Podcast transcript: Why the CFO is becoming private equity’s quarterback

17 min approx | 17 Mar 2020

Winna Brown

Hello and welcome to the EY NextWave Private Equity podcast. In our series we explore the impact private equity can have on the economy and society, capturing insights from industry thought leaders and private equity practitioners from across the globe. I’m Winna Brown, and I’m your host.

I’m really delighted to have Mike Lo Parrino here with me today. Mike is the Financial Services Organization PE Leader, and he’s one of the authors of the 2020 Global Private Equity Survey, which is in its seventh year. For those in our audience who have yet to read the survey, it takes the pulse of CFOs within the private equity sector. It dives into the key issues they’re focused on and considers how their role is rapidly changing. Mike, welcome.

Mike Lo Parrino 

Thank you, Winna. Really happy to be here.

Brown

Firstly, congratulations. The PE survey is super interesting, and I’d love to explore a little bit about the survey and its history. You know, when I think about the survey having been around for seven years, what strikes you as the key ways in which CFOs of private equity have had to evolve to keep up with the changing demands and responsibilities of their role?

Lo Parrino

Well, thank you for the congratulations. And this is a big team effort for the survey; there are a lot of folks who are involved in it and really happy with the result. This is our seventh year, and as we look back there has been a definite change in the topics. One of the observations I had that I think is key is when you look back seven years ago, you’ll see the topic of valuation or regulatory compliance were two of the key areas that we covered, and of course, they’re still very important topics. But as you now transition seven years later, the growth agenda, as well as talent, as well as innovation, have really been the main areas of priority for respondents.

To give you some background on the survey, we had about 100 private equity fund groups participate. We are really happy with the dispersion across the industry. We think it’s very representative. About one-third of respondents were $15 billion and above in AUM, one-third was $2.5 billion and below, and the other third was in between. So, it really represents the full industry, large and small, and the feedback. I’d like to also thank not only the team who put the survey together, but more importantly, the participants and the COOs and CFOs who participated.

Brown

Well, it’s fantastic, and that’s probably why there are so many interesting insights highlighted in the report. Perhaps we can unpack some of the findings a little bit. One of the strategic priorities you’ve highlighted that the CFOs have noted are asset growth and talent. What, in your experience and in discussions with CFOs that you work with, is the the key relationship between growth and talent from the CFO’s perspective?

Lo Parrino

They’re very much connected, of course, and that is another area that we have seen change over the last seven years — just the size of the capital and assets under management within the industry. There’s approximately $3.4 trillion of AUM in private equity. And if you expand that further into private credit, it goes up to $7.4 trillion. So clearly that’s an area that’s been a strategic priority. One of the first tables that we have in the survey, and it’s one of the first questions we ask, is “What are your strategic priorities?” Asset growth is the number-one priority, as we would expect, and obviously the industry has been very successful at it with the type of AUM that I rattled off.

I think it’s very well-connected to talent because, clearly, with that expansion in AUM, the operating model, talent, technology and process are very important to scale and take on the additional capital. As well as different strategies, which is another topic we’ve heard from the CFOs in the survey, where private equity, as I mentioned, is a large part of the strategy, but it’s expanded into credit and real assets and real estate. And even a small percentage that we’re starting to see included in the survey is retail and public funds. So, clearly, private equity has expanded further than the traditional private equity in the past.

Brown

Mike, how would you describe how the need for top talent has evolved over time? And specifically, what are you seeing as the types of skill sets and personalities and backgrounds that potentially have the biggest impact on asset growth? 

Lo Parrino

Yes, the skill set has definitely changed. Accounting, of course, is for sure still important as well as finance, but technology has become, as we see in the industry and generally in our society, such a big part of pretty much every industry, including ours. So the skill sets required for the talent pool are much more technology-savvy, with much more data analytics experience. Our CFOs are speaking about how, in this competitive landscape of private equity, you’re not just competing against other private equity firms; you’re actually competing against other industries, such as technology. So you really have to be focused on attracting talent and retaining talent.

On the retention side, CFOs have mentioned that they’re definitely changing some of the things they do at the firm to maintain retention. Office programs, more open workspace, casual dress, remote access, working from home — a lot of these things are used to attract talent. And as you know, Winna, we actually do a lot of this ourselves here at Ernst & Young. As I speak, I’m wearing jeans right now, as we have a casual workplace environment. So we’re seeing the same thing that we’re doing here within the private equity industry.

