When addressing staffing at a growing firm, chief financial officers usually bear the burden of ensuring that their finance teams are relatively spare in comparison to the size of the investment team. Tougher workloads due to increased investor reporting and regulatory and compliance requirements now mean that CFOs need to do more with less, especially since their teams have not been experiencing much year-on-year growth, according to data from PEI and EY’s 2015 Global Private Equity Survey.
The survey reveals that the finance-to-investment team ratio at most firms is nearly exactly the same as last year. Larger firms, as one might expect, tend to have more resources and larger finance teams behind them, averaging about 49 people for firms with more than $10 billion in assets under management (AUM). Those firms tend to have about 76 investment professionals (or a 0.69 ratio of finance staff to investment staff).
Smaller shops with less than $1 billion to up to $10 billion in AUM, however, are feeling the pressure handling their finance tasks with a team that averages at one-third the size of the investment staff.
One CFO at a mid-sized private equity firm who has served as the head of three other finance teams in the past tells pfm that staffing issues often haunt a back office leader.
“I wish I had a formula or an algorithm to tell you what the right balance is, but I don’t know. It’s more based on the feel of things,” he says. “But you just always need your senior folks to look at the back office as a necessary function.”
Keep it lean
The word that comes up most often when discussing finance team staffing with CFOs or chief operating officers is one that is more often associated with a butcher shop than a buyout shop: lean. Keeping only essential personnel on salary is essential for most growing firms that do not have the capacity and the resources of larger firms.
“It’s always a constant battle. You want to keep costs down and you don’t want to make hires that you might later regret because you were trying to solve short-term problems with long-term solutions,” says the CFO.
So if ratios are not changing to reflect the increased burdens on back office professionals, how are firms picking up the extra slack? One route is through improved systems and data governance.
“Data is the key to all of this,” notes Scott Zimmerman, private equity assurance leader at EY, and one of the lead authors of the aforementioned study. Many firms spend a lot of time and manpower manually reconciling information using Excel and other rudimentary technology in order to deliver uniform data to varied parties including management, investors and regulators. Tired of this extra time and effort, more firms are introducing new systems to do the work for them.
“I’d prefer to spend more time on that technology to allow us to work better without adding more and more folks to do it,” says a second CFO in response to the EY survey.
The catch-22 is that more staff are needed to implement new technology. At mid-sized firms ($1 billion to $10 billion in AUM), you are likely to find one person dedicated to IT, whereas at small firms (under $1 billion), technology is more often taken on as a small portion of a finance professional’s responsibilities.
Therefore, many shops are turning to outsourcing or contracted help to introduce IT solutions as well as solve other short-term problems. Much of the industry sees the manner in which private equity has begun outsourcing as similar to the route that hedge funds have taken over the past five years in that using a fund administrator for certain functions will soon become an industry standard.
“We’re getting larger, with more assets under management, and we’re moving into new territories so that takes more people. Our attitude is to outsource every routine function we can,” notes a third CFO.
Tax, technology, fund accounting and human resources are those functions most likely to have been outsourced over the past two years, according to the EY study, and respondents did not foresee much change in those outsourcing preferences over the next two years.
“I wouldn’t be surprised to see the use of third-party administrators in the industry grow in the next two to three years,” says Zimmerman.
Roy Kelvin, CFO of GI Partners, is not convinced that outsourcing accounting functions is always the best move for private equity firms. “You get better results when you have a dedicated team in-house that can respond now, rather than the possibility of paying higher overtime rates to an outsourcing firm,” Kelvin notes.
In that case, contracted or temporary positions offer another option. Some jobs like gathering contact management data and setting up employees with Concur expense reporting software, or tasks like scanning tax returns and other documents are essential to keep a firm running, but might not justify a full-time hire. Bulking up the staff with some contract employees allows the team to hand over a better finished product to their controller or senior accountant.
Money well spent
Using tools like better data management systems, outsourcing or contract employees are all ways to keep that finance ratio down even as a firm continues to grow and handle larger funds, more investors or wider geographies. With the right support, having the 1:3 ratio remain the same over time might not be an indicator of an overworked finance team, Zimmerman notes, but rather of one that has streamlined its work.
“As you grow, it doesn’t necessarily mean that your people handle more, it might actually mean the opposite,” Zimmerman notes.
Keeping headcount down on the finance team can mean different things for different firms, but the first CFO notes that two positions are really essential to have on your side: a dedicated investor relations position and a dedicated compliance position. Otherwise, all their responsibilities will fall onto the accounting department, and the best people there will be fielding investor calls and handling compliance functions rather than making progress on their own assignments.
While mid-sized firms are likely to have at least one body dedicated to compliance and investor relations, smaller firms usually split those functions amongst other team members, according to the EY survey. The first CFO suggests they make the investment in full-time staffers. “It’s money really well spent,” he adds.
In the end, that sentiment seems to prevail among CFOs: the limited money for finance team salaries needs to be well spent. Even more so, the firm’s senior management needs to be aware that those members of the team are indispensable.