Private equity CFOs play expanded role in facilitating growth despite formidable regulatory challenges through strategic investment in process and technology
- Three out of four CFOs expect their firms to raise another fund of equal or greater value within next three years
- Regulation and compliance are most pressing challenges for 45% of CFOs
- Two-thirds of CFOs view themselves as most valuable when interacting with investment professionals and investors
- 80% of CFOs expect to hire fewer professionals this year
Confronted with numerous changes that affect their business model, most CFOs at private equity firms recognise that global regulation and compliance, as well as operational efficiency, are the top challenges facing their firms over the next two years, according to Navigating the headwinds (pdf, 1.5mb), EY’s inaugural global private equity survey in collaboration with PEI. Despite these challenges, CFOs are optimistic about future opportunities and growth, and have been responding to the changing environment by increasing investments in process and technology.
The survey documents the views, insights and observations of 105 private equity fund CFOs and finance executives from Asia, Europe and North America among all different asset classes, and was conducted between August and November 2013.
Jeff Bunder, EY’s Global Private Equity leader, says: “CFOs believe the industry will continue to grow and five years out, PEs that have withstood the financial crisis will continue to flourish. With 80% of firms surveyed having raised capital in the last four years, CFOs are bullish about future investment opportunities. They are also looking to raise additional capital in the next few years.
“We were encouraged to learn that most CFOs feel that the most difficult times are behind them,” commented Arleen Buckley, Director of US Conferences at PEI. “And that while uncertainties loom with respect to regulation and compliance across various jurisdictions, CFOs feel they have the knowledge and power to be an effective partner in the stewardship of their firms.”
Graham Stokoe, EY’s Africa Private Equity leader commented, “For CFO’s of African PEs, we expect more focus on regulatory and compliance as this area rapidly evolves and continued focus on how the CFO and their finance team can add value to the investment professionals and the firm’s portfolio companies. Superior performance always attracts capital, so it was no surprise that CFOs view their performance primarily shaped by value brought to the front office. We also expect to see a trend to more outsourcing of back-office functions, particularly the small and mid-size funds which cannot afford a full Finance team. African PE CFO’s need to continue innovating in order to achieve more with less.”
Key findings from the survey include:
Regulation and compliance remain a key concern
For 45% of CFOs, regulation and compliance is at the top of the list of their concerns for 2014.They also cited the increased regulatory demands have put a strain on their firm’s resources and have limited their ability to focus on key priorities. Forty percent of respondents said that regulatory issues hinder their ability to oversee operational efficiency. As a result of regulatory changes, 83% of CFOs expect to see an increase in costs.
Improving operational efficiency while adding limited headcount
With regard to headcount for performing functions such as fund accounting, investor relations, tax, technology, valuation and human resources, CFOs said they plan to hire fewer professionals in the next few years. In areas where they plan to hire, CFOs are looking for talent with specialized competencies, such as fund accounting (26%), investor relations (24%), compliance/risk management (17%) and portfolio analytics (17%). More than two-thirds of the firms (72%) said they currently outsource or expect to outsource technology functions, while 66% say they already outsource tax functions.
CFOs highly involved in valuation and financial reporting
In addition to managing increased regulatory demands, firms are also looking to CFOs to enhance their valuation process through developing and implementing formalised policies and procedures. Of the firms surveyed, 65% have valuation committees, with 72% of CFOs highly involved in the valuation process. More than three-quarters of firms currently validate portfolio company operating results through discussions with the investment teams or through comparison of board materials with management, but may look to an automated solution in order to save time and costs.
When participants were asked to describe their firms’ current practices for disclosing information contained in quarterly financial statements, they unanimously reported that a standard has not yet been developed. In Asia, 67% of CFOs reported that they do not include footnotes in their quarterly financial statements, a practice that can often enable CFOs to alleviate one-off requests from investors.
To gain perspective on CFOs’ key priorities, the survey also asked participants to rank the factors that were used to review their job performance. Most CFOs said providing value to investment professionals (60%) and investors (44%) was most important, providing further evidence that the role of the CFO has expanded.
PEI is the only global B2B information group focused exclusively on private equity, private real estate, private debt and infrastructure. As these four asset classes continue to grow in scale and significance – for investors, fund managers, financial practitioners and other service industries globally – so PEI is positioned to provide unparalleled business knowledge and intelligence to these communities.
With offices in London, New York and Hong Kong, PEI publishes five globally-recognized magazines alongside five news websites, manages one of the most extensive set of databases dedicated to alternative assets, publish a large library of specialist books and directories, and run more than 30 market-leading conferences globally including the annual Private Equity CFOs and COOs forum in New York. They are the leading specialist information provider dedicated to alternative assets. For more information, visit www.thisispei.com
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