Brown

So there are a lot of parallels between what we’re seeing with our clients and what we’re seeing here, as we’re all bringing in or competing for top talent at the end of the day.

Lo Parrino

That’s right.

Brown

So, Mike, as the CFO’s role becomes more strategic, I’m imagining that CFOs are central to the growing global focus on DNI and talent. What are some of the interesting ways the CFO contributes to or measures talent and DNI objectives? Do you think that this challenge is actually elevated in a PE setting, or is it kind of similar to what we face in challenges in our own environment?  

Lo Parrino

It’s very similar. We were very pleased with the results of the survey and how our private equity fund, the industry, is focused on diversity and inclusiveness. I think we all realize how important it is as a society and how it benefits a business. Having diversity and freedom of thought helps retention, and I think it just helps in making better decisions, having diversity in viewpoints. The industry is definitely focused on this. Generally, 80% of the respondents have programs right now and have actions in place for diversity and inclusiveness, which is really great to see. And with all the conversations I’ve been having with CFOs, you could tell it’s definitely an area of ultra-importance to the industry. As far as what the industry is doing on this, identified in the survey results, involves looking at different universities for recruiting or different programs, such as family wellness or affinity groups, and diversity programs within the firms have been incorporated in a lot of the private equity funds. Also, we’ve also seen a lot of firms using metrics and targets related to gender or ethnicity.

So, just a lot of focus in this area. Really happy to see that. And it expands further than just gender and ethnicity. There’s educational background, experiential background. The industry is really looking at this as a very important area, of course, and I’m happy to see the progress being made.

Brown

Let’s kind of switch gears slightly. One of the key findings of the survey highlights that 69% of CFOs would prefer to focus more on technology and portfolio analytics. Why do you think there’s been such a dramatic desire to pivot into those areas of focus in recent years? And do you think it’s helping them be better CFOs and manage at a fund level?

Lo Parrino

Absolutely. I think there are a lot of things driving it. First of all, I think just technology, in general, within business and all industries has just become such an important area to be involved in. As you know, with all the asset growth and private equity, it’s been almost a necessity to deal with the growing AUM and managing a bigger base of capital, as well as diversity in some of the different strategies that we talked about earlier. Also, interestingly, in our strategic priority section in the beginning of the survey, another priority is cutting cost and cost optimization. So that’s another area that does benefit from the use of technology.

And lastly, 73% of the CFOs surveyed indicated they would like their employees to be challenged and productive and efficient, and technology does play a role in that as far as giving employees the opportunity to move routine-type functions more to technology or maybe outsourcing, which is another area, part of the operating model, and to move their time to more evaluated and strategic-type functions.

Brown

Playing on that, I mean, we often talk about how the role of private equity is around value creation in the portfolio, but what you’re talking about is that we’re seeing a parallel there at the fund. CFOs are using technology to build value within the fund. Can you talk a little bit more about that?

Lo Parrino

Yes. So, interestingly, if you look back to some of the earlier surveys from seven years ago or even just from the last three to four years, technology at the fund level, spreadsheets, Excel spreadsheets, Microsoft Excel were used often. And I’m not suggesting they’re not used still. Microsoft Excel is actually a very functional, good thing to work with.

Brown

Doesn’t everybody use Excel? Come on, Mike! (Laughs)

Lo Parrino

Including us, exactly. But definitely in the last few years we’ve seen a movement toward more accounting-type software, regulatory compliant software, tax software moved into the area of deal pipeline-type technologies or portfolio monitoring technologies. So it’s really expanded from the basic technologies that we started to see a few years ago to even the ones I rattled off, as well as really thinking about artificial intelligence and data analytics, and how to use data across the firm So, clearly, up at the private equity fund level there has been a focus. And then, and we may talk a little bit about this, there have been opportunities to take all that experience that you’re getting at the fund level and push that down to portfolio companies, too, so you get the top-to-bottom benefit.

Brown

Do you think that PE is starting to see a return on that investment? They’re investing in technology at the fund level and, as you say, it’s being pushed down to the portfolio level. Are we seeing that they can measure that success in terms of real value? And how instrumental is the CFO in terms of driving that?

Lo Parrino

Depending on the size of the private equity firm, there are some very big ones that have a technology officer and different functions, but in many of the middle-market and mid-sized private equity funds, the CFO wears a lot of hats, including oversight of the technology infrastructure and cybersecurity and things of that area. In the survey we did have a table on “Do you feel there’s been a return?” And it was another good source of feedback in that it does appear in almost 50% of the cases where the CFO was incorporating technology if it was in the accounting system, or tax, or regulatory compliance. About 50% of the time or greater they did feel there was a return on investment, which is so important to continue to drive the focus in investment and technology. So we were really happy to see that stat in the survey.

