Nearly four of five chief financial officers at private equity firms report that their firm recently finished raising a fund.
About the same number expect to raise another fund within three years and believe the new fund will be of equal or greater value than the last, according to an Ernst & Young global private equity survey.
Confronted with changes that affect their business model, most private equity CFOs indicate that global regulation and compliance, as well as operational efficiency, are the top challenges facing their firms over the next two years.
For 45 percent of CFOs, regulation and compliance are at the top of the list of their concerns for 2014. Increased regulatory demands have also put a strain on their firms’ 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 percent of CFOs expect to see an increase in costs.
Despite these challenges, CFOs are optimistic about future opportunities and growth.
Jeff Bunder, EY’s Global Private Equity leader, said “CFOs believe the industry will continue to grow and five years out, PEs that have withstood the financial crisis will continue to flourish.”
With 80 percent of firms surveyed having raised capital in the last four years, CFOs are bullish about future investment opportunities, he added. They are also looking to raise additional capital in the next few years.
Ernst & Young Cayman partner Baron Jacob noted, “Globally, we are seeing a healthy recovery for private equity, and this new survey of CFOs is further evidence of that trend.
“The Cayman Islands is a growing private equity market, so the fact that financial executives feel bullish about growth prospects for the next several years is positive news for the financial services marketplace.”
Private equity firms have responded to the changing market and regulatory environment by increasing investments in process and technology. However, investments in the improvement of operational efficiency will not necessarily be based on additional personnel, as 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 percent), investor relations (24 percent), compliance/risk management (17 percent) and portfolio analytics (17 percent). More than two-thirds of the firms (72 percent) said they currently outsource or expect to outsource technology functions, and 66 percent 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.
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 percent have valuation committees, with 72 percent of CFOs highly involved in the valuation process. More than three-quarters of firms validate portfolio company operating results through discussions with investment teams or through comparison of board materials with management, but may look to an automated solution in order to save time and costs.
Asked to describe their firms’ current practices for disclosing information contained in quarterly financial statements, participants unanimously reported that a standard has not yet been developed.
In Asia, 67 percent 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 used to review their job performance. Most CFOs said providing value to investment professionals (60 percent) and investors (44 percent) was most important, providing further evidence that the role of the CFO has expanded.
The survey, conducted between August and November 2013 in collaboration with PEI, documents the views, insights and observations of 105 private equity fund CFOs and finance executives from Asia, Europe and North America among different asset classes.
Related Videos
