A grueling fundraising market has added a fresh layer of complexity to the role of the CFO in 2023. Indeed, two-thirds of respondents to the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, described finding new investors as either challenging or extremely challenging right now, while close to half said that supplying existing LPs with the liquidity they require to re-up to fresh vintages is hampering their ability to hit targets.
“The current environment means managers are having to be more creative in order to achieve a successful fundraise,” says Ore Adegbotolu, head of US markets at Aztec Group. “Some are looking further afield in terms of where they are raising capital. They are marketing more into Asia, for example, or redoubling their efforts in Europe. Others, meanwhile, are intensifying efforts to tap into the retail investor space.”
Clayton, Dubilier & Rice, which recently closed its latest flagship fund on $26 billion after repeatedly raising its hard-cap, did both. “We targeted the high-net-worth market in a meaningful way for the first time and we also launched in Luxembourg to tap into Europe more than we have done before,” says CD&R’s CFO Jillian Griffiths. “We accessed most of the high-net-worth capital through a series of private banking platforms, providing them marketing exclusivity for certain time periods and strategically sequencing the platforms into the market over the course of the fundraise.”
Working with high-net-worth investors inevitably created additional operational complexities, particularly as CD&R is a firm that has typically insourced its administration. “We outsourced to an AIFM (alternative investment fund manager) in Luxembourg, largely because this is something we decided to do in the middle of a fundraise,” explains Griffiths. “We will see how that goes and then decide whether to continue down that route or bring it all inhouse.”
One of the challenges of moving into a new region or new investor group is the associated regulatory backdrop, and given the fluidity of the regulatory environment, selecting the right outsourced partner is key.
“We definitely noticed differences in opinion in terms of how all the various third-party administrators interpreted the rules,” Griffiths notes. “Some took everything very literally. Others were more pragmatic. It was important to spend a lot of time with the administrators to assess cultural fit and how everything would be operationalized post-fundraising.”
Despite the inherent challenges, the CFOs that gathered for a roundtable discussion in New York to discuss the findings of the latest CFO survey remain relatively upbeat about fundraising prospects.
Their optimism is matched by survey respondents, almost three-quarters of whom expect their latest fund to be larger than its predecessor, while only 8 percent expect to downsize.
Although the institutional investor market is certainly suffering with liquidity constraints compounded by the persistence of the denominator effect, there are still pockets of institutional capital that are in build-out mode when it comes to alternative allocations. There is also the allure of the elusive retail investor market, of course.
“Institutional investors are looking to build exposure to alternatives and, as Jillian mentioned, retail and high-net-worth investors should be able to access as well,” says Barry Giarraputo, CFO at NB Alternatives. “There is also much more focus today from an investor standpoint on Europe and Asia. Traditional institutional appetite is still there, but in addition there are whole new populations looking to invest in these asset classes.”
“We are seeing some liquidity issues with regard to timing, but GPs are responding by getting more creative in the fundraising process”
Jennifer Brouse, CFO at Blue Owl Capital’s GP Strategic Capital, concedes that there is a timing issue right now. “Data shows that private capital LPs are net cash out of pocket, which is in part due to the slowdown in realisations,” she says. “There is a mismatch in terms of money coming back from some vintages relative to capital ready to deploy in others, and it is impacting the timing of fundraising. For many, it is just a question of timing, however, and the fundamental value is still there.”
Aztec Group’s Adegbotolu agrees: “Some of the big pension funds are telling us they are actually increasing their allocations into alternatives, and as GPs start to find mechanisms to support retail investors, the overall pie will undoubtedly get bigger. We are seeing some liquidity issues with regard to timing, but GPs are responding by getting more creative in the fundraising process.”
Head of US markets, Aztec Group
Ore Adegbotolu is responsible for leading and driving the execution of Aztec’s growth strategy in the US. Prior to joining the firm in January 2023, he spent 13 years in the banking industry as a senior client coverage leader, covering large-cap multinational corporates and private equity firms, delivering corporate finance and transactional banking solutions on a multi-jurisdictional basis.
Consolidation ramps up
Despite this bullishness, some GPs are struggling more than others. The long-term trend of LPs consolidating relationships with favored managers has intensified, increasing the possibility for more inter-firm M&A. Two-thirds of respondents to the Insights survey expect to see consolidation among GPs over the next 12-24 months, and 12 percent expect this consolidation to be significant.
As far as the prospect of inter-firm M&A goes, however, the assembled CFOs are more circumspect. Private equity is, after all, a people business above all else, making mergers inherently risky.
Where consolidation does tend to make sense is where the acquirer is looking to add a new strategy to its platform, according to Adegbotolu, who points to the spate of acquisitions of secondaries specialists that has taken place over recent years. “If the acquisition offers access to a new set of skills or a new market, there is a better chance of it working, notwithstanding the challenges of meshing different personalities and cultures.”
CD&R’s Griffiths, meanwhile, says it is not simply an issue of culture, but also an issue of governance. “How do you truly make this acquisition target a part of your firm? Do you extend your governance structure across the newly enlarged organisation, or do you let things carry on as they have before, in which case, you are not really accomplishing what you were trying to accomplish.”
