How do you see the opportunity in your obstacles?

Authors

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.

Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

William (Bill) Stoffel

EY US Private Equity Leader

Transformation leader in private equity at Ernst & Young LLP. Loving husband and father to four teenagers. Avid history reader. College basketball fan.

Kyle Burrell

Ernst & Young LLP US FSO Assurance Partner

Looks forward to serving clients at a high standard. Enjoys taking on complex challenges and collaborating with others to come up with the best solution.

6 minute read 16 Jan 2019

The time is ripe for private equity to prosper, but margin concerns remain, according to our 2019 Global Private Equity Survey.

Our sixth annual survey of private equity CFOs finds that despite great strides in launching new products and investing in technological solutions, expenses continue to grow as fast as assets. The survey also found that while CFOs begin to prioritize the cost-effective and competitive advantage of outsourcing to boost their bottom lines, they are acutely aware of the talent necessary to grow their firms. 

You can download our 2019 global private equity survey here and the key findings booklet here.

While CFOs are divided on which path is the best fit for their aspirational goals, one thing is certain: they must act quickly in order to achieve a competitive edge.
Mike Lo Parrino
EY Americas Financial Services Organization Private Equity Leader

1. Strategic priorities

As investors increasingly choose private equity investments, CFOs are riding the momentum to maximize asset growth and rival hedge funds.

Private equity interest is booming, so it is unsurprising that 76 percent of CFOs said that asset growth is the top priority for their firm. What is shocking is the level of competition that the PE industry poses to hedge funds. Currently, 18 percent of the typical investor’s alternatives portfolio is made up of traditional PE investments. Given lackluster performance among many hedge funds, nearly 40 percent of investors expect to allocate more capital to PE firms. Taking advantage of this momentum and displaying optimism, over half of CFOs noted that they expect to raise a new fund in 2019 and 65 percent expect that the new fund will be larger than their last.

Asset growth

76%

of CFOs said that asset growth is the top priority for their firm.

Sensitive to the reasons investors are dissatisfied with traditional alternative asset management offerings, PE CFOs are responding by launching new strategies and less than half (41 percent) are increasing assets in existing strategies. In their quest to grow assets, of those PE CFOs who offer or plan to offer non-traditional products in the next two years, 46 percent will focus on private credit, and another quarter will focus on products across real estate, real assets and venture capital.

2. Maintaining margins during a period of growth

There is a cost to growing assets rapidly, causing margin erosion at many management companies during a period of growth.

The pursuit to grow top-line revenue has been plagued by margin erosion. Forty percent of CFOs noted that margins have worsened over the past two years and another third reported that they were unchanged. Only 28 percent have seen margin improvements. This begs the question: are PE firms doing enough to address gaps in their operational infrastructure to fend off ever-increasing margin pressures? Private equity firms are looking at several areas to reduce costs, with 39 percent of CFOs listing technology as a high priority in mitigating margin erosion, and another 37 percent aiming to prioritize outsourcing. 

Maintaining margins

40%

of CFOs noted that margins have worsened over the past two years.

3. Technology and data transformation

CFOs recognize technology isn’t a short-term fix and understand its long-term benefit for their digital future.

Private equity firms are just emerging from the era of Excel spreadsheets. Despite long-standing underinvestment in technology, most PE CFOs note that their firms have recently or are planning to make investments in technology across a wide array of functions. Over the past two to three years, PE managers have made technology investments in fund accounting (66 percent), investor relations (62 percent) accounts payable/time and expenses (57 percent), and compliance and regulatory reporting (56 percent).

Unfortunately, most report the payoff has yet to be seen. The tax and accounts payable finance functions have received the biggest benefit thus far, with 33 percent and 40 percent of CFOs reporting net decreases in operating expenses in these areas, respectively. The hurdles include the need to enter clean data, integrate systems and fully enable the workforce.

Robotics

60%

of CFOs are not aware of the breadth of robotics solutions available and their capabilities.

