It’s true that GPs have always taken an active interest in the firm’s IT infrastructure; after all, no one wants to be the dinosaur competing against rival firms with all the latest gadgets and gizmos. Across the industry, GPs are updating their portfolio monitoring systems, purchasing nifty accounting software and discovering new ways to share information with investors digitally. Throw in the potential system disruption endured by those caught unprepared by the destructive impact of extreme weather (most recently with Hurricane Sandy, which shut down some firms for weeks), and it’s easy to see why GPs are looking to enhance their technological capabilities where necessary.
But despite all this, the title of “chief technology officer” has never really enjoyed the same stature as other executive roles within the firm. During informal conversations with pfm, industry professionals stress the need for qualified IT professionals – but they very rarely talk about the CTO in the same way they would talk about the CFO or CCO, two other roles wrongly pigeon-holed as ‘back-office’ until quite recently.
This may be changing, though. And while reducing staff workloads and managing investor expectations are clearly two powerful reasons to pay more attention to IT infrastructure, we can’t help feeling that regulatory forces are really the driving force behind the recent rise of the CTO.
After all, LPs will typically prioritize performance and team stability when choosing a GP, meaning IT is typically a secondary consideration. And while employees’ lives can undoubtedly be made easier with new technology, it’s not normally seen as a necessity in the same way that salaries and office space are. However, regulators today are much less flexible today about the quality of GPs’ IT systems and procedures.
In the US, this can be most easily seen with the recent noise around cybersecurity, which the US Securities and Exchange Commission (SEC) has effectively warned is now a top priority for inspectors. A planned SEC cybersecurity sweep comes soon after a similar investigation into GPs’ disaster recovery planning, which was prompted by Sandy. In the UK, the trend is just as clear. As previously reported, the Financial Conduct Authority wants GPs to establish more oversight of third party IT service providers, in order to satisfy updated outsourcing rules. In a change from previous expectations, the UK regulator says fund managers need to understand exactly how an outsourced function is being delivered and take on more responsibility if a third-party provider isn’t meeting all the right regulations.
Although firms that get it wrong face fines, of course, the real danger is the reputational risk. Yes, investors like to receive quarterly statements in neat online portals; but what they like even more are firms that are in no danger of losing their license because of a compliance weakness identified in their IT systems by the regulator.
CTOs can use this leverage to instill the message within the firm that IT infrastructure has become an absolutely critical aspect of meeting today’s heightened regulatory expectations. And as a result, they have – quite rightly – been given a more prominent voice in the executive meeting room.