This article is sponsored by Sanne.
It is a familiar picture. One by one, the screen populates with faces, some in their home office, a couple in their dining and living rooms, the edge of a mattress pokes into one frame. Then another head appears, the background is somewhere lush and bright, far away from a world of covid-19.
This year’s Private Funds CFO Insights roundtable was held, like so many meetings these days, on Zoom. The topic: the findings of this year’s Insights survey. Based on chief financial officer and chief operating officer responses gathered in August and September 2020, it is a snapshot of a resilient industry adapting in real time to a fluid operating environment that provides few clues as to when it will settle.
“No one knows what the future looks like, so we’ve stopped saying ‘back to normal’ and are saying instead, ‘forward to new,’” says Karin Lagerlund, CFO at HarbourVest.
“The experience of working remotely changes the workforce and where people want to be; how clients want to invest; and the investment cycle too.”
That said, fundraising has not slowed. The survey reveals around three out of four firms are looking to market a new vehicle either this year or next and fund sizes are still rising. However, scratch the surface and the situation is more nuanced depending on fund size and brand reputation, as the discussion among our panel reveals.
From an administrator’s perspective, success has been mixed. “Our clients range from small start-ups to large and established, and we’ve seen a variety of impacts,” says Fred Steinberg, managing director for North America at Sanne Group. “We have clients that a year ago thought they would launch their next fund by Q4 2020. Now that’s moved out by six months to a year in certain cases.”
Managing director for North America, Sanne
Steinberg is regional head of North America at Sanne, a company offering fund administration, corporate administration, investor relations, treasury and portfolio monitoring services. He joined Sanne in 2017 from Morgan Stanley, where he held the position of executive director in finance, overseeing and supporting closed-ended alternative asset funds.
One reason for the pause has been disruption to the investment cycle. “We’re not actually fundraising now,” says Saw Mill Capital CFO Blinn Cirella. “We needed to complete one more investment in order to launch and that’s been impacted by covid. Everything came to a screeching halt.
“It will be interesting to see if funds that are in their investment phase decide to extend the investment period to make up for the fact that the market has lost the better part of the year. Covid-19 has pushed out our fundraising plans a bit.”
Saw Mill is not alone. “We’ve seen challenges with asset managers making new investments,” says Steinberg. “It’s still happening, but at a slower pace than 2019. There’s a lot of dry powder chasing fewer deals. We have clients that are six to 12 months behind schedule depending on their asset class.”
“We’ve had several GPs ask to increase the ability to reinvest proceeds or extend the investment period, and we’ve been open to working with them,” adds Lagerlund, who notes HarbourVest was able to close its latest secondaries vehicle on its $8.1 billion hard-cap in October because of a rise in LP interest when the covid-19 crisis hit. The new environment has triggered “a shift in what LPs want to invest in while they continue to put money to work.”
Managing director and chief financial officer, HarbourVest
Lagerlund is a managing director and HarbourVest’s chief financial officer. She oversees the finance team and is responsible for the firm’s global treasury, trading and accounting operations.
And as they do, LP scrutiny of back office functions continues to rise (more than two-thirds of the survey’s respondents report an increase in LP interest over the last three years) placing more demands on stretched CFOs. How have they managed?
For Kohlberg & Company, during its latest fundraise, putting in place a “robust data room with internal control flow charts and updated compliance manuals” helped the firm pre-empt many LP questions, says the firm’s COO, Shant Mardirossian. Investors “got a good sense that we had a solid operations group. Meeting over Zoom provided the opportunity to showcase the depth of the team. We included everyone from IT to general counsel to finance and operations teams on those calls. A couple of LPs made suggestions and we took them seriously, made changes and reported back. Zoom has turned out to be something valuable and useful. It allows more people to participate. It’s very efficient.”
In future, conducting due diligence remotely, at least in part, may well become standard practice. “I think LPs will split into three different groups,” says Béla Schwartz, CFO of The Riverside Company. “There will be those that as soon as they can travel, will want to come to meet you in person and kick the tires. And there will be others who use Zoom. It saves money and is more time efficient. And of course, there will be a hybrid approach among investors as well.”
Chief financial officer, The Riverside Company
With more than 30 years in private equity, Schwartz has been the chief financial officer at Riverside since 1998. Schwartz holds an MBA in finance from the University of Michigan; a masters in music from Northwestern University and bachelor degrees in music and psychobiology from Oberlin College.
Transitioning to working remotely appears to have been a relatively smooth process for all our panelists, partly because the digitization of key processes was already underway.
“We had a digital acceleration plan in place before the pandemic,” says Lagerlund. “Before the crisis, the implementation team was pushing for user adoption, going slowly and deliberately. When covid happened, it was definitely a digital acceleration catalyst.”