CFO, LLR Partners
Noah Becker has more than 30 years of experience in the corporate financial and public accounting sectors, and is responsible for financial reporting and oversight of all administrative financial matters at LLR Partners.
The march of AI
In addition to dealing with the immediacies of a turbulent macroeconomic environment, CFOs, in their ever more strategic role, are having to monitor and act on the potential threats and opportunities posed by rapidly evolving technological advances. The buzzword for 2023 and beyond is – of course – AI.
“Artificial intelligence and how it is applied is going to be a major differentiator in the private markets industry,” says Noah Becker, CFO at LLR Partners. “Some firms are starting to get really strategic about their use of this technology, which means their people can focus on what they do best, whether that’s fundraising, origination or helping companies grow, while letting AI look after day-to-day routine operations.”
Indeed, around half of the CFOs surveyed are actively evaluating potential use cases for AI, although only 11 percent have implemented the technology within their workflows and processes so far. Meanwhile, of the 37 percent that have yet to review the potential benefits or are actively avoiding the use of AI at this time, the reasons cited included the need to better understand workflows and outputs, and the need to see practical use cases, as well as security risks and a general sense of mistrust given the nascency of the technology.
“Artificial intelligence and how it is applied is going to be a major differentiator in the private markets industry”
“There is no doubt that technology is going to play a crucial role in what we do as administrators,” says Adegbotolu. “Where people are slightly guarded is around the complexity of side letter provisions and SMAs.
“When it comes to handing all of that over to technology and hoping it is going to pick up on the nuances from one vehicle to another, I just don’t think we are there yet. However, AI can be used to automate routine tasks where there is a high degree of standardisation, with the workforce used for quality assurance.”
NB Alternatives’ Giarraputo agrees: “I think the use of AI to complete routine tasks such as data gathering is inevitable. That then frees up people’s time to focus on the analysis. It also means we are having to bring new skill sets into the finance function, including data scientists.”
Data scientists are not the only hires on CFOs’ wish lists, however. CFOs across the industry say that they are making preparations for upcoming regulatory changes. One CFO, who asked not to be quoted on this issue, told Private Funds CFO that they have “no choice but to expand headcount given the proliferation in regulation”, adding that the US Securities and Exchange Commission’s recently adopted Private Fund Adviser rules will create a lot more work for CFOs and their teams.
“Even after we figure out how to address all the new calculations, the condensed timelines for quarterly reporting are going to create more pressure,” the CFO said.
For Becker, meanwhile, the key is not just recruitment, but also retention. “You have to make sure you have created a good place to work. You have to give people the chance to learn and to grow. That institutional knowledge that exists within an experienced team is so powerful, that that retention piece cannot be underestimated.”
CFO, GP Strategic Capital,
Blue Owl Capital
Jennifer Brouse is a managing director at Blue Owl and CFO of Blue Owl GP Strategic Capital. She is a member of Blue Owl’s operating committee and of GP Strategic Capital’s valuation committee. Prior to joining the firm, she was CFO of Dyal Capital when it was a division of Neuberger Berman. She previously worked at PwC.
Outsourcing gathers greater pace
As the demands being placed on finance and operations teams grow, CFOs are also revisiting the question of outsourcing. Almost three quarters of CFOs surveyed currently outsource their fund administration, and the trend appears to be gathering momentum.
Griffiths says CD&R is also planning to move toward a more outsourced model. “We want to scale, but we want to scale appropriately. It is challenging because we have recurring reporting that we need to do, but then there are also the non-recurring transactions. We are thinking carefully about outsourcing those elements that are easier to shadow, such as co-investment.”
“The staffing challenge that we all face is impacting administrators as well… And ultimately, these partnerships come down to people”
Clayton, Dubilier & Rice
The prospect of outsourcing can nonetheless be a daunting one for CFOs. “I fully understand that,” says Adegbotolu. “Anything that goes wrong is a reflection on the manager, which is why I think it is important to forge a partnership, rather than a vendor-customer relationship.”
“You can outsource the work but not the responsibility,” adds Giarraputo. “That means you have to pick a partner you can rely on.”
For others, meanwhile, the biggest risk involved in outsourcing is staff turnover. “The staffing challenge that we all face is impacting administrators as well,” says Griffiths. “And ultimately, these partnerships come down to people.”
The importance of continuity is why Aztec has taken the decision to grow its own talent internally, according to Adegbotolu. “The war for talent is fierce. We are fighting our peers. We are fighting with managers themselves, with the Big Four and with the banks. So we have developed an academy concept. We train people up from apprenticeships and help them get their qualifications. That creates loyalty in a world where talent can be fungible, and I think our retention rates speak for themselves.”
CFO, NB Alternatives
Barry Giarraputo joined Neuberger Berman in 2022. He is a managing director and CFO of NB Alternatives with 37 years of experience in the investment management space. Prior to joining the firm, Giarraputo was the CFO of Antares Capital, a mid-market private debt firm. He has also worked at Apollo Global Management and Bear Stearns.
Alongside their many other responsibilities, CFOs are also having to become increasingly investor-facing. In fact, the vast majority of LPs now expect to engage with the CFO as part of their due diligence process, either in person or via video conference, the survey shows.
