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Covid-19 has highlighted how integral the role of chief financial officer is within the structure of a private equity organization. It is now so embedded that three-quarters of respondents to the Private Funds CFO Insights Survey 2021 believe having a permanent CFO is a clear investor “must-have.” Only 4 percent disagree.
Across fund size and strategy, CFOs report that during the pandemic their workload has become even weightier. “We do less finance and more firm strategy, fundraising and people issues,” says a CFO at a growth investor. “Covid-19 gave us additional responsibilities like bringing portfolio company CFOs together to brainstorm, as well as working with talent on return-to-office [plans].”
And while the CFO of a venture capital firm doesn’t “think that the fundamental role of the CFO has changed significantly as a result of the pandemic,” they admit that “we are now faced with new challenges, including managing technology and personnel in a remote work environment.”
To cope with the workload, CFOs are leaning more on third-party providers to assume some of the burden. Fund accounting, tax and IT rank highest as areas where CFOs plan to increase outsourcing. Almost a quarter of respondents are considering outsourcing different or additional functions in light of covid-19.
For just under half of respondents (46 percent), the covid-19 crisis has strengthened their relationships with existing external service providers. Of those using third-party fund administrators, an overwhelming majority agree that their providers successfully adapted their technology to work remotely during the pandemic.
Cloverlay CFO Omar Hassan notes that while the nature of the firm’s relationship with its administrator did not necessarily change over the course of the pandemic – “We’ve always worked closely with our administrator and their team. They are hands-on and we have built a strong relationship” – remote working has blurred the lines between internal and external staff.
“There is less of a difference between strong outsourced partners and some of your co-workers,” he explains.
For firms managing in this current environment without an external fund administrator to assist them, “there could be heightened LP concern about the quality of their books, records and security,” says Joshua Cherry-Seto, managing director, CFO and chief compliance officer at Blue Wolf Capital Partners. “I think the industry is moving toward an environment where LPs require a third-party administrator. New funds raising capital now are going out to market with an administrator attached.”
Two dynamics are responsible for pushing the industry in this direction, says Cherry-Seto. The first is the difficulty for small organizations, like mid-market GPs, to attract and retain talent in a competitive space, given the limited prospects for promotion.
The second is the evolution of the advisory role into a strategic partner. “In the mid-market, firms don’t have a head of IR or an internal tax manager, so we look to our vendors to be partners to help us think through the business issues and not simply process transactions. In the administration space there are more niche vendors offering a white glove service. That makes it easier to outsource,” says Cherry-Seto.
At Cloverlay, the firm is looking to potentially outsource two data-related functions. The first is a portfolio-monitoring tool that assists with data cleansing and integration, including applying quality controls. The second is working on building a data warehouse where the team can “grab information from multiple sources and implement some analytical metrics.”
These are “all tech-driven processes,” says Hassan. “We want to harness the data we have.”
One function Cloverlay would not outsource is investment analyst. “It’s a foundational basis of what we do. Instead, we’ve invested in young talent,” he says.
When it comes to recruitment, plans to grow operations, back and middle office teams have slowed over the last year. While a third of survey respondents intend to increase their team by one staff member over the next 12 months, the share planning to grow team sizes by more than one has fallen from 29 percent to 18 percent.
A minority (4 percent) of respondents expect to reduce headcount over the year ahead. This is unsurprising given the demands placed on teams in the wake of the pandemic, as well as the ongoing attention investors are paying to back office functions. Indeed, more than two-thirds of respondents have seen an increase in LP interest in back office functions over the last three years, with just 1 percent reporting a decrease.
Survey respondents report that LPs’ questions about back office functions during due diligence are particularly detailed around valuations (69 percent) and compliance (58 percent). These are followed by cybersecurity and business continuity/disaster recovery, with 52 percent and 42 percent of respondents reporting that LPs’ questions on these issues are very detailed, respectively. Business continuity planning has, of course, become a much more pressing issue this year. More than half of respondents have reassessed their business continuity plans in light of the pandemic and a further 13 percent intend to do so.