Sandra Kim-Suk, CFO at Norwest Equity Partners, echoes the point. “We moved our legacy systems to the cloud at the end of 2018. People were slow to embrace it until covid and then they totally embraced it.”
However, the process has not been without its challenges. “We’re still getting used to the technology. There’s a lot that it offers and sometimes it feels almost too much. At the end of 2019, right before covid hit, we upgraded our AV system to include Cisco Webex. We had some initial issues but by the time we had to work remotely they were hammered out. Everyone feels connected using Webex.”
Such tools have proved crucial. “Seeing someone’s face on the screen is different from hearing a voice on a phone,” says Cirella. “When you can’t meet in person with your group, having those online connection points is really helpful. It’s the way to build resilience.”
Mardirossian adds: “We were not a Zoom user until covid hit and within days we became huge adopters, to the point that if someone sends me a conference call number I request they switch to Zoom, as it seems so old school.” However, there is a caveat. “With an existing relationship, we’re all comfortable doing everything by Zoom,” says Mardirossian. “But if you have someone new, whether it’s a new hire or new management team or investor, at some point you’re going to have to meet in person.”
Post-covid-19, Cirella anticipates that “some portion [of this new way of working] will stick and some [old ways] will come back. We are doing a lot more on Zoom, but on deals there will come a point when you need to sit in the room with the management team and get the feel for the group. But it will likely happen later in the process than it used to.”
Chief financial officer, Norwest Equity Partners
Kim-Suk is the CFO of Norwest Equity Partners | Norwest Mezzanine Partners and is responsible for financial accounting, operations and reporting – including performance analytics – as well as overseeing the technology group and sharing compliance responsibility. She is a senior financial executive with over 25 years of experience in banking and private equity.
GPs have also taken the shift to online annual investor meetings in their stride. The benefit is that investors “can attend as they please,” says Schwartz, noting that Riverside has historically made its annual investor conference available on a conference call to accommodate staff that could not fit into the venue and investors in other time zones.
“We have multiple funds. An online meeting means LPs don’t then have to sit through presentations for funds they’re not invested in. On the other hand, we’ve also heard this year that many LPs miss time spent with the investment teams and other members of the firm.”
Looking forward, “I wouldn’t be surprised if the AGM evolved into a hybrid meeting in which parts are live-streamed in addition to in-person meetings,” says Kim-Suk. “There could be a scenario where you give people the option of both. From an LP perspective, you may not want to send out an entire team. If you’re the CIO maybe you would attend and take two of your team members and let your junior team members join the conversation online.”
Chief financial officer, Saw Mill Capital
Cirella joined Saw Mill Capital in 2006 and manages all financial and administrative aspects at the firm. Previously she was a director at an administrator, the controller at Commonfund Capital and director of finance and administration at Orien Ventures.
Cirella expects that elements of the AGM will return as “LPs also find value in networking with each other there. It’s really important for them to stay connected to their peers.”
This year, rather than host a live meeting, Saw Mill is broadcasting its November meeting from a local TV studio. The meeting will follow a similar format with portfolio company presentations, market overview, and a question and answer session. “We’ll see how well this works and assess what we might be doing in the future,” Cirella says.
Now, more than ever, the role of the CFO is critical. It is top of the survey’s list of back office must-haves – only 4 percent of respondents say it is not a must-have. While our panel reports that during the pandemic the content of their role hasn’t changed, “there is more work; I am working more than I have in the past – and then I worked all the time,” says Kim-Suk. “There is no separation between work life and personal life; there is no more going into the office and coming home.” The heads on the screen nod in agreement.
“We’re all working around the clock; long term, it’s not sustainable,” says Mardirossian. As the “central gatekeeper” providing access to data and company information, it falls to the CFO or COO to accelerate communications with investors, he says. At the beginning of the crisis, “we got flooded with investor requests for information on liquidity, runway and other KPIs that we normally don’t provide.”
Over the past six months, among its LP requests, Riverside has received queries about how the portfolio was performing during the crisis, remaining unfunded capital commitments, recycling of capital, and fund governance, as well as lines of credit. “Communications to LPs have never been as frequent or detailed as they were during the first four months of covid,” says Schwartz. “LPs wanted to know what was going on in our funds with specific investments and the potential impact on valuations.”
And the queries were not just from investors. “It’s about being proactive and not waiting for a fund manager to ask how much capital is left. It’s about anticipating communications with your deal teams. We have 20-plus funds and every waterfall is nuanced, so we are using this time to create efficiencies, standardize processes and implement technology while maintaining accuracy.”
Partner and chief operating officer, Kohlberg & Company
Mardirossian is a member of Kohlberg’s investment committee, overseeing investor relations and the firm’s financial, compliance and administrative functions. Mardirossian joined Kohlberg in 1996, was named chief financial officer in 1999, a partner in 2005 and chief operating officer in 2013. Mardirossian is on the board of directors of Alacrity Solutions.
