The role of the chief financial officer (CFO) in private equity (PE) and venture capital (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.

Not only has the number of a fund CFO's tasks grown – with more investors to look after, and a larger number of back office systems and processes to take care of, each growing in complexity – there are increasing demands on the CFO in several new areas.

The ultimate multitasker

Investors (Limited Partners, or LPs), regulators and even portfolio companies have been taking a greater interest in back office functions over recent years. They are looking for ever more detailed information, not just 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 hear about how funds are implementing these programmes on paper. They want to know how funds are operationalising them, what they mean for the business and how they are being measured.

It is typically CFOs who are now tasked with providing this detailed information. In addition, CFOs increasingly have to ensure – and prove – their fund's resilience in terms of business continuity planning and cybersecurity, especially with the rise of remote working. They are also expected to manage their firm's Know Your Client (KYC) and Anti-Money Laundering (AML) processes to comply with increasingly strict regulations.

Another function that falls under the CFO's remit is the valuation process. Historically, valuations were mainly compliance driven. However, as funds raised money, the regulatory agencies wanted to ensure procedures were being followed and valuations were not being overstated. Today, it is the investors who want to understand how valuations are being derived.

In addition to being on top of all these back office operations, CFOs are also now expected to play a more strategic, client-facing role in terms of the direction and performance of the firm. This applies not just to the fund itself, but also to the management company as well as its portfolio companies, who appreciate the value of the CFO's knowledge and experience in firm strategy, valuations, structuring finance operations and finding efficiencies.

In contrast to their traditional, mainly internal accountancy role – taking care of the books and reporting needs – fund CFOs are now expected to be engaged with the wider industry, networking with people outside the organisation. They are managing a broad range of internal relationships with the partners, staff and other departments at the firm, as well as a variety of external vendors and partners.

'Show me the data'

As the breadth and complexity of LPs' due diligence and reporting requirements grow year-on-year, it falls to the CFO to find new and better ways to collect, analyse and present this data – and create a single source of truth.

In an ideal world, funds would have a single, standardised set of data that supports all investor requests. In reality this is very difficult to achieve, as different investors tend to want the data sliced and diced in different ways.

Detailed data is often requested by LPs in bespoke, prescribed or standardised formats as part of their diligence on firms' internal processes. This puts greater emphasis on finding new, efficient ways to present data for LPs and other stakeholders. Sending over spreadsheets is no longer enough – it is much more impressive to create a dashboard that shows the trends, rather than just presenting a table of numbers.

It is increasingly down to the CFO to take ownership of this data visualisation function, and act as the main point of contact for investors.

New technology is playing a role here: more sophisticated software tools are being developed to supplant the traditional spreadsheet-based approach. However, private funds do not generally have thousands of transactions to process – investment deals are more bespoke, and therefore harder to automate. This means the need for back-office resources to handle the growing due diligence and reporting demands is bigger than ever.

CFOs turn to outsourcing

Rather than creating huge in-house back office teams to handle these requirements, many CFOs are turning to third party providers for expert guidance and resources, and to help operationalise processes. Private funds are increasingly farming out the more routine tasks, such as data collection, analysis and visualisation through dashboarding tools, for example.

CFOs today tend not to see finance and accounting as their core business. They increasingly want their finance teams to focus on where they can add value and utilise data to make better investment choices, improve risk management, or carry out smarter deal sourcing. They need people in house to provide guidance to the deal team, handle investor requests and manage the fund in general.

The trend for CFOs to outsource functions to third parties was already well established before Covid-19 hit, but has gathered pace since, as people have realised 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 scalability of resources, taking on some of the heavy lifting so that the CFO can focus on being an agent of change, helping to facilitate business transformation.

In one recent example, TMF Group helped a private fund CFO implement a new investor dashboard. In addition to configuring the dashboard platform, TMF Group transferred ten years' worth of legacy data to the new system. This enabled investors to go in and generate tables and reports in real time 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 (GPs). This enabled GPs to easily access all information on specific investments, such as dates of investment, allocations, valuations, and exit proceeds, as well as carry reports (including waterfall calculations).

The role of the private fund CFO has evolved significantly over the past decade and is likely to change just as much over the next decade – from one of accounting and reporting to one of data capture and visualisation. One thing will not change however: the need to find new ways to handle growing demands more efficiently, and this is where technology and expert outsourced help can truly add value.

Find out more

To find out how TMF Group can help support efficient back office operations for private funds, make an enquiry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.