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The Evolution of the Private Equity CFO

The demands on private equity CFOs have never been higher: pressure from investors and regulators has ushered in new requirements for transparency and reporting, and the record levels of competition and attractiveness of private equity as an asset class have meant CFOs are more actively involved and considered in the differentiation strategy of their firms than ever before.

This marks a material shift in the perception of the role of the CFO: where previously it was focused on reporting and protecting value, in future it will be focused on delivering insight and identifying opportunity for value creation.

Competition 1.0

As evidence to this trend, a recent study by Ernst and Young showed that the reporting processes of fund managers grew 4x in significance as a key factor in investors’ manager selection decision.

What is also clear is that most CFOs have responded positively to this challenge, with almost two-thirds implementing improved investor reporting to satisfy these new demands. While this investment will no doubt benefit the industry, and the data flow between fund manager and asset owner is crucial to improving the reputation of private equity, most firms view this as a “cost of doing business” and their data as a means to a reporting output as opposed to a real opportunity to add value to their portfolios.

Outsourcing has been a key element of this reporting improvement. Most firms are looking to streamline operations while maintaining best practices in order to remain competitive with the increasingly dominant mega funds – and third-party administrators have thrived in being able to offer scalable resource to address new and complex regulatory challenges. According to EY’s findings, CFOs are outsourcing the day-to-day process of tax compliance, fund administration and accounting, with >60% of firms indicating they have or will shortly look to outsource these functions. Investors too are sympathetic to this trend, and over two-thirds of them are comfortable with these functions being assigned to external specialists.

Competition 2.0

Through this migration of transactional processing, CFOs are beginning to see scope to provide more input into portfolio analysis and the strategic positioning of their funds. In today’s market of inflated valuations, where operational value creation is becoming increasingly important as a driver of overall fund performance, this shift in expectations and objectives could be both timely and necessary for funds wishing to remain competitive.

This shift in focus would include CFOs taking greater ownership of the operating data of the fund’s portfolio and improving the timeliness, granularity and actionability of this information. Technology will be the key to their success, both in enhancing the amount of data available to firms, but also in shortening the reporting cycle such that any data collected is inherently more actionable.

Further, portfolio analysis in the future will shift from traditional, backward-looking KPIs and financial information to more integrated reporting with non-financial data to supplement the bottom-line performance. This presents a new challenge to finance teams in ensuring they have the right mix of skillsets and talent be able to convert greater volumes of traditional data, as well as this new non-financial unstructured data, into meaningful insights and analysis.

The first step is always just to collect the data, and 45% of firms have indicated they will be investing more in data warehousing and analytics over the next two years in order to harness this growing opportunity. In an industry that for the most part still relies on Excel for reporting and analysis, this is an important milestone in a journey that should end in private equity firms delivering on the full benefits of big data and potentially helping to define the digitization strategies of their portfolio assets.

The question for private equity CFOs then is really whether they see opportunity to include this analytical expertise within their existing teams, given they already govern the financial data of the firm, or whether this is better left to investment professionals. Based on the responses of the survey, they certainly seem to have the appetite for it; now comes the execution.

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