Fund administration: Why CFOs are passing the book

From helping source deals to setting strategic goals, the modern chief financial officer wears many different hats, as speakers at January’s PEI CFO and COO Forum in New York were quick to point out.

The picture they painted was of an ever-increasing CFO workload which is forcing them to outsource more traditional day-to-day tasks. The result has been a big increase in the external sourcing of many tasks a CFO would previously have considered part of their core remit.

More than half of firms participating in a recent EY survey now outsource their tax, fund accounting and technology matters, with at least one-third of those that don’t currently outsource planning to start doing so.

Time is just one of the motivating factors behind the decision; participants in the survey said they wanted to spend less time on regulatory and fund accounting matters, and more time on portfolio analysis and investor relations – factors they believe add value to the strategic direction of the organisation. 

There is also a trend for CFOs to get more involved with deals, at least in the US. According to fund administrator Augentius, this has been a factor behind its increased workload recently. Anecdotal evidence from CFOs supports the theory. 

“I have noticed that several of my male counterparts who have their MBA are getting involved with deals. I’m not sure if it’s a gender thing, or an MBA thing, or both,” Blinn Cirella, CFO at Sawmill Capital, says.
But this is more likely to happen at the smaller firms, says Chris Merry, chief executive at Europe-based fund administrator Ipes.

“Tasks undertaken by chief financial officers vary from firm to firm. In a small firm they may be heavily involved in the deals process, while at a firm with a larger headcount they may take more of a back seat, or not be involved at all,” he says.

Growing demand for data from LPs, both at the portfolio company and fund level, means the CFO has no choice but to demand more from service providers, Cirella says. Every quarter the firm must provide portfolio company level data to several LPs for each portfolio company, each of which has specific data formatting requirements making it highly time consuming.

“One of our LPs has a process where we are required to upload data to their data-gathering website. It’s a nightmare to fill out because it doesn’t follow traditional accounting and requires fund level and portfolio company level data. I would be very happy if a fund administrator could take care of this for me,” Cirella says.

Service providers would do well to invest in technology and build systems that allow data to be “sliced and diced” and presented in various ways. That would be very valuable to the stressed CFO, Cirella adds.

“I know two fund administrators who have put considerable time and money into their system to accommodate the ILPA template. This was a very wise place to spend time and money. There is no way my team can provide this data so if we had a potential LP who demanded it (and they were important enough to us), I would have to hire a fund admin to meet the demand. This is a whole new service offering.”

In the future, CFOs will be managers of service providers, including compliance, cybersecurity and fund administrators, and in turn fund administrators will become a commodity, meaning they will have to distinguish themselves from the competition. 

“I think range of services (and price point to some degree) will likely be what rules the day,” Cirella says.
Ipes’ clients have been turning to third-party administrators because of the growing complexity of running a private fund. This includes regulation, investor demands for more information and the increased frequency of co-investments, Merry says. These pressures are unlikely to be eased any time soon. 

“On the investor side co-investments will remain popular and demand for reporting is also going to increase. There’s no standard reporting template or requirement, you need to offer a bespoke solution,” Merry says.
Regulatory pressure will also remain consistent, adding to the complexity of running a fund, he says. 

“There are already various regulatory requirements in place – accountancy, regulatory reporting, FATCA, AIFMD, CRS demands – and they’re going to continue. Further down the track there’s also a potential change to UK regulation, following Brexit, so that will create further complications,” he says.

FOLLOWING THE RULES
At SANNE, an administrator with a presence across multiple global jurisdictions, increased workload has been the result of the regulatory adjustment following the global economic downturn. This fundamentally changed the role of fund administrators, Charles Le Cornu, co-head of private debt and capital markets at the firm, says.

“The same themes are noted consistently. Regulatory change and investor appetite for transparency of information have seen the role of the fund administrator becoming increasingly important and more varied,” he adds. 

The firm itself has beefed up its policies and procedures as a result of the growing threat of cyberattack, and it now takes a much more proactive approach to risk management and cybersecurity, something it has also been able to pass on to its clients. 

“[Cybersecurity] is something we at SANNE have monitored and we have developed future-fit solutions allowing our clients to be abreast of change and remain leaders in their fields,” Le Cornu says. 

As fund managers become more comfortable with outsourcing, there has been a notable increase in the level of trust they put in their chosen third-party service providers, viewing them as an extension of the team. Gone are the days of clients reviewing every piece of information reported by a fund administrator, Le Cornu says. 

“Fund managers have adopted an outsourcing arrangement for a reason, the onus is on the fund administrator to add real value, whether that be providing exceptional systems capability, regulatory expertise or compliance,” he says. 

It’s clear CFOs have a lot to gain from outsourcing their administrative tasks – not only can they free up time to devote to other, more desirable tasks, but they can also leverage the benefits of their service provider’s technology, investment in which many firms have not made. 

For those that are yet to outsource, the key roadblock is a lack of trust in third party service providers. These typically relate to the ability of vendors to deliver a consistently high-quality service; in total 79 percent of participants in the EY survey said that sub-standard service level and quality was a constraint to outsourcing, while 68 percent viewed their inability to manage complexity as an issue. 

Those administrators that can turn around these perceptions are likely to thrive as CFOs look for ways to free up their time to spend on different pursuits.