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July 19, 2024
PI Global Investments
Private Equity

Efficiency and insight: How private equity CFOs are reimagining finance and the back office


Chief Financial Officers (CFOs) in private equity firms are navigating a turbulent economic landscape. In May, EY, in collaboration with LPEA, hosted a roundtable to discuss the key challenges and opportunities for CFOs operating in private equity.

No longer confined to the back office, CFOs are emerging as pivotal players in steering GPs towards enhanced performance and profitability. As economic instability and escalating interest rates persist, their roles have grown even more critical, demanding perceptive financial strategies and innovative solutions. CFOs are nowadays charged with the dual mandate of maintaining financial stability and driving strategic growth, requiring them to adeptly manage multiple priorities to ensure their firms remain competitive.

The 2024 economic landscape still presents both opportunities and challenges for private equity firms. With a 37.2% decline in deal value from Q4 2023, and low transaction activity (only five megadeals in Europe executed in Q1 2024, totalling €8.1 billion),  we witness an increasing number of CFOs taking the opportunity to “put their houses in order”. They implement transformative actions aimed at enhancing their finance and back office functions, in anticipation of a resurgence in transaction activity.

Recent EY research highlights that CFOs who are proactive in implementing innovative changes within their finance functions are not only adding significant value to their organizations today, but are also setting the stage for future benefits. These CFOs are concentrating on the synergy between human capital and technology, emphasizing cultural shifts, digital transformation, the use of advanced analytics, and the development of future finance leaders.

Despite the increasing demands and complexities of the CFO role, it remains one of the most fulfilling and dynamic positions. Forward-thinking CFOs can leverage these transformative opportunities to redefine their roles within their organizations.

The research provides a valuable resource for finance leaders who aspire to be bold and create value for their teams, contributing to the overall success of their companies.

To shape their organization, research and the discussion with CFOs and finance executives attending the May 2024 roundtable show three key trends:

  • The increase of co-sourcing, as a strategy to establish agile and flexible internal teams who are better positioned to address the changes that are happening right now and prepare for the future
  • The acceleration of digitalization and centralization to improve internal processes, free up capacity and enhance the relationship with investors
  • The critical importance of robust data management, to drive effective decision-making and meet increasing investor expectations

The surge of co-sourcing of finance, tax and back office functions

Over the past decade, fund managers have transformed significantly, forcing a rethink of traditional strategies. A recent EY research on private equity shows that more than 95% of the surveyed firms co-source or outsource a significant part of finance, tax and back office related activities.

For back office tasks, large firms often handle some work internally with some outsourcing, while smaller firms typically outsource/co-source these functions to focus on strategic goals and ensure effective management of service providers.

Co-sourcing involves partnering with external providers to manage specific functions while retaining strategic control – enhancing efficiency, flexibility, and leveraging advanced technologies for tasks like tax compliance, transfer pricing, accounting and financial reporting. It allows PE firms to focus on core activities such as investment strategies and portfolio management, while addressing talent management challenges. Co-sourcing also allows asset managers to retain control and access to granular data (granularity which is often partially lost with pure outsourcing), and leverage specialized external expertise for better overall performance.

A strategy gaining increasing traction where in-house activities are still important is the lift-out. Fund managers transfer their entire (or a significant part of their) in-house team, including system and data access, to specialized fund administrators. Rather than facing the dilemma of laying off experienced staff, dismantling internal systems, and undergoing the arduous process of transferring information to a fund administrator, fund managers partner with specialized fund administration entities to “lift out” their team or selected members. In essence, the team and systems are transitioned from the fund manager to the administrator, while still providing service to the fund manager.

This model offers numerous benefits, including preserving valuable data, technology, and institutional knowledge, ensuring effective integration, and maintaining operational continuity. Furthermore, essential custom processes are retained and a culturally aligned relationship with the administration team is established, enhancing efficiency and trust. This approach mitigates cost inefficiencies related to technological investments or compliance management for instance; moderates operational risks; and improves job prospects for transferred staff, making it a strategic choice for fund managers.

Digitalization and centralization as the next frontier

In the current landscape of finance operations, there is a pressing demand for enhanced digitalization and centralization, particularly in light of the prevalent dependence on labor-intensive processes and disjointed systems architectures. It affects a wide range of activities from fund reporting to treasury management across the finance, tax and back office functions.

