Seven standout findings

The private funds industry is on a roll. Fundraising has surged over the past year as the US and global economies rebound from the shock of covid-19. The Private Funds CFO Insights Survey 2022, conducted in partnership with TMF Group, makes clear that more firms are fundraising and that fundraising targets will increase. But back office teams are being made to work harder than ever as LPs increase scrutiny of how firms manage their investments.

This year’s survey finds that many of the trends identified in 2020 have accelerated over the past 12 months as firms continue to hit new fundraising heights. The seven charts displayed here illustrate how LPs are demanding more detail from fund managers across a range of areas.

As firms seek to cope with these reporting requirements, most say they plan to grow their back office team, while also increasing their reliance on outsource partners for functions such as IT, tax and accounting. The use of advanced technology, however, is on a more tentative trajectory, with smaller firms in particular reluctant to bear the costs of tech investments.

Scouring the globe for investors

The past year has seen a series of high-profile deals where US-based firms have acquired companies in the UK and, to a lesser extent, the EU. But another trend that has received less attention is that US firms are also going abroad in search of investors. Over half of respondents said that European LPs will make up a larger share of their investor base at the next fundraise, while around one-third expect Asia-Pacific and the Middle East to provide more investors.

Fund size matters

Amid a booming market for private funds, with huge volumes of capital searching for yield, this year’s survey sees a large rise in firms reporting that the next fund will be larger than their current vintage. Some 73 percent of respondents expect their next fund to grow in size and less than 6 percent of respondents expect it to be smaller. These figures mark a significant change from previous editions of the survey, when the share of respondents expecting the next fund to be bigger had hovered between 62 and 65 percent.

Every CFO will be acutely aware that breadth and complexity of LPs’ due diligence requirements increases every year. In particular, investors are increasingly focusing on firms’ ESG credentials. Almost nine in 10 respondents said they are ‘always’ or ‘sometimes’ asked if they have an ESG consultant to advise on responsible investing – a 13 percent increase from last year’s survey. Cybersecurity is another major investor concern; 46 percent of respondents are ‘always’ asked about their readiness for a cyberattack by LPs.

Firms battle to increase headcount

With intense fundraising and dealmaking activity, along with the ever-increasing list of investor requirements, back office teams are busier than ever. It will come as no surprise to see a huge increase in firms expecting to grow back office teams. The proportion planning to add more than one hire has more than doubled to 45 percent, compared with 18 percent last year. Whether firms can actually find the recruits in this job market is another question.

Managers remain tepid in welcoming waterfall technology

The past two years have seen a modest rise in firms adopting technology for waterfall calculations. The share of firms that say they use technology has reached 18 percent, up from just 6 percent two years ago. Another 16 percent report that they plan to adopt technology. Nevertheless, a resounding two-thirds majority remain steadfast in rejecting automated waterfalls. A preference for using Excel is listed as the most common reason for avoiding waterfall technology, with many firms considering technology unnecessary or excessively expensive.

Outsourcing grows as firms offload non-core functions

The pressure on back office teams, coupled with the challenges in hiring the right staff while keeping payroll costs under control, means that outsourcing remains a logical strategy. The past year has seen a significant rise in outsourcing across the board. Almost half of firms told us that they plan to increase the outsourcing of IT, with tax, fund accounting and compliance the next most popular functions to outsource. The proportion of firms planning to increase the outsourcing of compliance rose from 27 percent to 40 percent.

Advanced technology remains a future aspiration

Technology and automation may seem the obvious tools to make back office processes more efficient, but this year’s survey again finds a mixed picture in terms of take-up of tech solutions. Cloud computing is becoming ubiquitous – 55 percent of firms have implemented this technology, up almost 10 percent from last year. But more advanced forms of technology remain largely absent. Only 4 percent of respondents claim to use machine learning tools, while AI and robotic process automation are used by less than 3 percent.