More investors and more deals are piling the pressure on private capital CFOs

A shortage of specialist staff and exponential growth in demand are driving many CFOs to pivot their strategies, says Marshall Saffer, Global Head of Funds, Intertrust Group.
By Editors

In general, have you observed any additional pressures on private capital CFOs from the broadening of the investor base for private capital funds?

The private capital market is growing exponentially and the interest in deals and investments is rapidly increasing. That puts a strain on all operational components and has led to a dramatic increase in the number and nature of demands on the CFO.

We are seeing managers face challenges at all levels of the market – whether a start-up looking for the right systems and personnel for launch or a global firm grappling with the demands of the 24/7 operating paradigm. From fundraising to deal management and financing to operations, deliverables and pressures are increasing across the board.

One major example is the ongoing investor-base shift into “retailisation”. In August 2020, the US Securities and Exchange Commission (SEC) expanded its definition of accredited investor to allow more investors to participate in private offerings.

The SEC expects the total pool of individual investable assets to rise from USD 70 trillion in 2018 to USD 106 trillion in 2025, while average allocations for individual investors are less than 5%, compared with 27% for pension funds and 29% for endowments.

That flow of retail funds into alternatives over the next five years will likely be slow and steady. To capitalise on any increase in “retailisation” in private markets, fund managers will need to add more customer-centric capabilities, such as more frequent and regular reporting, to support this distribution channel.

As this was the second consecutive year that Intertrust Group has run this survey, what for you were the most interesting differences in the results?

We are seeing increased regulation and regulatory reporting responsibilities, as well as a need to supply detailed and credible ESG data and information on diversity and inclusion (D&I).

Investors are asking for more information and greater transparency. While institutional investors are still at the heart of the market, there is an ongoing demand from retail investors and high-net-worth investors. These changes dramatically impact operations, service providers and staffing for all types of CFO.

Retail investors are coming in with smaller amounts, and so it becomes a volume game. When CFOs start dealing with hundreds of investors or thousands of them, rather than one or two very high-profile investors, the nature of the processing – and what you have to do for capital calls and distribution tracking – changes significantly.

In addition, investors in different jurisdictions also have different demands. Their needs vary based on where they are physically domiciled – plus there are currency and regulatory issues to contend with in different global jurisdictions.

Given the growing demand from LPs for more data, what would your advice be to CFOs to help them get ahead of the game?

It’s time to reconsider operating paradigms and to evaluate what systems or providers can help you scale. These could be concepts such as leveraging data warehousing – and what type of automation can be enabled to ingest all this data so it is accessible, in any format, when required. An example is the data required to support ESG requirements.

There are also pressures around staffing. There is currently a shortage of qualified people to perform the jobs that are needed.

By not having the right people in the right roles you are creating operational risk. Operational risk is a big concern for any investor running any business – but it becomes exceedingly important when you manage people’s money.

For example, there is a lack of accountants who understand private debt and a shortage of people who understand loan processing and are experienced in the operational components of what is needed. Finding and recruiting the right people to understand and perform these operational tasks is becoming very challenging – and that is driving the need for more outsourcing.

Many firms are working, researching and evaluating the right partners to help them build and scale their business. Research is paramount – because not all vendors or systems are compatible or provide the level of data analysis and operational sophistication that your business might require.

When researching a provider, consider the quality of service, the nature of the organisation and the staying power of the partners you will be working with.

What benchmarks would you recommend when it comes to ESG and D&I reporting? Do they already exist – or does the industry need to come together to agree on them?

There are more than 60 ESG frameworks, so there is no single standard. The most common are the Global Real Estate Sustainability Benchmark (GRESB) and the UN’s Principles for Responsible Investment (PRI). The industry should come together around a common metric via the Institutional Limited Partners Association (ILPA) or the Financial Accounting Standards Board (FASB).

In Europe, for example, the proposed Corporate Sustainability Reporting Directive (CSRD) will significantly extend the scope of the Non-Financial Reporting Directive (NFRD), capturing far more companies. It is due to take effect in January 2023.

Investors know that regulation presents an increasing risk to non-compliant companies or those who misrepresent their ESG credentials. And a growing number want to invest in a way that genuinely makes a difference.