Brown

Absolutely. I’m imagining if they’re seeing that return, it’s freeing up their time and their team’s time to focus on more value-add activities. This kind of leads into another finding of the survey, which talks about CFOs having expressed an interest in one-third of the fund playing a bigger role in onboarding and working with portfolio companies. So I guess they have to find that time, and technology is probably freeing up some of their time to be able to do that.

Do you think that’s why we’re seeing the shift? I mean, technology is giving them an ability to focus on higher value-adding activities, but also it’s probably giving them better access to information. You know, portfolio companies are all over the globe so it’s not like you’re going to be on a plane all the time. So I guess technology is enabling the CFO to become a broader professional. Is that what you’re seeing?

Lo Parrino

Absolutely. I think technology plays a very big role in it. When you think about the operating model, which includes technology, people and process, private equity funds and CFOs have been actually revisiting the operating model in general. So the use of better technology, the use of third-party service providers for outsourcing — all these things combined have actually improved the ability to shift time from routine things to more strategic things. That said, technology, to your point, actually does provide the data that you gain from that technology. It really does add a whole new dimension or another dimension to the ability to share that down to the portfolio company as well as across the portfolio companies, as you share best practices that you’re seeing at portfolio companies and across the others.

Brown

Mike, how do you think that more involvement at the portfolio level will change that traditional role that the CFO has always held at the fund?

Lo Parrino

I think the involvement at the portfolio company level really adds another dimension to the benefit and the value add that the private equity fund provides to the portfolio. If you take a step back, the CFO is actually doing the same exact role managing the private equity fund business as the CFO at the portfolio company is doing. So for them to share best practices makes a lot of sense. There are things that the CFO is seeing at the private equity fund that clearly will benefit the portfolio company, particularly in the area of the finance group, for sure. There are a lot of synergies there, of course, but then there are broader things that cut across the private equity fund, such as the topic of cybersecurity. And the stuff that the CFO is doing at the private equity fund can benefit them at the portfolio company, and can then be shared across the rest of the portfolio company. A lot of synergies there.

Brown

So, Mike, given the significant evolution of the role of the PE fund CFO that we’ve seen over the last seven years, what do you think are the new skills that will define the next generation of PE fund CFOs?

Lo Parrino

I think we’re already seeing the CFO role expanding. CFOs are leveraging technology and advisors to handle the routine back-office tasks. In the future, I think we’re going to continue to see CFOs think strategically, focusing on analyzing that data for the business both at the private equity fund and the portfolio companies.

Brown

So what I’m hearing is that one of the skills a CFO of the future will need to have is around data analytics. This includes understanding the data that’s coming out that they have more access to and being able to kind of manipulate that and think strategically as to how it can bring value both to the top of the house and potentially to portfolio companies. As the firm makes investment decisions, this gives the CFO a bit of a different seat at the table, perhaps.

Lo Parrino

That’s right. I think the data itself is so valuable and it’s consumable by so many different areas. It’s not just for the CFO or the finance team; it’s going to be useful to the investment professionals and, as you mentioned, it’s going to be very useful for the portfolio companies, too.

Brown

So it sounds like we’re going to be seeing a whole new level of skills coming to the CFO of future at the PE house, probably not dissimilar to what we’re seeing trending across industry as a whole. That access to technology and data is probably spurring on that change, which is pretty exciting, actually, as we see the role evolve.

Lo Parrino

Very exciting. As we’ve seen feedback change in the last seven years of the survey, I think we’re going to continue to see surprising and new feedback in the next seven years. So we’re really looking forward to it.

Brown

Thanks, Mike. Really appreciate you joining the show today and sharing your insights into the trends that are shaping the future of private equity CFOs. It’s been really interesting to look back over the last seven years and get a glimpse as to what we think the next seven years is going to look like for those CFOs. I really appreciate your time.

Lo Parrino

Thanks, Winna. My pleasure. Thanks for having me.

Brown

I hope you enjoyed this episode of the NextWave Private Equity podcast. Please subscribe, review and share it with your colleagues and friends. To find out more about the topics we discussed, check out ey.com\privateequity. I’ll see you on the next episode.

Disclaimer: The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.