1 Fund administrators have a role to play in PE’s ESG efforts
The pandemic has accelerated a number of trends in the private equity industry, not least a greater consciousness of environmental, social and governance risks.
Whether it be investors or portfolio companies’ customers, a growing number of stakeholders are paying closer attention to how firms are addressing issues such as climate change, diversity and inclusion, and social inequalities. Indeed, 38 percent of respondents to Private Equity International’s LP Perspectives Study 2021 say a GP’s consideration of ESG factors plays a major role in due diligence, up from 31 percent the previous year.
ESG is on regulators’ minds too – the most notable recent example of this is the EU Sustainable Finance Disclosure Regulation, which came into effect in March. With pressure coming from all sides, ESG is becoming an increasingly risky issue to ignore. Many GPs are stepping up to the plate. For example, 41 percent of PE managers with assets under management exceeding $15 billion list ESG initiatives as a top strategic priority, according to EY’s 2021 Global Private Equity Survey.
Given their existing involvement in supporting managers with their reporting and regulatory compliance needs, fund administrators have the opportunity to play an important role in assisting clients with their ESG requirements too.
Sitara Fernando, an associate director at Vistra, says: “Fund administrators have been developing ESG products and services, with investment focused on partnering with consulting practices and specialists in the sustainability space and product development, including the development of systems for collecting, analysing and reporting on ESG data.”
Data is a particularly vital piece of the ESG puzzle, both in terms of measuring, monitoring and reporting progress, but also in informing decision-making and ensuring advances are made as effectively as possible. It is not just about having the data, but what you do with it.
Andy Pitts-Tucker, managing director at Apex ESG Ratings & Advisory, says: “I have no doubt that ESG data will ultimately be audited to the same extent as financial data. If your fund administrator can be the single source of data collection and report generation, that takes a headache away. Also, having this wealth of information alongside the financial information, and being integrated into decision-making, will put managers in a great position in a few years’ time to produce some really interesting analysis about financial success and ESG integration.”
2 Access to data and tech is increasingly valued
ESG data is not the only area where fund administrators’ services are being put to use. With the pandemic limiting travel and in-person contact, managers and investors have had to adjust to virtual communications and processes. This has put the onus on technology – around a quarter of managers of all sizes that took part in the EY survey view the enhancement of back-office processes and technology as a top strategic priority, and 53 percent of managers in affiliate title Private Funds CFO’s latest Insights Survey say that the pandemic has encouraged them to increase their investment in tech.
Partnering with fund administrators and other third-party providers is one way managers can access technology platforms and reduce the time and resources spent on building and maintaining systems in-house.
“Technology makes my role a lot easier,” says David Sims, finance director at mid-market firm Tenzing Private Equity. “One of the benefits of the administrators is to lean on their use of the latest PE-focused software, which would likely be too expensive to bring in-house ourselves.”
3 There’s still scope for AI and automation to make an impact
Advanced technologies such as robotic process automation and artificial intelligence also have the potential to yield benefits in private equity. Automation, for example, can drive efficiencies in day-to-day processes, enabling staff to concentrate on more high-level tasks, while natural language processing can enable firms to extract, process and more easily access data from documents. Equally, AI could be harnessed to help inform decision-making, such as when sourcing and analysing deals.
Jay Cipriano, senior vice-president at SEI Investment Manager Services, says: “One of the attractive things about AI is its ability to power predictive analytics. Predictive insights enabled by machine learning could prove to be transformative for many firms, leading to better decisions across a range of functions.”
Despite its potential, uptake of emerging technologies has been relatively slow in the private equity industry. Implementation of RPA and AI remains in the single digits, according to Private Funds CFO’s Insights Survey, with 84 percent and 69 percent of managers yet to review these technologies, respectively. Where such technologies have been implemented, the most significant gains have been felt in performance analysis and back-office management, with around a fifth of managers reporting that the tech has been highly effective in these areas.
4 Establishing effective partnerships is as vital as ever
In addition to investing in tech, the Private Funds CFO survey found that covid-19 had strengthened managers’ relationships with existing external service providers (46 percent) and led some to consider outsourcing different or additional functions than they had previously (22 percent). More than a third of respondents plan to increase outsourcing of fund accounting, as they look to external providers to help meet growing investor demands.
One of the key considerations for GPs looking to outsource finance functions is finding a service provider with which it can form a partnership rather than a merely transactional-based relationship. “The administrators are an extension of myself and of the firm, so building that trust and relationship is really useful and important,” says Tenzing’s Sims.
“It has to feel like a partnership,” adds Stacey Relton, head of North America at Sanne Group. “It needs to feel no different than if the team were down the hall in another office. It needs to have that same response time, same partnership approach – it needs to feel seamless between the internal and external team.”