The CFO's white knuckles

These four issues are vexing the busiest person in the private equity firm, writes David Snow

It is sometimes said that private equity CFOs are in charge of everything at the firm other than doing deals. In today’s market that would make the CFO the busiest person at the firm.

Indeed, the dramatic decline in deal activity appears to be inversely proportional to the dramatic rise of painful things other than deals that must be dealt with or planned for. With most of these issues, the CFO plays a lead role, or at the very least is made to play air traffic controller.

Consider the range of challenges that CFOs must, now more than ever before, meet and overcome:

Catch 157 – A US Supreme Court judge once famously observed that he could not define obscenity, but that he knew it when he saw it. This most recent valuation season, auditors were telling their GP clients that although they themselves could not assign the proper valuations to portfolio investments, they knew FAS 157 compliance when they saw it (and buddy, this ain’t FAS 157 compliant, they often added).  This often led to an absurdist theater in which the GP was compelled to apply a guideline he didn’t quite understand to value an investment about which the auditor knew little.

‘What’s my Iceland exposure?’ – Limited partners now demand heretofore unheard of levels of detail as they scramble to assess the health of their portfolio. This means that CFOs (with the head of IR, if there is one) are responding not only to frequent inquiries about the performance of individual portfolio companies but also to requests for cross-portfolio analysis, such as to what extent the portfolio has been hit by, say, the collapse of the Icelandic kroner. Ad hoc investor relations of this nature takes up huge amounts of time and is requiring firm managers to build out more robust systems for collecting, analyzing and distributing information.

Smaller fund, tougher choices – Planning the firm budget is a lot more fun when you have a new, double-sized fund under your belt. But for many firms, the next fund will be both smaller and further away, and this means the fee stream will be diminished. Some firms may have to cut partners. But for reasons listed above and below, the finance and administrative teams need more support than ever, and CFOs will need to make sure the senior partners understand and properly prioritise this.

How’s that CCO hat fit? – Unless the heavens part and the Gods of Regulatory Reprieve smile upon private equity, it seems clear that most firms will face a heavier burden from their local regulatory regime. Across the EU, fund managers face a steeper cost of doing business. In the US, firms may be required to register with the SEC. Being a registered investment advisor means hiring a chief compliance officer or, if you can’t afford one, designating someone within the firm to play that role – often the CFO. PEM associate editor Jennifer Harris reported recently that hiring a CCO and other compliance costs may total as much as $280,000 per year, which at a smaller firm is going to give the CFO a real case of the white knuckles during budget planning.