The demands of transparency

If there was one common theme that reverberated throughout the 2016 PEI CFOs and COOs Forum, it was transparency. The importance of disclosure was stressed during the opening keynote address by Peter Freire, chief executive of the Institutional Limited Partners’ Association (ILPA), setting the tone for the remainder of the conference as delegates discussed how best to confront the demands for greater transparency from investors and regulators alike.

For private equity chief financial officers, improving transparency often means handling increased investor reporting requests. LPs are now four times as likely to name reporting as their number one area of concern for private equity funds than they were in 2014, according to an EY investor survey unveiled at the event.

Conducted in conjunction with parent publisher PEI, the survey asked investors to name their top private equity fund-related concern beyond track record. While 11 percent of LPs said reporting was most important in the 2014 survey, a whopping 44 percent named reporting as the number one concern in 2015.

This massive shift is burdening finance teams to search for answers to better data management and technology. The issue is especially pervasive because of the current reliance on manual processes at many private equity firms, noted Scott Zimmerman, EY private equity assurance leader for Americas and one of the lead authors of the study.

“There are not a lot of sophisticated, integrated systems where information can flow from one piece of the business to the other. Instead there are numerous bridges that have to be walked across, and usually those bridges are spreadsheets,” noted Zimmerman. “It’s creating a real burden on finance teams.”

Indeed, 63 percent of the CFOs surveyed stated that data was the most significant operational challenge they currently face.

But as private equity funds become more digital in order to keep up with increased investor and regulatory reporting, the importance of cybersecurity only grows, noted Zimmerman.

While private equity funds are increasing their focus on cybersecurity policies and programs, only 7 percent of the investors surveyed said they were satisfied with fund managers’ current cybersecurity policies. Interestingly, most of those investors also said they did not see cybersecurity as a high risk in current regulatory campaigns.

“Cyber-threats are a real business risk; the day cybersecurity becomes a top priority is the day one of their funds is directly affected,” noted Zimmermann. “There just needs to be a wake-up call, and it will happen, just a matter of when.”