Private capital LPs are ‘increasingly empowered’ to demand transparency: how will CFOs adapt?

Investors are becoming increasingly empowered to demand transparency from fund managers across the alternatives spectrum.

Private capital is far from being an exception. Indeed, investors are always looking for more sophisticated ways to engage with the private capital funds in which they invest, not least because of the nature of the way transactions are structured and their increasing appetites for customised mandates.

The burden of fulfilling these information requests is falling to the chief financial officers (CFOs) at private capital funds. They must interpret client questions correctly, collate the necessary information and formulate the answers. The solutions they adopt to achieve this must be ever more sophisticated if they are to keep up with the volume of data generated in today’s world.

Priorities will determine the solutions

How CFOs allocate resources to this challenge will depend on the demands they prioritise.

Research we conducted with Global Custodian and outlined in a new report entitled The future private capital CFO: Evolving in a digital age, provided some clarity around this. The research shows that over the next decade, almost two thirds (64%) of CFOs at private capital funds around the world expect their investors to be looking for access to live or daily updates on portfolio performance. This was followed by cybersecurity (57%), environmental, social and corporate governance (51%) and operational service level agreements (50%).

Cybersecurity and ESG are particularly dynamic areas and the pace of change here will require close attention for CFOs.

Data held by private capital managers will be in the crosshairs of cyber criminals, requiring increasing investment to protect themselves and reassure investors and regulators that they are addressing the risks. This has been amplified in the pandemic, as staff and systems have had to function outside of the organisation’s four walls.

Regarding ESG, the industry keenly awaits formalised guidelines on this hot topic among investors, who need to demonstrate to their own stakeholders that they are adhering to sustainability standards, but they also see investment opportunities here, for it is no longer seen as a category in which returns are less.

Operational due diligence

In addition to the demands outlined above, CFOs should also be prepared for increasing operational due diligence requirements as their limited partners seek to understand how they use and deploy capital and mitigate the risks.

This part of the discussion has become more sophisticated over the years, and operational due diligence is a key discussion issue at almost every industry conference.

Modern outsourced systems can deliver rich outputs

To meet these increasing data requests, CFOs will have to either invest substantially to build systems and technology to manage the data in-house or outsource.

Taking the in-house route is fundamentally complicated. There are costs to owning and updating technology and, essentially, the manager becomes a manager of technology and operations as well as a manager of assets.

Alternatively, the required functionality can be provided by outsourcing partners who have invested significantly in modern systems to deliver rich outputs for fund managers who, released of this burden, can then focus on their core business. In other words, CFOs can place more attention on enhancing their services and client responsiveness, without worrying about crunching complex data day-to-day.

Our research also provided insight into how CFOs will meet these increasing demands for more information in practice. The three most popular responses were to invest in technology (25%), increase the size of the in-house finance team (21%) and outsource more functionality (20%). Nearly one in five (18%) will invest in distributed ledger functionality and 11% will retain the existing balance between in-house and outsourcing.

Competitive disadvantage

If general partners are to preserve their relationships with investors then they must fulfil their data requests, provide comfort around key operational areas such as cybersecurity and stay on top of the ESG conundrum.

They will suffer a competitive disadvantage if they fail to respond adequately to these increasing demands.

Outsourcing removes the technology burden while still providing power to clients. But private capital CFOs should see potential solutions as being more than just all in-house or all outsourced, for a hybrid option is also possible.

Intertrust Group can deliver these non-binary solutions, too, for it has the technology to fulfil any LP requests and can adapt as their needs change.

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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