Alpha generation is key criteria for driving outsource decisions, Edwin Chan tells BVCA webinar

Alpha generation should be the key criteria driving general partners’ (GPs’) decisions on whether a specific area of their operations should be kept in-house or outsourced, a British Private Equity & Venture Capital Association (BVCA) webinar was told.

Edwin Chan, Director, UK Funds, Intertrust Group, told the webinar, entitled GPs in a digital age: the forward-thinking CFO, that if an internal operational function does not generate alpha for GPs then they should look to get help.

Edwin explained that helping clients in terms of economies of scale (EOS) is a key area in which Intertrust Group can support. He said: “Are there areas where economies of scale can actually help with operating a fund, operating the investments rather than having it in-house?”

He said a good example of an EOS opportunity was ‘know your client’ checks when a fund had an LP in multiple vintages by using an outsourced provider’s automation technology. He said: “From our perspective, we would have clients who have the same LP across many different funds and across different clients, so the KYC burden is therefore far less on that LP themselves because they are just giving information once.”

The webinar, chaired by Leon de Bono, Associate Director General, BVCA, and also joined by Tony Robison, Partner at Scottish Equity Partners, addressed the changing role of CFOs, the importance of data and how the management of it should be resourced.

Leon commented: “Today we are living a world that is rapidly changing socially, economically, environmentally, digitally and politically and this all means new challenges for portfolio companies, fund managers and institutional investors. CFOs sit in the midst of this and have to make sense of it all, harnessing a wealth of information, digesting, deciphering and presenting it in forward-thinking ways.”

Tony told the webinar that the CFO role today has evolved way beyond traditional finance functions: “Never has the role been so pivotal and subject to so much innovation and change. Financial and accounting skills are important, but technology and innovation have become essential. Data management is central to this. The CFOs are becoming custodians or guardians of the most valuable asset for most organisations, which is data.”

Edwin told the webinar that Intertrust Group had recently conducted research* among more than 300 CFOs at private capital funds globally to gauge their thoughts on technology and data. The survey found that the CFOs expected their LPs to require data updates with increasing frequency over the next decade.

“Data is the new oil – it is only useful if you know what to do with it,” Edwin commented. “Oil itself is useless unless you know how to disseminate it, enrich it and refine it. It is the same with data. Just having data does not mean there is going to be enough transparency and governance of a fund or for the LPs. The data is there but it is not being fed up the chain, it is not being disseminated and seen by the LPs and that is going to drive the technology.”

The survey also found that over 24% of respondents expected to substantially increase their technology spend, but Edwin, a former Finance Director himself, pointed out that such increases should be executed wisely. He said: “I know the pain of choosing the right system and that of choosing the wrong type of infrastructure for it. Just recognising the need is great, a positive first step, but for CFOs to move into the digital age they have to make the right choice now because changing that five years later could be painful.”

Leon observed that a lot of information is collected for GPs’ own use and is then passed on to LPs. He asked Edwin whether this chimed with his own feedback from CFOs.

Edwin replied: “Yes. Ultimately, we advise our clients that there should always be one golden source of data, especially at a time when we are all working remotely. At Intertrust Group we pride ourselves on the right use of technology in that there is one golden source and additional IT systems that can be bolted on to provide more reporting, whether that relates to ESG, finance or the KPIs of portfolio companies, for example.

Ultimately there has to be one golden source. What we don’t want is the left hand telling the right hand to repeat the same manual task of inputting data.

Edwin added that the Intertrust Group survey revealed differences between different countries’ GPs and their perceptions of what LPs want. He said: “Most UK, German, French and Italian GPs are seeing increasing engagement from LPs on ESG. GPs in other jurisdictions need to be aware that there are very few GPs that have only one single set of LPs from one single country. Therefore, the drive now is global as more countries rise up the curve in terms of ESG requirements.

“We are getting that pressure from not one LP, but many. Our advice is that GPs should plan for the worst and the best will come. They should plan for everyone wanting that data, so when GPs set up infrastructure and the IT interfaces then it is all there ready for the different LPs out there.”

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*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 88 in the US