“I am lucky that I have an incredible IR team that does a lot of the leg work for us,” says Griffiths, “including creating an extensive operational due diligence deck, which addresses a lot of the questions that investors have. Investors still require meetings, but those meetings tend to be shorter and tighter than they would otherwise be.”
“Investors increasingly want to hear directly from the CFO,” adds Giarraputo. “They want to know who is managing governance and hear about the control structure. Valuation is another hot topic, as is the treasury function.”
“Investors increasingly want to hear directly from the CFO… They want to know who is managing governance and hear about the control structure”
Becker agrees that valuations and treasury are the top priorities for investors right now, particularly in the wake of the regional banking crisis in the US. “LPs want to know a lot more than simply who you bank with today. They want to get into the nitty-gritty of cash management in a way that they never would have before.”
The collapse of several of the most prolific players in the fund finance market has certainly focused attention on the way private equity firms are managing cash and monitoring liquidity.
The complexities of cash management will only increase, of course, if the asset class extends into retail investment in a meaningful way. “High-net-worth investors may have operational difficulty meeting capital calls on 10 days’ notice,” says Giarraputo. “There needs to be a real education process to ensure these new investor groups understand the alternatives space.”
Becker adds that, while in his experience institutional investors have never missed a capital call, they are asking for better forecasting so they can manage their own liquidity needs. “Institutions want you to tell them what capital calls are likely to look like over the next three to six months, and what distributions are likely to be coming their way as well.”
CFO, Clayton, Dubilier & Rice
Jillian Griffiths joined Clayton, Dubilier & Rice as chief operating officer in March 2015, before being appointed CFO in October 2021. Prior to joining CD&R, Griffiths was a partner in PwC’s US deals practice, specializing in financial due diligence.
Navigating the fund finance market in the wake on the collapse of Silicon Valley Bank, First Republic and others in the US has also become a major operational issue, as CFOs re-examine how they think about counterparty risk in this space. Indeed, over half of respondents to the Insights survey have moved money as a result of the banking crisis, with a further 12 percent still considering shifting funds at the time the survey was taken.
GP Strategic Capital’s Brouse says the regional banking crisis “has materially changed the market landscape and how businesses are run, and we are still very much in it and waiting to see how it all plays out.
“Banks need deposits, but you can’t give everyone deposits, which means many businesses are constantly chasing their own tails. Balance sheets are tighter making it harder to find to capital. We would expect to see some people borrow less simply because borrowing costs have become much more expensive, so that may naturally even things out to some degree.”
“The regional banking crisis has materially changed the market landscape and how businesses are run”
Blue Owl Capital
Greater exposure to retail investors could also muddy the waters when it comes to fund finance, according to the panel. “Retail presents different dynamics in terms of collateral for subscription facilities,” Brouse explains. “The regional banks were a little more scrappy and had more appetite to look at complex situations. The big banks are inevitably going to be more cookie-cutter in their approach and may find it harder to lend to funds with a high retail concentration.”
Aztec’s Adegbotolu adds: “There is a gap starting to form because the regional banks were more aggressive from an underwriting perspective, but the reality is that the bulge bracket banks are going to be more conservative in their approach.
“New capital adequacy rules are going to add even more pressure and so the shadow banking space is going to have to fulfil the role that banks are starting to vacate.”
Indeed, 30 percent of survey respondents are already tapping into institutional investor capacity to help meet their fund finance needs, while 10 percent have borrowed from private debt funds. Of course, the banking sector’s appetite for fund finance has always ebbed and flowed with the cycles, but Adegbotolu believes that the current regulatory environment means there will be more of a structural change this time around.
Brouse agrees. “I think private equity firms are looking at alternative sources of capital. Insurance companies, in particular, are new entrants to the traditional banking space. Change of this nature isn’t necessarily a bad thing because it forces the industry to evolve. It forces the industry to get creative.”
The covid-19 pandemic prompted a paradigm shift in people’s relationship with office working, but many still believe in the value of a shared workplace.
Of all the myriad operational and strategic responsibilities that have fallen under a CFO’s purview over the years, one that few would ever have considered five years ago is whether or not to require team members to come into the office. The disruptive force that was covid-19 compelled all firms to consider their flexible working policies and, two years on, these policies have now been fine-tuned and become a feature of business as usual.
“Post-Labor Day, our investment teams are in Monday to Thursday, while finance is in Tuesday to Thursday, although many come in on Monday too, because they recognize they get a lot done when they are in when the investment professionals are in,” says Clayton, Dubilier & Rice’s CFO, Jillian Griffiths. “If you are going to be in the office, we think it makes sense to be in at the same time.”
Griffiths adds that her firm has also added a couple of weeks where staff can ‘work from anywhere’, in July and early January. This seems to be a common theme.
“We were back in the office early,” says Jennifer Brouse, CFO at Blue Owl Capital’s GP Strategic Capital platform. “We have an in-office culture because we believe that is the best way to develop talent and run the business most efficiently. We have four days in the office from Monday to Thursday, but we have ‘work from anywhere’ in August. I believe all or nothing works best.”