The ideal private equity CFO must be able to master technology and data analytics to navigate the volatile economy and improve firm efficiency. Despite recent investments, only a minority of large firms feel highly digitalized. CFOs are focusing on automating both fund processes and management company functions, aiming to support growth and enhance decision-making for stakeholders. Large private equity firms are at the forefront of tech transformation, using data analysis to inform investment choices and hiring experts to deepen insights. Mid-size and smaller firms are also investing in tech, though less extensively than their larger counterparts. 

To address these challenges, strategic automation solutions are being implemented. Automating routine tasks, such as fund and SPV accounting related activities, frees the time of finance professionals, allowing them to focus on more strategic activities. Real-time data analytics and centralized dashboards enable better monitoring and management of financial performance, providing investors with better transparency. Advanced technologies leveraging AI can automate complex data extraction and analysis, leading to more accurate forecasting and risk assessment. Modern cloud-based accounting systems centralize functionalities, providing easy access to updated financial data for informed decision-making.

Unleashing the power of automation and centralization can be achieved only by including treasury and cash management. More mid-sized PE firms are adopting unified Treasury Management Systems (TMS) for better cash visibility, automated payments, reconciliations, and real-time cash flow forecasting, joining larger firms in this trend. The TMS acts as a single source of truth, boosts the overall efficiency and effectiveness of treasury operations, enabling CFOs to pivot their focus towards strategic initiatives and performance management.

Data as the catalyst for excellence

In today’s dynamic environment, PE firms need to pivot towards a robust master data strategy that prioritizes exceptional data quality. Effective data management is crucial for streamlining back-office functions, ensuring data accuracy, and enhancing operational efficiency.

Implementing or enhancing functionalities of IT solutions brings limited benefits if it is not joined with robust data management. By establishing high standards for data structure, entry, aggregation, storage, and protection, finance teams can manage the increasing volume of data necessary for advanced analytics and forecasting. This optimizes finance and reporting processes, providing a robust foundation for strategic decision-making – ensuring finance functions support business decisions at both management company and fund levels with reliable, insightful data.

The demand for data granularity from PE investors is also rapidly growing, especially concerning performance metrics, financial health, and additional operational KPIs. Digitalizing and centralizing finance processes and data management is essential; however, these efforts fall short without sufficiently granular data to meet investor expectations. A recent EY survey revealed that 76% of PE finance leaders view the lack of a sustainable technology and data plan as a major obstacle to achieving strategic goals. This indicates a lack of long-term vision for integrating advanced data analytics and ongoing technology enhancements – essential for meeting evolving regulatory requirements and investor expectations. Aligning data standards and developing a forward-looking analytics strategy empower CFOs to transform finance into a strategic partner for investors, fostering long-term growth through data-driven decision-making.

Addressing the ESG reporting gap can also significantly strengthen investor relations. Nearly 74% of finance leaders surveyed by EY indicated an accelerated shift from traditional financial reporting to a comprehensive model that includes both financial and ESG reporting. Despite this progress, a discrepancy remains between the perceived usefulness of ESG reports by PE firms and the actual value investors derive from them. In terms of expectations, investors often highlight a lack of focus on material issues that really matter, and insufficient real-time information as key concerns. Efficient and integrated data management is crucial to providing investors with the necessary granularity in ESG data.

Looking ahead

CFOs are now at the forefront of transformative change within the private equity sector, transcending their traditional roles to become indispensable strategic partners. By leveraging co-sourcing, they are building agile and responsive internal teams poised to tackle today’s challenges and anticipate future demands. The digitalization and centralization acceleration revolutionizes internal processes and investor relations, making CFOs architects of a more efficient financial “ecosystem”.

In this new paradigm, effective data management is critical for informed decision-making and meeting escalating investor expectations. CFOs are redefining portfolio strategies, driving significant investment decisions, and maintaining robust communication with stakeholders – all while leading cutting-edge finance teams. Recognizing the potent value creation potential of ESG, they prioritize it alongside asset growth, positioning ESG as a cornerstone of strategic initiatives. By funding and supporting innovation at the firm level, CFOs drive advancements, balancing innovation with risk management to drive enterprise-wide transformation. They are key to reshaping the talent landscape, ensuring their organizations are equipped to thrive in a rapidly evolving market. The modern CFO is no longer just a finance leader but a catalyst for growth and innovation.



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