Disruption causes seismic shift for private equity

2016 global private equity fund and investor survey

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In this report, we seek to understand the effects of an evolving regulatory landscape confronting both private equity funds and investors. We are confident these insights will help CFOs and fund managers make more informed decisions as they develop strategies for the future.

Background and methodology

Private Equity International conducted the research, collecting information through telephone interviews with 31 private equity funds and 20 investors, and an online survey to which 103 private equity funds and 88 investors responded.


Disruption. Seismic shift. These three words, more than any others, describe the current challenges and landscape of today’s private equity arena.

Funds are now keenly focused on managing regulatory change, risk and volatility and rapidly positioning themselves to compete for market share. In this new environment, many firms have been redesigning their business operating models to focus on controlling costs and improving operational efficiency.


Relentless regulation

The seismic shift: In just one year, we see a 400% increase (from 11% in 2014 to 45% in 2015) in investors that now rank a private equity firm’s ability to handle reporting requirements as the most important when selecting a firm.

EY – Regulation exponentially multiplies the importance of reporting

The restructuring of the compliance environment and regulatory policy will continue for the foreseeable future. But firms should not rebuild their reporting infrastructure just to keep regulators happy.

The type of data that regulators require is highly similar to the data institutional investors collect and analyze. Many investors now consider the ability of a private equity firm to respond transparently and timely to reporting requests as a key indicator of superior operations.

In their eyes, private equity firms that have their financial house in order are more likely to avoid “headline risk” that could damage a firm’s reputation just as severely as poor performance, which investment decisions.

 

Catch-22

EY – ... the absence of digital solutions drives continuous reliance on personnel

Private equity funds across the globe have been forced to look at restructuring their reporting frameworks and internal processes.

Technology would be the obvious solution to scale, but a standardized, robust technology solution that can help achieve more effective governance and risk management does not yet exist. Nearly all existing systems are an inefficient mixture of technologies.

While private equity firms are confident that they have enough people to meet the challenges they face, they are less confident that their people are performing the right tasks or if they have the right skill sets.

Transformation begins with technology and must be matched by roles, responsibilities and process. In today’s environment, transformation has stalled at the first step, prolonging the dependency on people doing the wrong things and at the wrong time.

 

EY – Outsourcing is endorsed as a sustainable means to improve operational efficiency

Optimizing personnel

These findings highlight the strong influence regulatory changes are having on people. The cost focus, regulation dictated transparency and lengths pursued to avoid risk in the industry have resulted in greater demand for new skill sets and talent.

Funds that wish to overcome the shortage of talent, will need to make important strategic decisions and quickly lay the foundation for superior personnel development. The new environment will also favor firms who can help their people shift between different teams and quickly adapt to new roles as they are pulled in to work on ad hoc projects and initiatives.

This new era is also creating demand for the offerings of asset servicers. The question is no longer whether to outsource, but which functions to outsource, how many providers to rely upon and how to integrate them effectively.

 

Digital divide

EY – The emergence of cyber-threats to business and information security

To survive and win in the new regulatory environment, firms need to embrace a data-centered strategy that enables them to effectively source, manage and process data. As regulators require more reporting information, firms can take advantage of this opportunity to have the new data drive their sales, marketing and client communications efforts.

Of course, this digital transformation will also open new avenues of access for cyber criminals. As many organizations in other sectors have learned, cyber-attacks are no longer a matter of if, but when. To address these risks, private equity firms will need to elevate oversight to the top levels of the organization.

 

Closing thoughts

Implementing a new regulatory framework comes at a steep price. With profit margins squeezed, firms must focus on operational excellence to achieve and maintain a competitive advantage.

Managing the wave of new global regulations while controlling costs represents a formidable challenge in both data management as well as process automation. CFOs can no longer decide that this is someone else’s job, as the success of their funds hinges on their unique ability to adapt and buffer the disruptive forces of perpetual change.

At EY, we are confident in the resolute nature of both managers and investors and are enthusiastic about the future of the global private equity fund industry. We look forward to continuing to invest alongside the industry and support its efforts to enhance financial well-being for investors worldwide.

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