One-in-five private equity firms is already offering “non-traditional” fee structures, such as only charging performance fees or offering fee breaks to big investors, according to a survey of 103 CFOs by Ernst & Young presented at the Private Equity International CFOs & COOs Forum 2019 on Wednesday.
According to EY’s 2019 Global Private Equity Survey, a further 39 percent of PE firms are considering adopting different fee structures, although they have not done so yet. The most common variation on the fee model currently being offered is a performance fee-only model, with 64 percent of those who are changing the model going for this option; 56 percent offer fee breaks for bigger investors, while 44 percent have negotiated an expense cap.
Overall, asset growth and talent management are the two top priorities for private equity CFOs. On the topic of asset growth, 46 percent of CFOs are thinking as much about new strategies – with private credit being the most often cited – as growing existing strategies.
“It’s far easier to grow your investor base when you stick to your knitting; the next fund being bigger – a step expansion – is a far easier way to grow,” said one CFO at the Forum. And it’s much easier for the back office, she continued. “You might not think about the fact that your back office needs to understand that tracking a real asset is different to a private company. So there is lots to consider.”
PE firms are also looking to diversify their workforce, with gender diversity being a top priority; 79 percent of CFOs said their firms are looking to increase gender diversity. After that, 63 percent said they were aiming to increase cultural diversity.
“We have all done a poor job of diversity and if you keep doing the same thing, then surprise surprise, you get the same results,” said one CFO.
“Those discussions are underway,” noted another. “Firms may not be enacting it, but most firms are starting to recognise that they need to be better at these issues.”
A lack of diversity can cost. In June 2018, sister publication Infrastructure Investor reported that a lack of workplace diversity had caused Blackstone Group and Brookfield Asset Management to be passed over for a $50 million infrastructure allocation by the Chicago Teachers’ Pension Fund, which has $10.8 billion of assets under management.
This goes hand-in-hand with what private equity managers and investors both see as the most critical risks affecting the private equity industry over the next five years. Fifty percent of both groups said changing investor preferences is a critical risk – the highest among the options listed. Another 50 percent of managers and 32 percent of investors said talent attrition is among the critical risks.
Fund accounting has been getting the most tech spending
Over the past year, firms have been investing in technology as a way to improve operations and reduce costs. Right now, many firms have yet to see tech-induced savings. Said one CFO: “It is not just the upfront cost – both of money and time, because you have to run the new and old systems in parallel for a while – people are mostly seeing [an] increase in technology costs and we are not yet seeing the benefit.”
Fund accounting has been the most common area of technology investment in the last three years, with 66 percent indicating they have made technology investment in this area. A close second with 62 percent was investor relations, followed by accounts payable and time and expenses with 57 percent.
While technology can help reduce costs, it’s also important to make sure that your firm’s staff has the skills to meet your technological needs. Larger firms have prepared their talent least to meet their current technological and data requirements, the report says. Only 63 percent of firms with more than $15 billion in assets under management said their front office talent was prepared, and 67 percent for the back office. This is a steep drop from 83 percent and 81 percent, respectively, for firms with less than $2.5 billion in AUM.