When a GP goes to market it is all hands on deck as managers raise ever bigger funds and often increasingly specialist vehicles that demand they demonstrate niche expertise. So, as pfm and fund administrator SANNE embarked on a survey of private fund CFOs, we sought to gauge exactly how far the role of the most senior financial executive in a private equity firm has extended in response.
The pfm/SANNE CFO Survey 2018 polled 100 US-based finance professionals who had fundraising either directly on their plate, or on their minds. More than half worked at firms with assets under management of between $500 million and $5 billion. Almost a third were at GPs in the midst of raising a new vehicle and more than 15 percent said they would approach the market later this year. Another third expected to seek capital in 2019. For those CFOs, there are busy times ahead.
A significant majority of CFOs (63 percent) reported their next flagship vehicle would be bigger than its predecessor. Our cohort was solidly mid-market. About 40 percent had closed their last flagship fund on between $100 million-$500 million, while a quarter had raised $500 million-$1 billion previously.
CFOs agreed that their contribution to the fundraising process is at the very least important if not crucial. Among ways they contribute are by “keeping operations clean, clear and well documented, providing transparent reporting, and ensuring they represent the firm in its best light,” one survey respondent said.
Another highlighted the CFO’s access to historic fund and performance data, as well as their ability to satisfy investors and get them comfortable with the firm’s reporting and operations as critical aspects of their participation in fundraising.
What is clear is that CFOs are being shoved into the fundraising spotlight as LPs increase their scrutiny of back-office functions, and even more so at GPs with which investors seek to establish longer term relationships beyond the fund currently in market. Such is the extent of this shift that New Spring Capital president and COO Jon Schwartz expressed surprise at the survey finding that so few investors asked to meet them.
“Maybe it’s a barbell thing, where the large firm’s CFO may never meet an LP, or they may not be in meetings for small firms, but I would have expected those two answers [to questions on LPs demanding to see CFOs personally and on a CFO’s importance to the process] to be more aligned,” Schwartz says.
That said, a huge majority of CFOs – 83 percent – reported that LPs “sometimes” ask for an audience, with 13 percent expressing that LPs always demanded a meeting during the due diligence process. A tiny proportion, only 4 percent, said that never happens. And even if a CFO toils away in the background without ever having to take on a client-facing role, the results indicate that investors do want to know they are there and their back office presence is permanent.
While fundraising is largely about the investment team and its track record, says Jeffrey Hahn, SANNE managing director, alternative assets, Americas, “the CFO often is asked to provide color regarding performance data, and certainly about the workings of the back office,” he says, adding, “I believe institutional investors want assurances that the technology, process and control environments are sound.”
In this, the CFO is central to ensuring the firm meets LP reporting expectations, which are high and contribute to the overall levels of service investors demand.
“Larger, more sophisticated LPs are going to have higher expectations and may look at reporting standards as an essential part of their participation in a fund,” says SANNE managing director Fred Steinburg, who is responsible for the firm’s day-to-day operations in New York and Belgrade. “The bigger the LP, or the commitment, the more questions and information they’ll demand.”
So does that mean the reporting load will continue to get heavier? LPs are asking for more data, including more detail and cashflow for underlying deals but “are typically satisfied (for now)” with performance data, said one respondent. However, the prevailing absence of standardized reporting templates for track record data during fundraising still means CFOs must address each request individually. After all, most CFOs believe offering improved reporting gives them a competitive advantage when promoting their fund to investors.
No doubt, for CFOs the paperwork is mounting. “The DDQs [due diligence questionnaires] used to be a couple of pages, now they are 20, 30 or 40 pages,” says Scott Norby, executive director, private credit and equity, at Morgan Stanley. “Then the spreadsheets that you’re being asked to fill out, which often is a significant burden on the internal teams and the external teams, are incredible. It is a lot more work and it’s adding a significant level of expense from true dollars and a time perspective.”
To ease the strain and boost efficiency, one CFO said his firm is “looking to implement AI [artificial intelligence] and automation on recurring tasks as much as possible, including the fundraising cycles ie, data room access, subscription material process, notices to prospects, etc.”
The same respondent noted that the most challenging elements of the fundraising process confronting CFOs included planning for different investor types and accommodating them based on their domicile, regulatory issues and tax sensitivities, as well as ensuring there is enough flexibility to allow for streamlined administration of the fund being structured.
Find a home
For any CFO, picking the right jurisdiction for a new fund is critical. In making the selection, the respondent said he looks for flexible regulations, little overhead and a domicile that is easy for investors to understand. Another survey respondent cited investor acceptance first, followed by a clear legal regime, a “good community of similar funds” and “appropriate costs” as qualities he looked for in a domicile.
With these considerations in mind, a significant but unsurprising proportion of survey respondents reported that their next vehicle would be domiciled in Delaware or the Cayman Islands.
Tax, technology and fund accounting are core functions CFOs said they typically handed over to third party service providers. “I think a lot of the need and trend towards outsourcing has to do with the increasing complexity and increasing amount of responsibilities CFOs now face,” says Blinn Cirella, CFO at Saw Mill Capital.
Certainly, as our survey shows, for the private equity CFO today, these responsibilities include engaging in an expanding range of tasks that offer critical support to a successful fundraising.