CFOs can create a competitive advantage in PE
The overwhelming demand for private equity makes it the asset class of choice. But investors are now focusing on operational excellence as a key differentiator.
Almost three-quarters of the PE-firms we surveyed plan to raise significant capital in the next two years. Performance has been, and always will be, an investor’s top criterion, but stakeholders are now also focusing on regulatory and operational risk management and transparency.
Investors have added a new layer — proven operational excellence — to their definition of ‘performance.’ To create a competitive advantage, private equity CFOs must demonstrate that their internal operations are both effective and efficient.
“Performance opens the door. To win, we must demonstrate why investors should allocate capital to us.”
Regulatory: managing risk
Today’s CFO must master operational and regulatory risk, portfolio monitoring and valuation, as well as direct interaction with investors.
They have been spending more time than ever dealing with regulators, and compliance will remain a core concern. Investors are increasing their focus on private equity firms’ fiduciary responsibilities, and regulators continue to sharpen their examinations of the industry.
At the same time, CFOs are being asked to mitigate, if not eliminate, operating risks. Top among those risks is cybersecurity; protecting confidential information involving investments, investors and the firm itself has quickly become a fundamental issue.
Reporting: the critical link
Reporting is more than the critical link between private equity firms and investors; it’s also the most prominent area for firms to gain a competitive advantage. Private equity firms that report in a transparent, timely and reliable fashion demonstrate operational excellence.
Investors want to increase their comfort level by developing a complete understanding of valuations and how private equity firms operate behind the scenes. This desire for faster, more robust and more customized reporting increases the CFO’s workload.
“Investors have become more sophisticated. They are asking new questions, developing processes, and making specific requests.”
Private equity firms expect requests for customized reports to increase in both quality and quantity. CFOs who master the complexities of timely and transparent reporting can place their firm head and shoulders above the average.
Making the best use of resources
CFOs, in extending their focus, face a series of challenges around infrastructure and resources. Spreadsheets and manual processes limit private equity firms in their ability to respond to the increase of reporting requests, so they must look at new technology and new processes, including outsourcing.
Investors are comfortable with private equity firms moving to an outsourced model for tactical areas. But they prefer compliance, investor relations, portfolio analysis and valuation to remain in-house.
For those functions, technology solutions might address capacity challenges. Innovation and optimization will allow businesses to scale, minimize resource constraints and enable CFOs to focus on strategic priorities.
Getting in position
The role of the CFO is growing exponentially more complex and important, shifting from traditional finance functions to optimizing performance based on proven operational excellence. To conquer these formidable challenges, CFOs must move beyond tactical actions to strategic priorities.
This year’s survey reveals one area where investors and private equity firms are in agreement: both value the CFO more than ever. By rising to the challenge, we are convinced that leading CFOs will skillfully position their firms to win the competition for capital.
Beyond track record
CFOS Expect to focus more on cybersecurity
Investors request customized reporting
CFOs are learning to do more with less
CFOs plan to increase their focus on strategic functions