Redefining the role of private equity CFOs & COOs

Fundraising, AI and cybersecurity topped the agenda at our 2024 New York Forum as delegates pondered the multiple challenges facing the modern CFO. By Tom Auchterlonie, Jennifer Banzaca, Graham Bippart and Graeme Kerr

Our New York 2024 CFO Forum convened in January after a challenging year for the private equity industry. Fundraising had fallen for the second straight year in 2023 and the global economy, while improving, remained mired in uncertainty.

Add in the political uncertainty from the upcoming 2024 US elections and it’s fair to say that delegates who gathered at the New York Sheraton had a lot to discuss.

Technology was a topic on everyone’s lips amid growing demand from investors for better data, with cybersecurity proving a rich source of debate when two FBI agents took to the stage to offer hacker prevention advice.

Talent retention and recruitment remain an issue for hard-pressed CFOs amid rising salary levels at private equity firms. Valuations, meanwhile, are a source of conflict given the lack of strong comparables and benchmarks.

But there was general agreement that for all the challenges, the role of the private equity CFOs and COOs continues to evolve in myriad ways, with AI providing some exciting opportunities.

Here are six takeaways from the event.

Grounds for optimism on growth

Meera Pandit, global market strategist and executive director at JPMorgan Asset Management, was largely upbeat in her macroeconomic snapshot on the opening morning of the New York Forum.

For 2024, JPMorgan projects 2 percent real GDP growth in the US, 2 percent inflation by the end of the year with unemployment remaining around 4 percent.

“Yes, we do still have headwinds when we think about rates and lending conditions and consumer headwinds. But that doesn’t necessarily push us into a full-blown recession,” she said.

“And then when we think about inflation, if you looked back two years ago, it was everywhere, in every category. Now we’re not seeing it as broad-based inflation. I think that is a good thing.”

The big uncertainty surrounds interest rates: “We don’t necessarily think we’re going to see as many cuts as are priced in right now,” she said. “If inflation comes down, then they’re trying to bring rates down to keep that real rate steady. Unless inflation is going to drop 170 basis points, there’s no reason that the Fed would need to cut that much.”

GPs face fundraising ‘beauty contest’

The ever-steeper climb that sponsors face in fundraising weighed on the minds of GPs who spoke at the New York Forum, where they shared tips on how to adapt.

“My great big insight is: it’s super tough out there, and so just trying to maintain quality engagement on a very regular basis is really what’s going to put you on the shortlist for the beauty contest,” one buyout panelist said. “That’s another word that investors keep referring to it as – it’s a beauty contest.”

And getting a foot in the door to land new LP relationships is now a big challenge.
“If you’re talking to an investor who has room for a new manager relationship, pretty universally they’re saying, ‘Maybe we have room for one new name or two new names,’” said the panelist, after worldwide PE fundraising dropped for a second consecutive year in 2023.

A venture capital speaker noted that fundraising times have grown over the past five years. But it has gotten particularly hard in the past year, with some CFOs at the event saying one and a half to two years is common right now, as opposed to the three or four months it took when the market was at its hottest.

The VC panelist cited pre-marketing as contributing to prolonged fundraising periods. “That used to be a six-month process for me, and now it’s in triplicate. It’ll take 18 months.”

The buyout speaker noted that successfully establishing relationships means proactive and ongoing engagement with potential investors.

“You’ve got to show up early and often,” she said, adding that CFOs should “look broadly,” for investors, and that repeat visits with potential new investors are especially critical in distant regions that are newer to the asset class, like Asia and the Middle East.

LP requests require better tech

Managers are rethinking their tech needs as LPs demand more granular data on portfolio companies’ operating performance and fund finances.

Fifty-one percent of attendees at one panel said LPs’ requests for information and ongoing reporting were becoming more detailed, and they are requesting more analysis in their reports. Another 22 percent said LPs want information in specific, standardized formats.

The CFO/CCO of a healthcare PE firm said investors are asking more sophisticated questions now. “LPs are really digging in more to our valuation process. They want to know how we do our valuations and what methodologies we are using. It’s more than just a data dump. They want to be able to recalculate their returns,” the CFO/CCO said.

Firms with smaller compliance teams may have trouble responding to so many investors’ requests, particularly for ad hoc questions. To head off so many requests, some firms are making as much information available to investors as possible.

“We’ve had investors ask for additional information, so we decided to put it out there for everyone, so all of our LPs are on the same level,” the CFO/CCO said. “Technology can help you gather and distribute the data, but with so many LP requests it’s just not practical, frankly. So, it’s easier to get ahead of it but making the information available that you are most often getting requests for.”

Besides reporting as much information as possible, one fund admin exec said he is working with clients to standardize their reporting so all LPs get the same information at the same time.

The CFO of one large PE and private credit shop said she prepares reports as if presenting to multiple constituencies: LPs, the investment team and the IR team. Each group needs different types of data reported from the firm’s platform. However, because the different platforms do not talk to each other, reports may require data to be generated manually.

“While we’ve standardized data on our different platforms, and that has made some reporting much easier, we haven’t been able to integrate the different platforms to talk to each other. There are different software programs that are optimized to serve different needs, but they don’t talk to each other, and that’s what we’re searching for now,” the CFO said.

The COO/CFO of a venture capital firm agreed that firms need platforms that can talk to each other and aggregate data from different areas of the firm.

