You get what you pay for

An issue we here at PEM have been vocal about lately is the lack of recognition that private equity finance and operational professionals receive for their contribution to a firm’s success (and thus sustainability).

Partly as a result of GPs looking to control costs and limit hiring, CFOs, COOs and CCOs are being asked to do more with less. No matter what the budget situation, it is their job to stay on top of new regulatory and compliance requirements; answer ever-increasing amounts of LP due diligence questions; perform robust valuations on a quarterly basis; distribute K-1s and other tax reports to investors in timely fashion and perform countless other duties that have become more challenging in the last five years.

For many of those responsibilities, where more manpower isn't really an option, technology has been GPs’ saving grace. It’s far easier to complete fund accounting with software that can automatically generate ledger entries whenever a capital call notice or transaction is entered into a shared system, for instance.

All things considered then, it seemed a bit curious to us that the recent CFO survey we conducted in conjunction with EY found that firms typically allocate less than 5 percent of their annual budget to technology spend.

Why so little? Well for one GPs don't tend to be big adopters of new technology. Even if a new 'must have' bit of kit emerges, many will take a skeptical view, at least until the business case has been thoroughly proven or it has been tried and tested by others.

But what we hear from CFOs and other industry sources is that because the 'back office' is not a profit center per se, there’s often a perception among senior management that available resources would be better put to work elsewhere.

This seems like a mistake. Take investor reporting, for example, which an increasing number of investors say is vital to enhancing the LP-GP relationship. SunGard research shows that 70 percent of senior private equity executives think it is important to provide LPs with interactive reporting, but fewer than one in four actually provide their finance and IR teams with the technology to do so. Happy LPs may not directly translate to better performance, but their capital is the firm’s lifeblood.

The obvious solution here is for the CFO or COO to make the case to senior management during the budgeting process that better technology is a firm-wide benefit. However, according to one CFO, GPs may not take this message seriously until investors start making an issue of it during fundraising. “LPs often say ‘I want this and that’, but until they say ‘I’m not re-upping until I get interactive investor reporting’, GPs will hold fire and make do with what they have got,” he said.

What these firms should consider is that current reporting and data requirement trends are only going in one direction – and finance and operations professionals are already stretched thin. GPs that are already thinking about how to enhance their portfolio management technology, build better data warehouses, integrate their systems and so on – before picky LPs start making it a deal breaker during due diligence – stand to reap significant dividends in the future.