This article is sponsored by SANNE.
The Private Funds CFO Insights Survey 2019 paints an intricate picture of the multifaceted role of the finance head. Today, the chief financial officer shoulders an ever-growing burden as firms launch more and larger funds, LP reporting requests increase, and regulatory obligations become more complex. We spoke with SANNE’s managing director for North America, Fred Steinberg, to understand the role of external providers in supporting the CFO to manage a heavier and more diverse workload.
Given the volume of work handled by the back office, are CFOs outsourcing new functions?
Tax is the most outsourced function as it requires technical expertise around laws and regulations. All businesses need this support, regardless of jurisdiction. We’ve also seen upticks in other areas, most notably fund administration.
To date, outsourcing fund administration has been more prevalent in Europe where these services are more regulated. The US has lagged in this respect; but, given the size of the US market and the number of new funds launched in a wider array of products, the outsourcing of administration will continue to grow.
In addition, we also see increased outsourcing of investor services and compliance, mainly due to anti-money laundering laws, know your customer requirements, data privacy regulations, and investor sophistication.
Interesting data suggests the rate of back office recruitment is slowing.
Internal hires are a cost to GPs, who try to be as profitable as possible. As funds invest and divest over time, the volume of back office work ﬂuctuates. The decision to outsource is unique for each asset manager. Those who have seen the benefits and efficiency of using external service providers will continue to utilize this service.
For their first fund, many GPs may handle back office work in-house. Once they’ve demonstrated success to investors and raise their second vehicle, they’ll typically move these time-consuming functions to an external platform that has the advantage of scalability rather than increasing staff.
Are you seeing the creation of new roles? Chief technology officer? Chief information officer?
Not necessarily – these responsibilities stay with CFOs. Ultimately, GPs want to focus on investing. They will scale where possible and will turn to external providers for technology solutions. As a service provider, we’re proactively investing in technology to support our platform, so GPs can rightly focus on fund performance.
According to the survey, LP interest in GP back office functions remains strong. What kinds of concerns do they voice?
LPs expect asset managers to have a CFO, as the role is critical. They are responsible for running the fund in a holistic sense. There are so many funds competing for the same investor dollars, LPs are scrutinizing everything. They want to know that if they give substantial capital to someone, it’s being managed in a professional, regulated, and well controlled environment.
It is the CFO’s responsibility to determine how best to meet those standards and the fund’s needs. LPs don’t think everything should be outsourced, nor should they be. However, when a function is outsourced, LPs rightfully expect someone in-house to manage and oversee the service provider.
Additionally, one area where we’ve seen a significant uptick in due diligence by prospective investors relates to cybersecurity infrastructure. It has become a hugely sensitive area the past few years, and it continues to evolve. It’s crucial for the asset manager to be able to protect their own and their investors’ data, and it’s critical for the service provider to do the same, as we handle data pertinent to the GP and their investors.
As a service provider, do you feel that scrutiny of your activities has increased?
It has – and we welcome it as it validates our model. We are invited more often than in the past to due diligence sessions for prospective LPs, as well as current investors who come in regularly to re-inspect our processes and procedures.
They want to understand how we interact with asset managers and CFOs, and ensure that our controls are efficient and eﬀective. They want to know that outsourced services are handled by someone who is competent, independent and professional.
Is back office scrutiny by LPs continuous across the fund cycle?
LPs are more focused when deciding whether to invest with a new asset manager, or, commit to their next fund, though as investors mature, more LPs continue to maintain some level of focus afterwards. The amount of recurring due diligence undertaken by institutional investors committing substantial sums of money is rising. They want to establish an ongoing relationship with the asset manager and their service providers.
Are LPs requesting new types of information?
LPs always first look at the asset manager’s track record and the professionals running the fund. As institutional investors become more sophisticated, they scrutinize the same functions, but in more detail. For instance, LPs are digging into risk and compliance frameworks and are probing how managers keep up to speed with new laws and regulations across the regions in which they operate.
Are they asking for information in new formats or templates?
Yes. If you go back over the past decade, due diligence questionnaires have grown from 10-20 pages to two or three times that size, depending on the level of granularity. LPs also are trying to standardize how they ask questions to compare asset managers across the spectrum. They want to consume the same type of information on a quarterly and annual basis, in a consistent fashion that fits their internal reporting of metrics and KPIs.
We touched on cybersecurity. What’s the role of new technology in boosting back office functions?
GPs are more sensitive to the need for better technology and data provision. They are consuming more information on their portfolio company performance and their fund metrics, and they’re using that information to perform scenario analysis to plan ahead. They expect their service providers to deliver that data in an efficient, automated and controlled environment, since they don’t typically invest in database technology themselves.
GP expectations are forcing fund administrators to be more tech-savvy. On the other side, in recent years, we’ve seen growth in the use of portals through which GPs report to investors. That will continue. At the same time, these portals will become more dynamic in supplying data to both investors and GPs.
Are you seeing an increase in automation?
There is definitely an increased appreciation of automation and how it can help. You hear about machine learning, AI and blockchain, and many are investigating these avenues. However, there’s a lot to learn about how these innovative changes may impact service providers and their private fund clients.
Ultimately, the most important things we take pride in as service providers are our professional expertise, exceptional client service, and attention to detail. At the end of the day, we see ourselves as transparent extensions of the CFOs that hire us. We want to give them white glove service and make sure that they know they will receive the attention and the professionalism they require.