“We’re trying to find that application that sits on top of our different platforms to aggregate across fund accounting, deal information or management company information. We have systems that solve every reporting problem in different areas across the firm, but we’re searching for the tool that is going to bring that all together, whether it’s for forecasting, budgeting or just general reporting of returns,” she said.

“We’re trying to find a system that can take us out of Excel and make the reporting function much more automated and integrated with our system.”

AI is starting to make inroads

More PE firms are turning to AI for fast and accurate extraction of data from documents, such as quarterly reports and financial statements.

“I think AI is going to be a big part of data gathering and sorting on our end, so more information can be readily available for our investors,” said one CFO. “I think data reporting will be more interactive for the LPs, and they will use it to look at our portfolio companies and find out as much information as they want and communicate with us. I think AI will also be very helpful in scheduling investments and creating better search tools and more interactive reports. It’s going to be an interesting next five years as GPs start taking advantage of more opportunities using AI.”

Reporting may be more interactive and efficient using AI, but there is something of an age divide, with mainly younger employees excited by AI.

“The younger generation are able to do so much more with AI. They are lobbying for the technology to be used more to build the business to meet their current and future data needs, and the needs of the LPs. It’s a continuously shifting landscape and we’re seeing a push to stay on top of it to try to improve things,” said the COO/CFO of a venture capital firm.

Audience polls taken live at the event repeatedly showed that very few firms have adopted AI for anything, with many citing the still-unknown risks associated with the advanced technology.

But for some, the robots are already here. One partner at a mid-sized firm recalled an anecdote from another recent conference. There, a member of a large private equity shop related that the firm “fed all of their investment memos from the last 20 years into this AI robot that they had, and asked it to share what they thought the outcome of that investment would be, and it was so spot-on that that robot now has a vote on their [investment committee].”

FBI agents Amit Kachhia-Patel and Paul Roberts told delegates to ‘think creatively’ about hackers

FBI keen to help with cyberattacks

Fund managers worried about their growing cybersecurity risks should know that the FBI is here to help, two top agents told the Forum.

“We’re not a regulatory agency. Our primary goal is to provide relief,” Amit Kachhia-Patel, assistant special agent in charge of the Bureau’s New York field office, told a packed room at the conference.

“We may be in a position to provide you with an encryption key, we may be in a position to provide you with more fidelity into that particular threat. We’re happy to work with your third-party mitigators.”

If the “intrusion is severe enough,” Kachhia-Patel added, the FBI has a team of “packet ninjas – these are some of the most technical folks we have” to work on-site with fund managers under a memorandum of understanding to help fix the problem.

Just last fall, “a large firm” in the New York area was crippled with a ransomware attack. The firm called the FBI out of the blue. Within 48 hours, the Bureau was able to provide an encryption key that got the firm back online, Kachhia-Patel said.

Joining him on stage was Paul Roberts, another assistant special agent in charge who focuses on financial crime. He urged managers to “think creatively” about how insiders in their firms might try to profit on the information they help hackers uncover.

“It’s important to get in touch with the FBI as soon as possible.” If a firm suspects a hacker has authorized illegal wire transfers, for instance, and alerts the FBI within 72 hours of the hack, “there’s a very, very high likelihood that we get that wire transfer stopped and get your money back to you.”

AI – for all its promises – has also magnified funds’ risks, the FBI men agreed. It’s allowed state-backed hackers in China and North Korea, for instance, to improve the English-language proficiency of their spear-phishing attacks, Kachhia-Patel said. (That’s just one reasons firms should consider segregating their networks if some of them run in countries where cyberhackers proliferate, he added.)

The barriers for entry for cyberhackers have also dropped dramatically. A would-be hacker can buy a spear-phishing kit on the so-called dark web for about $3, “less than most of us would spend on a latte here in New York,” Kachhia-Patel said.

A growing concern are AI-created deep fakes, Roberts said: “We’ve already seen examples of deep fake technology fooling people by the millions. The risk that a cyberhacker could create authentic-seeming audio or video clips of a fund CEO is growing.” Roberts said that some of the Burea’s top cybersecurity experts, recently told him: “We’re in the advanced phase of AI now. The early phase was six months ago. Just imagine what it’s going to be like in five years, or even one more year.”

Secondaries surge boosts sale options

The heightened pace of secondaries fundraising will likely produce a larger and more liquid market for sellers, speakers said during a panel focused on continuation funds. “If there is more competition in the marketplace, there could be tighter bid-ask prices, so there could be an impact on pricing as well,” one speaker noted.

A CFO from a firm active on the sell side pointed out how greater fundraising and the resulting dry powder gives more choices for secondaries transactions: “There’s that extra optionality as fund managers that we can look at.”

The CFO recalled that their firm moved its entire portfolio of a growth vehicle into a continuation fund during the pandemic before dabbling in single-asset versions of the fund. Another panelist argued that a deeper market will help to mitigate a vexing topic for continuation funds: primary fund GPs sitting on both sides of the deals.

“More money, more buyers means more competitive process and a better, more robust opportunity to check these transactions given how much conflicts are usually involved,” they said.

Secondaries fundraising hit an annual record in 2023, final fund closes totaled $117.9 billion, more than double the 2022 count of $53.3 billion, according to affiliate title Secondaries Investor.