Lagerlund notes that her team has received new requests for data like uncalled capital, credit capacity and fund liquidity. “We’ve also become more focused on risk management and identifying risks that we may not have thought about before.”
Cirella foresees that the spread and detail of tasks is pushing the evolution of the CFO role toward something “completely different, and at some point it’s going to be about being a really strong project manager responsible for co-ordinating different people – consultants, lawyers, tax advisors, fund administrators, HR, 401K consultants – to provide services you need in a way that’s fast, efficient and accurate and at a great price. The role is so deep and so wide and so technical that no one person can do all this.”
This realization also applies to smaller firms where “they have a lot on their plate and are looking to expand their teams to include a VP of finance and a CCO. It can be overwhelming, with too many things happening at once,” says Steinberg.
Saw Mill, which put its recruitment plans on hold when covid hit, “will be hiring hopefully in the next couple of months,” Cirella adds. For others, the pandemic has proved to be an opportunity to bring people on board. Schwartz, Steinberg, Mardirossian and Kim-Suk have all recruited. And HarbourVest has scooped up a number of new hires in the past six months, including 10 additions to Lagerlund’s team. “The number of available candidates has been great. I was able to fill my open positions easily,” she says.
How best to integrate new team members who have never worked in the physical office has been a consideration. For Kim-Suk it has meant “tons of calls. We talk every morning as a team on a half-hour check-in. Our new hire joined in May and has been instrumental to the team, but the last time I saw him in person was in March. Part of our culture is to take the new person out to lunch, show them around, and we haven’t been able to do any of that right now.”
For all our panelists, and the industry as whole, life will continue to be very different for an unknowable amount of time to come. In the meantime, as our panel reports, the back office continues to adapt and evolve.
The pandemic has amplified concerns around cybersecurity, with 83 percent of survey respondents reporting that working remotely has made them more conscious of it. No wonder – all our panelists can describe scam attempts, which have increased in volume and sophistication.
“Cybersecurity is always top of mind,” says HarbourVest’s Karin Lagerlund. “I’m happy to see people are using virtual signing platforms that emphasize security. The environment has accelerated the adoption of those types of technologies.”
“We’ve changed some of our security protocols,” says Norwest Equity Partners’ Sandra Kim-Suk. “Some of our investors have asked us why, but given the increase of cybersecurity fraud, I say that we’d rather be safe than sorry and they see that makes sense, although it’s a bit more painful for them.”
Going forward, “the risk is that we get used to this environment and that we might let our guard down,” says Saw Mill Capital’s Blinn Cirella. “We’ve all got to stay vigilant.”
Sanne’s Fred Steinberg agrees: “The key to success is the engagement with your team, staff and clients. Everyone has the right technology and security in place. The issue is human error. Phishing has become more sophisticated and that is how a hacker bypasses your controls. Someone opens an email and thoughtlessly clicks on a link. People need to be sensitive and vigilant. Security training is key to ensuring people working from home are not too relaxed and let their guard down.”
Spotlight on valuations
According to the Insights survey, when it comes to LPs’ questions on back office functions during due diligence, those pertaining to valuations are the most detailed. During the pandemic, how easy has it been to manage detailed LP scrutiny around valuations?
“There are more questions around the process itself rather than LPs challenging valuations,” says Fred Steinberg at Sanne, who sits as an observer on valuation committees. “LPs want to know that GPs are being thoughtful about their inputs – there’s subjectivity here, and it can be an iterative process – and what’s going on in the market to help validate their thought process.”
As to whether current valuations will impact exit timing, Steinberg says: “The assets here are not short-term, so it depends on how you are marking your assets over a multi-year horizon. In the future, this period will be a blip in a fund’s lifecycle.”
“Valuation is an art, not a science,” says Riverside’s Béla Schwartz. “We all learned a lot in March and June when we tested our processes and methodologies to see if they could assess what a willing buyer would agree to pay a willing seller for a business. This was not a fire sale valuation exercise. We use a third-party valuation firm to value the portfolio companies, which includes input from the deal teams. Their work product results in a valuation range recommendation from which the value is generally selected. Maintaining consistency and adhering to the valuation methodology is critical during these uncertain times.”
At Kohlberg & Company, Shant Mardirossian conducts valuations in-house. “There is no precedent,” he notes. “We had to think creatively. In consultation with our auditors, other valuation professionals and by talking to peers, we try to approach it from a reasonableness standpoint, recognising that covid is not a permanent change to the fundamental demand drivers of one particular business, but might be for others. We’ve made some modifications to our approach, which when explained to our auditors and LPs, backed by analytical support, is understood and accepted.”