until people are hired to take care of the accounting, tax and compliance.”
“There’s a huge demand for resources right now, but there’s not the supply that was there even a few years ago”
The CFO adds that their back office team had grown from 19 to 26 people in the space of two years. And in our survey, the proportion of firms saying they plan to increase the number of staff working in operations, back office and middle office teams has increased drastically. Some 69 percent of respondents said these teams will grow in the next year, compared with just 52 percent who said the same a year ago. Only 5 percent expect the size of their team to decrease.
But, given current conditions in the recruitment market in the US and Europe, finding qualified staff is getting harder – and more expensive.
“There’s a huge demand for resources right now, but there’s not the supply that was there even a few years ago,” says Kwame Lewis, TMF Group’s co-head of fund services for North America. “The big four auditors are experiencing very big churn right now and that’s trickling down to everyone else in the market.”
Multiple sources consulted by Private Funds CFO report growing difficulties in finding the right candidate. One CFO at a mid-market firm describes the process of filling a role this year as taking “a lot longer” than was typical before the pandemic.
The obvious alternative is to outsource – and the survey shows that this strategy is increasingly widespread across a wide range of functions. More than four in 10 firms reported that they plan to increase the outsourcing of IT, tax, fund accounting and compliance. In the case of compliance, the share planning to increase outsourcing grew from 27 percent last year to 40 percent in this year’s survey.
Some sources argue that the rise in outsourcing is directly related to the increased pressures of diligence. The CFO of the mid-market firm says it is “helpful to have outsourcers who may have templates to help answer LPs’ questions” on areas such as ESG, where firms tend to lack experience.
The CFO at the investment technology firm says that their firm started to outsource fund accounting two years ago. The CFO explains that the firm “didn’t need to bring in a whole army of people to do very simple administrative work.” By offloading these routine tasks, the CFO reports that the firm had been able to give “more of a career trajectory” to those professionals who remained in-house.
Other sources note that smaller firms face a particular challenge in coping with evolving investor expectations in areas that require specialized skills, meaning that outsourcing to expert providers represents the best way to secure both efficiency and quality.
Lewis agrees that outsourcing to a fund administrator, which “can be scaled up or down depending on the amount of work required,” may be more efficient than hiring an in-house resource, who the firm then has to train and integrate into the team. Yet Lewis adds that firms must strike a balance between outsourcing for the sake of efficiency and effectiveness, while retaining a strong back office team.
“There’s a lot of analytical tasks that you can’t always get your fund admin plugged into, just because the fund admin is not inside your firm as an employee,” he says.
“You still need a couple of employees inside the firm to act as a bridge between management and the fund admin.”