Private equity (PE) and venture capital (VC) firms are management companies or firms in their own right that need a chief financial officer (CFO) to run their operations. They have staff reporting to management and investors on a regular cadence, and they fall under regulatory scrutiny just like their public company counterparts, depending on their size and strategy. With the continued growth in the industry, there are more and more funds that need this operational infrastructure – and the CFO is the chief architect.
The role of the CFO in PE and VC firms has seen significant evolution over the past couple of decades and looks set to continue to develop as investors, regulators, and other stakeholders demand increasing levels of transparency around fund performance, valuations, due diligence, and compliance. As such, the role of the CFOs becomes even more strategic as it involves client-facing responsibilities regarding the direction and performance of the firm, the fund itself, the management company, and its investment portfolio companies. These CFOs’ skills in terms of knowledge and experience in firm strategy, valuations, structuring finance operations, and finding efficiencies are highly appreciated.
Over the past years, back office functions are expanding in their importance: Investors (Limited Partners, or LPs), regulators, and even portfolios want to have more detailed information on fund performance and returns, and also in matters regarding environmental, social, and governance (ESG), and portfolio monitoring.
CFOs today are interested in understanding if their finance teams can represent an added value besides utilizing data to make better investment choices, improve risk management, or better identify deal possibilities. They need in-house people to guide the deal team, handle investor requests, and generally manage the fund.
“To optimize resources, many CFOs are looking for support from third-party providers for expert guidance and resources, and to help operationalize processes”
Nowadays, CFOs are requested to provide detailed information about the funds, besides ensuring – and proving – the resilience from business continuity, planning, and cyber security point-of-view, especially with the rise of remote working. Another important part of their role is to handle the Know Your Client (KYC) and Anti-Money Laundering (AML) processes to be compliant with increasingly strict regulations.
Additionally, another responsibility of the CFO is the valuation process since the investors want to understand how valuations are being derived.
As outlined, a fund CFO’s tasks have grown – due to a large number of investors to look after, together with more back-office systems and processes to take care of, each growing in complexity. There are also increasing requirements for the CFO in several new areas.
What are the solutions that the CFO can implement to fill all these tasks?
To optimize resources, many CFOs are looking for support from third-party providers for expert guidance and resources and to help operationalize processes. While this trend was already in force before Covid-19 hit, it has gathered pace since then, as the back-office team does not need to be physically in the office.
Another positive side to consider is that outsourced providers can act as an extension of the fund’s back office team and provide scalability of resources. This allows the CFO to focus on being an agent of change, thus easing the process of business transformation.
From a technology side, a fund administrator can take a lot of that implementation burden. As such, the administrator can offer additional technology features, such as automated operations, treasury technology, and LP reporting solutions, to name a few, since each solution is often too expensive to implement on a standalone basis internally at the firm. The CFO needs to identify gaps between current operations and a technology-enabled future and implement that technology and other efficiencies to improve processes. A third-party administrator can provide resources across jurisdictions, bring scalability, and support CFOs to drive efficiencies and process improvements.
However, as with any relationship, the key point here is regular communication. The biggest issue for any outsourced provider is the fact that they are outsourced, which means they need regular communication with the CFO and the team. You have to keep your provider as close as possible through the implementation phase of any new technology and arrange regular ongoing touch points. This is the only way to conquer the new frontier called outsourcing.