Private equity investors significantly value the finance function and are looking more closely at whether private equity funds have effectively pushed the enterprise towards operational excellence, extending the responsibilities of chief financial officers and increasing the importance of their role, according to “Positioning to win”, EY’s second-annual global private equity survey in collaboration with Private Equity International. Nearly one out of every two investors sees PE as the asset class of choice, and three-quarters of PE firms, recognizing market opportunities, plan to raise significant capital in the next two years. To mitigate the risk of rapid growth, CFOs see the need to shift their focus from tactical to strategic functions like investor relations and portfolio monitoring.
“Our survey clearly shows that investors have added operational excellence to their definition of performance, with 49% of those surveyed identifying it as their top concern beyond track record,” said Scott Zimmerman, the EY Americas Private Equity Assurance Leader. “As a result, firms are counting on CFOs to drive business changes and strategically position their firms to win the competition for capital.”
The survey, conducted between August and November 2014, documents the views, insights and observations of 170 private equity CFOs, financial executives and investors from the Americas, Europe and Asia among all asset classes. Key findings from the survey include:
In recent years, CFOs have been spending more time than ever dealing with regulators, but they see themselves as having a better grasp on this moving forward. Reflecting their growing acceptance with regulatory processes, 14% of CFOs say that by 2017 they are less likely to focus on compliance issues; that compares to 3% of CFOs who have currently shifted their attention to other priorities.
CFOs are being asked to mitigate, if not eliminate, operating risks. Top among those risks is cybersecurity, with 56% of respondents saying it is the CFO’s responsibility to oversee information security at PE firms. CFOs also foresee an increased focus on cybersecurity, and over the next 12 months they expect to increase fund activity to address various cybersecurity functions, including cyber threat analysis (59%), awareness programs (72%) and compliance programs (63%).
As the burden of portfolio monitoring increases, investors are requesting granular information concerning valuations, and PE firms expect requests for customized reports to increase. Three-quarters of investors want tax reporting within four months after year-end, although only 31% are currently receiving reports at this rate, and up to 55% of investors are requesting one to four customized reports per year. To demonstrate operational excellence, PE CFOs believe they could improve investor reporting through transparency (66%), timeliness (50%) and frequency (12%). Meanwhile, 19% of CFOs think that PE fund partners see investor transparency as their most important business activity, and 22% expect this will be the case in two years. As expected, investors prefer to receive their financial (87%) and tax (84%) information in digital format.
Do more with less
Investor demands and requests of PE firms engaged in due diligence will only increase and CFOs must optimally manage their teams to meet the rising expectations. Headcounts are generally not keeping pace with the increase in responsibility. The average finance team is typically a fraction of the size of the investment team, regardless of geography or size of the firm, so CFOs are learning to do more with less.
To meet these demands, firms are looking into digital platforms and redesigned processes, including a possible outsourcing model. As an indication of investors’ preference for in-house versus outsourced functions, portfolio analytics (60%), valuation (60%) and compliance (48%) are preferred by investors to be kept in-house, with fund accounting (31%), treasury (26%) and tax (12%) much more likely to be accepted with third-party involvement.
For a free copy of a PDF of the full survey report click HERE.
© 2015 PEPD • Private Equity’s Leading News Magazine • 2-10-15