2014 global private equity survey
We approached our inaugural survey of private equity CFOs wary that its tone would ring of uncertainty and concern. In the aftermath of the crisis, CFOs face extremely high expectations from investors and unprecedented burdens related to regulation.
Our apprehension was unfounded. PE CFOs are meeting these demands with rigor, creativity and a relentless focus on operational efficiency.
As a result, CFOs are optimistic about growth. Nearly four of five CFOs report that their firm recently finished raising a fund. About the same number expect to raise another fund within three years and believe the new fund will be of equal or greater value than the last.
Regulation and compliance top the list of challenges, with operational efficiency a close second. Executives report that regulatory demands drain resources and limit their ability to focus on key priorities.
Interestingly, although most CFOs ranked “providing value to investment professionals” as the most important factor used to review their performance, only 5% said it was the most concerning challenge over the next two years.
Impact of regulation
Firms are actively working to understand global regulations, assess their business impact and tailor their compliance programs accordingly. FATCA, AIFMD and the tax treatment of carried interest are expected to have the largest impact.
According to survey respondents, 42% of new costs associated with regulation are passed on to the fund, with 58% borne by the firm.
CFOs allocate compliance-related spending primarily to external-facing areas, such as investor reporting, regulatory reporting and marketing material/collateral.
AIFMD and FATCA
CFOs report that the AIFMD will not affect their firms’ fund-raising efforts. CFOs in Europe and Asia are more definitive in this position, presumably because they have already dealt with the AIFMD and are determined not to leave money on the table.
FATCA is likely to affect PE firms’ focus on legal entities and investors, although this is still in flux depending on the final 2014 compliance guidelines. Still, nearly three-quarters of respondents say FATCA preparations have been manageable to date.
Spurred by inquiries from regulators and investors, valuation committees have taken shape to influence the development of formalized policies and procedures. Nearly two-thirds of firms overall have formal committees, although the practice is far less common in Asia.
Nearly all firms prefer to manually obtain portfolio data, refraining from automated solutions. However, we believe CFOs may move toward scalable solutions so investment teams can spend more time analyzing (as opposed to collecting) portfolio data.
North American firms are much more likely to prepare full valuations quarterly, compared to firms in Europe and Asia.
The vast majority (88%) of firms issue annual audited financial statements within 90 days, and most firms (76%) issue quarterly financial statements within 45 days.
Regarding the degree of disclosure and reporting detail in quarterly statements, practices vary significantly. Still, we believe that clarity (in the form of footnotes) can alleviate one-off requests from investors.
Firms with more than US$10b of assets under management (AUM) maintain comparatively higher levels of non-investment-focused employees. Overall though, more than 80% of CFOs express the sentiment that current staffing levels are “just right.”
CFOs more often outsource specialized functions, such as technology (72%), tax (66%) and fund accounting (44%).
Technology concerns facing CFOs resonate beyond private equity to the broader asset management industry. System incompatibilities, production and scalability are top concerns.
Many executives agree that, in the long run, “big data” will be essential to effective firm operations.
What do finance/operations executives see as the most concerning challenge over the next two years?
What is the expected impact of regulatory changes?
Has the AIFMD reduced your firm’s likelihood to raise money in Europe?
How difficult has it been to prepare for FATCA?
What percentage of firms have a valuation committee?
Describe the level of your firm’s footnote disclosure in quarterly financial statements.
Average total number of employees
What are your firm’s major technology concerns?