Confronted with numerous changes that affect their business model, most CFOs at private equity firms recognize that global regulation and compliance, as well as operational efficiency, are the top challenges facing their firms over the next two years. 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.
These CFO perspectives come from Navigating the Headwinds, a recent private equity survey conducted by EY in collaboration with Private Equity International (PEI). Navigating the Headwinds 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. A link to a free copy of the report is available at the end of this article.
“CFOs believe the industry will continue to grow and five years out, private equity firms that have withstood the financial crisis will continue to flourish,” said Jeff Bunder, EY’s Global Private Equity leader. “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,” said 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.”
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.
“As regulatory and investor demands continue to grow, CFOs are tasked with doing more with less and using innovative thinking to ensure operations are running effortlessly and creating opportunities that allow their firms to stay competitive in the industry,” said Scott Zimmerman, EY’s Private Equity Assurance leader, Americas.
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 formalized 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.
EY is a financial services provider with nearly 35,000 financial services professionals around the world providing integrated assurance, tax, transaction and advisory services (www.ey.com).
PEI is a B2B information group focused exclusively on private equity, private real estate, private debt and infrastructure. The company has offices in London, New York and Hong Kong (www.thisispei.com).
For a free copy of Navigating the Headwinds click HERE.
© 2014 PEPD • Private Equity’s Leading News Magazine • 1-23-14