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The 2019 Private Funds CFO Insights Survey reveals an unexpected pattern. Although the demands loaded onto the back office are growing (due to LP reporting, soaring fund sizes and regulatory scrutiny, among other factors), the rate of back office hiring appears to be slowing. Only just more than a quarter of respondents plan to increase their team by more than one person, compared with more than a third last year.
Bill Tomai, CFO at Centre Partners, believes that “hiring will continue above trend as more funds are created.” But, he adds, “after a long period of above trend growth, a slow down makes sense.” Looking to the future, he expects the automation of the routine elements of reporting will eventually dampen hiring growth.
Today, not everyone notices a change in pace. “Back office [recruitment] is not slowing for us, but it is also not picking up: [it’s] flat,” says one CFO. “I don’t see this changing any time in the near future.”
“We are not seeing that [slow down in pace], we are spending more time on internal and external reporting,” says another CFO. The divergence of opinion seems to reflect the state of private markets today: a wide variety of firms at different levels of maturity investing across different strategies in numerous locations, each with their unique back office staffing needs.
A third CFO comments that he doesn’t know if a slowdown in the rate of hiring is a trend because “I outsource most back office functions.” His response highlights a key determinant of team size: how much work a CFO deems appropriate to delegate to external service providers.
“Our internal back office headcount has been stable over the last three years, but if you include all outsourced work, the number of people involved in supporting the back office function has increased,” notes Dimitri Korvyakov, CFO at Sandton Capital Partners. “So while hiring directly by investment advisors may have slowed down, I would expect the slack was picked up by the companies supporting the back office, like fund administrators, compliance consultants, etc.”
In the face of increased investor scrutiny, CFOs need the additional support. “I would always consider [outsourcing back office functions], and there is usually at least one workstream in each function where you can leverage a third-party’s technology, scale and human resources,” another CFO points out.
One-third of respondents have seen a hike in LP interest in back office functions over the past three years. But LPs still expect a strong CFO to oversee the back office and external providers. An overwhelming majority of respondents, 73 percent, report that a permanent CFO is “to a great extent” an LP “must have.”
One area where LPs insist that firms invest in support is cybersecurity. “One area where we’ve seen a significant uptick in due diligence by prospective investors and relates to cybersecurity infrastructure,” says Fred Steinberg, SANNE’s managing director for North America. “Over the past few years, it has become a hugely sensitive area.”
Compliance is a top priority for investors (around half of respondents report that LPs ask detailed questions on this topic), which is an area that GPs prefer to keep in-house. Only a third outsource these services. “We already outsource tax, accounting and IT,” says one CFO. “We’ve no plans to outsource compliance. However, we are required to appoint a regulated fund administrator and to appoint a compliance officer for the fund/manager. This is in addition to our in-house compliance function.”
One chief compliance office notes that while he is open to outsourcing tax, accounting, technology and compliance, the latter “still needs someone in-house to oversee/own it.”
Similarly, 88 percent of respondents conduct investor relations from within the fold, and only 11 percent – the lowest proportion across functions – plan to increase the amount they outsource.
Unsurprisingly, tax and technology – areas that require cutting-edge expertise – are the two most commonly outsourced functions at 88 and 73 percent, respectively. Of all functions, the biggest proportion of respondents – around one-third – plan to increase outsourcing of fund accounting, which is already high at 69 percent.
However, oversight remains a CFO concern. “I do not think that we should outsource 100 percent of [any] function, as we need to retain some control,” says Korvyakov.