Operational excellence: one path or many?

In our 2018 Global Private Equity Survey, we explore the paths CFOs are taking to help their firms become more efficient as they grow.

Private equity chief financial officers (CFOs), facing pressures including increased investor scrutiny and intensifying market competition, are seeking operational success via different pathways, according to the EY 2018 Global Private Equity Survey.

The fifth annual survey of 110 private equity (PE) CFOs finds many firms, especially larger firms with more than US$2.5b asset under management (AUM), consider technology transformation and talent development as key priorities, while smaller firms (under US$2.5b in AUM) are also more likely to view outsourcing as an alternative.

Mike Lo Parrino, Partner, Ernst & Young LLP, said: “While ideal operational maturity may be defined differently for private equity firms by size, it is clear that this needs to be their focus in order to compete for talent and investment capital. CFOs are increasingly confident that they will be taking major strides toward operational efficiency in 2018.”

Our key findings cover five key areas.

1. The importance of operational efficiency

The asset management industry as a whole continues to face investor pressures around fees, and the private equity industry has not been immune.

  • Seventy-three percent of PE firms said they have experienced significant pressure from investors to reduce management fees, and as a result, 31% of CFOs report they have experienced some form of margin erosion.

To protect their margins, private equity firms have had to take action.

  • Twenty percent of CFOs neutralized margin erosion by strategically cutting expenses and growing top-line revenue. Growth remains a top priority for PE firms, with record fundraising in 2017. Therefore, it’s no surprise that 55% of CFOs said they expect to raise a new fund in 2018, and 60% of CFOs expect the fund to be larger than the last fund raised.

Asset growth/product expansion (58%) and talent management (47%) are the highest priorities for PE firms in the coming few years.

2. Technology

CFOs said that they are still in the early stages of technology development for practically every finance function, especially management reporting (51%) and valuation services (53%).

  • Similarly, while PE firms understand that harnessing and managing data is a top priority, 62% of CFOs feel their data is not well-integrated across the organization.

Despite the difficulties in incorporating new technology, over two-thirds of CFOs (66%) said they currently invest or plan to invest in next-generation technology.

  • Firms are currently investing in emerging technologies such as digital data delivery (37%) and advanced analytics (20%). While they are just beginning to delve into robotic process automation (4%), more CFOs said they are planning to do so in the future (14%).

 

Investment plans

66%

The percentage of CFOs who said they invest or plan to invest in next-generation technology, including digital data delivery and analytics.

3. Talent management

Despite larger firms’ reliance on technology, talent management remains one of the highest strategic priorities for CFOs across the board.

  • They see human capital as a valuable asset, but 47% also identified talent attrition as a top risk. A trusted CFO with a capable team that exceeds investor expectations and upholds the firm’s reputation is an important piece that investors consider during due diligence.

Although CFOs are trying to engage millennials and tech-savvy individuals to stay within finance functions, 35% said it is difficult to attract talent in these functions.

  • As a result, firms are increasingly offering other incentives beyond compensation to retain talent, such as expedited title changes/promotions (62%) and flexible work arrangements (51%).

4. Outsourcing

CFOs view outsourcing as a way to shift finance teams’ tactical responsibilities to more value-add activities.

  • If a “perfect” outsourcing model existed, CFOs believe that shifting tactical finance areas such as fund accounting (67%), tax (67%) and regulatory compliance (62%) to a third-party would be most valuable to their ongoing success.

Satisfaction of outsourcing varies based on how large a firm is and which areas they are outsourcing.

  • Tax is currently leading the way, with an average of 70% of respondents saying they currently outsource this function, most under US$2.5b in AUM.

5. Cybersecurity

The increasing sophistication of cybercriminals poses a risk to private equity firms, regardless of size.

  • Twenty-two percent of private equity firms surveyed reported they have experienced a cybersecurity breach, but many more could have gone unreported. Over half (58%) of those breaches were considered at least moderately serious.

To identify vulnerabilities and manage risk, most private equity firms (70%) rely on externally developed intelligence products to monitor cybersecurity.

  • Firms are beginning to recognize the effectiveness of a multipronged approach, taking steps to improve employee training (87%), email monitoring (80%) and using external vendors to perform ethical hacks (80%).
  • 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 CFOs’ strategic priorities, technology and data transformation, talent management, and outsourcing.

    This survey brings forward the perspective of 110 private equity firms of a wide range of sizes and complexities that have operations across the globe. From October to December 2017, Greenwich Associates conducted 110 telephone and online interviews with private equity firms.

Summary

While achieving operational maturity is still a few years away for most private equity firms, CFOs are increasingly confident that they will be taking major strides toward making their organizations more scalable, competitive and efficient in 2018.

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EY Global

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