With technological advances comes the need for skill sets beyond investment and finance. When asked if their workforce is ready to meet the current data literacy and technology requirements of their roles, the vast majority of CFOs feel that they are. Still, 52 percent of CFOs seek candidates with more data and analytics experience and 23 percent seek candidates with coding and programming skills, indicating that CFOs are focused on strengthening their staff’s technology literacy.

Unlike their peers in the hedge fund industry, PE firms have been slow to adopt robotics. The largest firms (by assets under management) are the furthest along in pursuing next-generation technology investments, as 52 percent are planning to make an investment in robotics, as compared to just 10 percent of the smallest firms. Still, an awareness gap exists. A staggering 60 percent of CFOs leading firms of all sizes are not aware of the breadth of robotics solutions available and their capabilities.

4. Outsourcing

Often overlooked, outsourcing is a key competitive advantage for fighting margin compression.

Private equity firms have traditionally been hesitant to outsource, partly because of the limited availability of outsourced solutions, but the benefits to be reaped in cost savings are significant. Outsource providers are spending money to implement robust technology and supporting infrastructure to take operational burdens off of PE firms. This allows employees to pivot their focus from routine, time-consuming tasks to more value-added activities.

A majority of firms are already outsourcing some portion of their tax function (94 percent), compliance/regulatory reporting (73 percent) and fund accounting (55 percent). Yet, fewer than half of PE CFOs note that they are outsourcing activities such as investor relations, treasury, portfolio analysis, valuation, and accounts payable/time and expenses, leaving room for further cost savings opportunities. 

Outsourcing

94%

of PE firms are already outsourcing some portion of their tax function.

Managers aren’t the only ones increasing their acceptance of outsourcing. Investors increasingly favor this option. Many CFOs report passing associated costs with outsourcing through the funds, helping cut costs to investors. The majority of managers (89 percent) plan to pass through costs of fund accounting services and tax reporting performed by a third-party.

5. Talent management

CFOs place diversity high on their agenda, prioritizing gender and cultural diversity.

Despite the increasing availability of technology and outsourced operational solutions, 60 percent of PE CFOs rank talent management as a top strategic priority. In this environment, talent management programs are a “need to have,” not a “nice to have” for recruiting and retaining best-in-class talent.

Talent management

60%

of PE CFOs rank talent management as a top strategic priority.

As the workforce is evolving, approximately half of CFOs have changed the profile of the candidates that they evaluate, interview and ultimately hire relative to five to 10 years ago. Now more than ever, they recognize the role diversity plays in fostering different perspectives that can positively impact investment decisions. Because of this, 79 percent of CFOs seek to improve gender diversity and 63 percent seek to increase cultural diversity.

Even as technology plays an increasingly critical role in a fund’s operations, there is no substitute for quality people. Investors expect that talent programs to develop future leaders, increase diversity of skill sets and maintain employee satisfaction to minimize disruption caused by turnover are commonplace. In fact, 68 percent of investors say that is it critically important for managers to have a talent management program in place, and 78 percent of investors request information about a firm’s talent management program during the due diligence process.

Managers must heed these requests, as more than half (54 percent) of PE CFOs do not yet have a formal talent management program in place.

  • The purpose of this study is to record the views and opinions of CFOs and heads of finance at private equity firms around the globe. Topics include strategic priorities, technology and data transformation, talent management, outsourcing and the future landscape of the private equity industry. From July to October 2018, Greenwich Associates conducted 103 telephone and online interviews with private equity firms. All amounts in the survey are USD unless otherwise stated. For several of the questions, multiple answers were allowed resulting in responses that do not total 100%.

Summary

Private equity CFOs experienced another year of unprecedented growth, but are still struggling to overcome operational issues that are dramatically eroding their margins, according to our 2019 Global Private Equity CFO survey. Download the full report (pdf).

About this article

Authors

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.

Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

William (Bill) Stoffel

EY US Private Equity Leader

Transformation leader in private equity at Ernst & Young LLP. Loving husband and father to four teenagers. Avid history reader. College basketball fan.

Kyle Burrell

Ernst & Young LLP US FSO Assurance Partner

Looks forward to serving clients at a high standard. Enjoys taking on complex challenges and collaborating with others to come up with the best solution.