The Evolving Role of the Private Fund CFO – Fund Management/REIT

The role of the chief financial officer (CFO) in private equity (PE) and venture capital (VC) firms has evolved significantly over the past two decades and is expected to continue to grow as investors, Regulators and other stakeholders are demanding increasing levels of transparency around fund performance, valuations, due diligence and compliance.

Not only has the number of tasks of a fund CFO increased – with more investors to monitor and more back-office systems and processes to manage, each becoming more and more complex – but the CFO is increasingly in demand in several new areas. .

The ultimate multitasker

Investors (Limited Partners or LPs), regulators and even holding companies are increasingly interested in back office functions in recent years. They are looking for ever more detailed information, not only on fund performance and returns, but also in areas such as environmental, social and governance (ESG) and portfolio monitoring.

Investors don’t just want to know how funds implement these programs on paper. They want to know how the funds operationalize them, what they mean to the business, and how they are measured.

CFOs are now typically responsible for providing this detailed information. Additionally, CFOs increasingly need to ensure – and prove – their fund’s resilience in terms of business continuity planning and cybersecurity, especially with the rise of remote working. They must also manage their company’s Know Your Client (KYC) and Anti-Money Laundering (AML) processes to comply with increasingly stringent regulations.

Another function within the competence of the CFO is the evaluation process. Historically, valuations were primarily about compliance. However, as funds raised funds, regulators wanted to ensure procedures were followed and ratings were not overstated. Today it is investors who want to understand how valuations are derived.

In addition to being on top of all these back-office operations, CFOs are now expected to play a more strategic, customer-facing role in terms of business direction and performance. This applies not only to the fund itself, but also to the management company and its portfolio companies, who appreciate the value of the CFO’s knowledge and experience of business strategy, valuations, structuring financial operations and seeking efficiency.

Unlike their traditional, mostly internal accounting role – looking after the books and reporting needs – fund CFOs are now expected to be engaged with the wider industry, networking with people outside the organization. They manage a wide range of internal relationships with associates, staff and other corporate departments, as well as a variety of external vendors and partners.

‘Show me the data’

As the scale and complexity of LPs’ due diligence and reporting requirements increase year on year, it behooves the CFO to find new and better ways to collect, analyze and present this data – and to create a single source of truth.

In an ideal world, funds would have a single, standardized set of data supporting all investor demands. In reality, this is very difficult to achieve, as different investors tend to want data to be sliced ​​and diced in different ways.

Detailed data is often requested by LPs in bespoke, prescribed or standardized formats as part of their due diligence on internal business processes. This puts more emphasis on finding new and effective ways to present data to LPs and other stakeholders. Sending out spreadsheets is no longer enough – it’s much more impressive to create a dashboard that shows trends, rather than just presenting a table of numbers.

It is increasingly the responsibility of the CFO to take ownership of this data visualization function and act as the primary point of contact for investors.

New technologies play a role here: more sophisticated software tools are being developed to supplant the traditional spreadsheet-based approach. However, private funds typically don’t have thousands of transactions to process – investment transactions are more bespoke and therefore harder to automate. This means the need for back-office resources to manage increasing due diligence and reporting requirements is greater than ever.

CFOs are turning to outsourcing

Rather than building huge internal back-office teams to manage these requirements, many CFOs turn to third-party vendors for expert advice and resources, and to help operationalize processes. Private funds are increasingly outsourcing the most routine tasks, such as data collection, analysis and visualization through dashboard tools, for example.

Today, CFOs tend not to view finance and accounting as their core business. They increasingly want their finance teams to focus on areas where they can add value and use data to make better investment choices, improve risk management, or perform smarter deal research. They need people in-house to provide advice to the deal team, handle investor inquiries and manage the fund in general.

The trend for CFOs to outsource functions to third parties was already well established before the arrival of Covid-19, but has since accelerated as people have realized that the back office team does not need to be physically in the office.

Outsourced providers can act as an extension of the fund’s back-office team and provide resource scalability, taking on some of the heavy lifting so the CFO can focus on their role as a change agent , helping to facilitate the transformation of the company.

In a recent example, TMF Group helped a private fund CFO implement a new dashboard for investors. In addition to configuring the dashboard platform, TMF Group transferred ten years of legacy data to the new system. This allowed investors to enter and generate real-time charts and reports on their individual investment performance.

In another example, TMF Group worked with a fund CFO to create a single source of truth by consolidating fund data held in multiple spreadsheets into a single platform for general partners. This gave generalists easy access to all information on specific investments, such as investment dates, allocations, valuations and exit products, as well as rollover reports (including waterfall calculations ).

The role of the private equity CFO has evolved significantly over the past decade and is likely to change just as much over the next decade – from an accounting and reporting role to a data capture and visualization role. One thing won’t change though: the need to find new ways to handle growing demands more efficiently, and that’s where technology and outsourced expert help can really add value.

Learn more

To learn how TMF Group can help support efficient back-office operations for private funds, apply.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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