Death and taxes might be inevitable, but people are happy to pay a premium to dodge both for as long as possible. Few firms have the luxury of outsourcing their entire tax effort forever, and none can do so without devoting real time and effort to supervising service providers. Eventually, a CFO wants to delegate that task, but the role can be hard to fill.
Veteran tax professionals don’t come cheap and often have developed specializations that don’t include every facet of the firm’s business. Rookies might be affordable, but they haven’t the expertise or credibility to supervise multiple advisors around the world and make the tough calls. And some firms struggle to know when an in-house tax person is truly necessary.
First-time funds can rely on their accounting and law firms to tackle the tax work, but there does seem to be a consensus that there is a magic number that triggers the need for someone to manage the tax effort in-house.
“We see $2 billion AUM as the most common point for that shift,” says Dom Megna, a tax specialist at PwC. “By then you have increasing demands from LPs for their sizable commitments and regulatory demands begin to mount.” However, Megna says that number shrinks when firms have international transactions. “It’s almost a full-time job to manage advisors across multiple jurisdictions.”
And it’s not just size or geography that prompt the need for in-house management. “It’s the complexity of the firm overall, of the funds, and the exposure to international tax issues that can drive tax needs too, says Adam Golden of Tax Search Inc. “A $500 million firm with multiple funds might be more complex than that $2 billion fund.”
Size may imply complexity, but complexity is what truly dictates whether it’s time to hire someone. One CFO says it was the successful launch of three smaller funds in new asset classes that finally triggered the hunt for an in-house tax director.
Making it work financially
As with any role on the finance and operations side of the firm, budget is no small factor. Broadly speaking, the standard salary for that tax professional with the skill set discussed ranges from a base salary of $120,000 on the low end, going up to and beyond $175,000. However, when benefits, supplies and IT upgrades for the role are factored into the price, the real cost can be from $175,000 to $250,000, all in.
And sometimes the CFO’s fellow partners need to see cold hard numbers to approve that new hire. “I’d suggest looking at the billable hours with your current advisors,” says Melissa Henderson of Summit Executive Resources, a recruiter. “If you’re looking at a single hire, double the base number of hours. If you can keep someone busy for 60 to 80 hours, it might be time to bring someone in-house.” And given the hourly rate of most advisors, a new hire might be a bargain.
The recruitment process
No two firms are alike, but the first hire is most often a gatekeeper or liaison role that manages all the outside tax service providers, which requires someone with enough experience be credible in that role. “You need someone who the external advisors, the deal professionals and the senior partners can respect,” says Henderson. “They have to explain the how and why of a particular approach or decision and that credibility only comes with sufficient experience.”
The first hire should also be senior enough to be able to coordinate all the outside advisors with time in the relevant asset class. Experts suggest recruiting from within the GP’s accounting firm, unless they’re unhappy with the current level of service.
Megna suggests someone at a senior level, a director or above, from a Big Four accounting firm. “They have to be able to manage multiple stakeholders and someone with one or two years of number crunching won’t be able to do that.” But one GP noted it’s possible to err on the side of too much experience. Some senior tax professionals develop such specializations that they struggle as the firm moves into different business lines.
Five to seven years appears to be the sweet spot where a candidate has sufficient expertise to be credible, with still enough room to develop the skills required for a firm’s unique needs. Those five to seven years at Big Four firms should also include some IT experience.
“Tax is as much about managing data as it is about process, so someone should have savvy with both,” says Megna. “I see a lot of senior tax directors and heads of tax today struggling to deal with the technology facets of their roles, and these days, data, technology and process skills are non-negotiable. At this point if a tax provider or in-house tax person is not focusing on these issues with an eye on data, process and technology, the firm is being underserved.”
It’s also vital that they have experience in the relevant asset class. One private equity GP bemoaned the fact that the first dozen or so candidates boasted years of experience with REITs, but that expertise didn’t translate easily into their business. “They have to know private equity, and been battle-tested at one of those Big Four firms in order to provide the guidance required,” says Henderson.
Some CFOs consider tax to be too crucial to delegate, or may have extensive expertise themselves. For them, they can increase their bandwidth with a hire dedicated to advising deal teams.
“There’s a tendency when outsourcing the tax function to bring in advisors towards the close of a transaction,” says Megna. “Connectivity is the single most important factor to really benefit an organization. Where someone is connected from the start of that transaction, they can help develop an ideal structure and troubleshoot any potential problems from the very beginning, so there are no issues near the close.” For that role, CFO sources say it’s best to hire an attorney from the firm’s current tax counsel who’s looking for an in-house opportunity.
In fact, the consensus is any first tax hire should be a known commodity. “Chances are, the ideal candidate is already working for you,” says Henderson. “They’re at the accounting firm you’re currently working with, so they know your issues and you’ve test driven them before bringing them aboard.” The operations staffs at private equity firms tend to be small, so any new hire needs to truly fit the culture, and someone who’s been working alongside the team can already feel like a member of the organization.
Naturally, this implies a satisfaction with existing tax advisors. Recruiters may be unavoidable if a firm is looking to change their entire tax team. “Sometimes it might make sense to set up a short term independent contractor to devise the ideal profile of the candidate and then go to market to hire your permanent person,” says Golden.
It should be noted that a formal search adds time and cost to the hire. Furthermore, there is skepticism that any recruiter has access to a wide selection of the potential candidates, since they tend to get hired right out of the accounting firm by existing clients.
Recruiters might be fine for lower level tax professionals, but the first tax hire does tend to be a more senior role. One executive search firm noted that the first tax hire eventually becomes the in-house recruiter that hires young, promising talent they know from their former firms.
Given the growing complexity of tax codes and the industry’s increased exposure to authorities hungry for revenue, it might be best then that a firm’s first tax hire be a familiar and trusted face.