The following article is a recap of a June 22nd, 2023 panel at LPGPConnect: CFO / COO Private Equity West titled: What’s Keeping CFO Up at Night. Concertiv CEO Priya Iyer was the moderator and was joined by three private equity CFOs.
Key takeaways and topics discussed:
In the current business environment, CFOs are focused on:
- Operational efficiency to save time and make better decisions for the firm. Discussion points include data, technology, and outsourcing partners
- Evolving compliance and regulatory issues are front and center for operational leaders at firms. Discussion topics include LP requirements, SEC regulations, and internal controls to ensure compliance.
- Talent acquisition and retention remain at the forefront. Discussion topics include hiring the right people for the right reasons, and ensuring retention practices to keep talent.
Talking Point: What are some of the top concerns that you, as a CFO, have right now?
Current challenges for CFOs and CEOs include an array of issues, from the looming recession, cyber threats, compliance and regulatory oversight, talent shortages, and the recent banking crisis that is impacting corporate liquidity. These challenges are leading to strategic shifts within firms in how they approach their go forward plans.
Specifically, they are looking to optimize the following areas:
- Operational efficiency: identifying and orchestrating strategic initiatives across the firm and Port Cos
- Compliance and regulatory oversights: identifying and implementing processes and technology that ensure regulatory compliance and is easy for employees to follow
- Talent: looking to build for the future to acquire and retain key talent.
Talking Point: Based on all the different pressures outlined above, how are you approaching this year?
The economic and business environment in 2023 is starkly different from previous years, with an increase in the cost of capital and a talent shortage making operational leverage even more important. Firms are feeling the pinch and are forced to adjust their strategies to manage these challenges effectively.
Areas that CFOs are focused on include:
- Cross-functional collaboration, efficient tech stacks, and utilization of historical information across various departments are becoming increasingly important. This aids in ensuring information accessibility and maintaining operational efficiency amidst these uncertain times.
- Long-term scalability is a key focus for firms, with an emphasis on utilizing technology and automation, outsourcing, and optimizing core processes and workflows.
One interesting point made was that optimization doesn’t always mean cost reduction. In certain areas like compliance, increased spending might be necessary for the company's long-term benefit. In areas like technology and market data, it includes finding the right tools to improve efficiency and make the best decisions. The overarching goal is to build a resilient and efficient organization amidst challenging circumstances.
Talking Point: How is the current macro environment impacting fundraising and various firm operations?
Collaboration and open communication across departments are more crucial than ever, especially for smaller teams. Breaking down barriers and reducing compartmentalization can aid processes like fundraising by ensuring that useful information is shared and utilized effectively.
Fundraising requires defining, vocalizing, and delivering a firm's value proposition to Limited Partners (LPs). This can't be accomplished without substantial collaboration among the Investor Relations team, the Investment team, and the Operations team. Each department brings unique insights about LPs' concerns, investment exposure, and value-added services, all of which are crucial for a successful fundraising season.
Changes in the market environment necessitate alignment between investment teams and general partners. With shifts in investor preferences, it's become crucial to align on strategy and communicate effectively to keep the team together. This alignment fosters trust within the team, and aids in meeting LPs' investment preferences.
Talking Point: From an operations perspective, how are you thinking about compliance?
The importance of conducting comprehensive vendor due diligence is emphasized, especially for investment firms. This involves checking how vendors handle and store data, their cybersecurity policies and procedures, and the maturity of their product offerings. However, the main challenge lies in finding the time in resources to conduct diligence, and getting team members accustomed to the new workflows associated with this process.
SEC regulations are constantly changing, which poses a challenge for firms. Two major takeaways from recent amendments are the importance of maintaining internal documentation, such as compliance and risk control policies and procedures, and the emphasis on transparency and visibility in disclosures, particularly regarding fees and preferential terms.
Adjusting to new regulatory requirements often involves changing established workflows and habits within the firm. Building a culture of compliance is critical to ensure everyone understands and adheres to the new processes, including using pre-approved software and stringent sign-up protocols.
Talking Point: How are you leveraging data and technology to drive your strategic initiatives?
The use of data and technology is critical to the firm's operations, with a combination of pre-packaged services and proprietary tools being used for data analysis. Firms are using a mix of industry-specific tools and their own analyses to ensure that everyone is working with the same numbers.
For mid-market firms with budget and resource constraints simpler, centralized solutions are often more effective. It's important to implement a central area where different solutions can be accessed easily. Making information readily available to team members is critical. Leveraging tools like Microsoft Teams, firms can create homepages where necessary data can be easily found. This reduces time wasted in seeking information and boosts productivity.
Talking Point: Talent management remains a hot topic. How are you thinking about talent management?
Understanding the firm's value proposition to potential hires is crucial, as is knowing why and for what role you're hiring. There's a focus on hiring for character and growth mindset beyond just skills. Being able to distinguish between truly great talent and good talent involves close attention to detail and various interactions.
Retention relies on open and transparent communication, recognizing when workloads may become unsustainable and having conversations about it. Making sure people feel seen and heard and treating them as individuals can improve retention.
Firms also need to consider talent management for their outsourced partners. Building good relationships and rapport with these providers is essential, and dealing with high turnover or changes in these third parties needs to be factored into management strategies. This is because changes can impact the quality of work and deliverables, which can hinder the firm's growth.
Talking Point: When considering outsourcing, why are you outsourcing and what are you looking for?
When deciding to outsource certain tasks, one key factor to consider is whether the outsourcing firm has the necessary expertise to deliver the expected results. This can involve an evaluation of their past performance and credentials in the field.
Outsourcing firms must be able to scale and adjust their operations to meet your firm's needs. The flexibility to customize reports and processes in line with your organization's requirements is a critical consideration in the decision-making process.
For firms that are regulated, like we all are, it's important to ensure that outsourced services comply with regulatory requirements. Vendor selection and due diligence should involve a review of the outsourcing firm's internal control policies and procedures, and their strategies for risk mitigation.