TMF Group on PE CFOs’ transition from accountant to data analyst

Communication, technology implementation and data visualisation are key to being an effective chief financial officer within the private equity industry, says Kwame Lewis, head of product innovation for fund services at TMF Group.

This article is sponsored by TMF Group

How has the role of the CFO in a private equity fund evolved over time?

As the private equity industry has matured, the role of the CFO has shifted from simply running the books and keeping investors happy to being the trusted partner in supporting all the affairs of the firm. The role continues to be strategic in the leadership of the business, with the modern-day CFO overseeing operations, identifying and implementing technology solutions to streamline processes, working closely with investor relations on fundraising and responding to requests around fund performance.

Kwame Lewis, TMF Group

Today’s CFO also works through all the elements of carry administration and other components of compensation plans. They play a key role in other general strategies, looking at diversity and inclusion initiatives and employee performance management.

Environmental, social and corporate governance (ESG) also falls on the CFO, as does legal and compliance, cybersecurity and data privacy.

The role is no longer a pure play accounting role. The future of the role will also turn to data analytics and visualisation as all the data around performance will be distilled and communicated to investors and management.

What other challenges do CFOs face in terms of regulatory change and tech?

In the majority of private equity firms, a lot is done manually right now. You need someone with a computer and a spreadsheet to track a lot of things, such as carry, ESG for portfolio companies and so on.

However, the challenges are now twofold: to find technology that you will be comfortable using to do all these things, and then to implement and operate those solutions. Often, particularly in mid-size funds, the CFO will be a chief technology officer and a chief operating officer in one, identifying where technology can be used to help process improvement and investor reporting at reduced cost to the firm. There are technologies and outsourcing solutions available that can help but implementation is tough. It’s also important to remember that a CFO must invest in upgrades and updates to make sure it is always evolving.

The other growing challenge for the CFO community relates to ESG, with investors and regulators increasingly expecting people to collect and track ESG data. PE firms have to implement processes to track that data across their entire portfolios in order to report to regulators, while at the same time responding to the requests of investors. There is a lot of demand for ESG information coming from LPs, and that too is further driving change.

What steps can CFOs take to ensure resources are directed correctly?

Working with the front office is like working on any relationship, so you need a goal, regular communication, documentation of the process, strategy and execution. When it comes to documenting the process, this is an area where I see most people fall down.

Documentation of the process sets out a handbook guide to how operations are run today and how they actually should be run. It identifies process gaps so the CFO can plan how to gain efficiencies.

The first thing to do is identify is the goal – what are you trying to achieve for the organisation? Is it better analytics, process flow, growth of AUM, or something else? Then there must be regular communication to make sure each group involved is aligned in meeting the firm’s goals. Any lack of communication will kill the relationship.

Then there is strategy, which is also difficult in the fast-paced world of private equity. It can be hard to step back and find the time to look at the overall view of the firm to perform a strategic analysis and identify improvements. But once those process improvements are identified, it is about execution, which means finding the resources to implement the new software or accounting system, and then potentially assessing and implementing new vendors. It is essential to hold each other accountable for commitments, which only serves to highlight how difficult it can be to find enough time in the day to do all of that.

How might a third-party provider support a CFO with driving efficiencies?

The key thing here is regular communication. One thing I like about TMF Group is the fact we have weekly team meetings with our clients, we have an automated tracker system and we communicate all the time on open items and what we are doing.

The biggest issue for any outsourced provider is the fact that they are outsourced, which means they need regular communication with the CFO and the team. You have to keep your provider as close as possible – at TMF, we focus on solutions that help the CFO to be their best selves. We provide resources across jurisdictions, bringing scalability, supporting CFOs to drive efficiencies and process improvements.

When it comes to technology, a fund administrator can shoulder a lot of that implementation burden, but they cannot do everything. The administrator can bring additional technology solutions to the table that are often too expensive on a standalone basis – treasury technology, LP reporting solutions. The CFO needs to bridge that gap between the current team’s day job and the implementation of technology and other efficiencies to improve processes.

How do you see the role of CFO changing?

The role will certainly continue to expand, and I see the CFO changing over time into the chief analytical officer. CFOs are sitting on a goldmine of information about portfolio companies at a time when deal teams and investors are hungry for that data and the analytics that can accompany that. Whoever conquers that will win out.

In an ideal world, funds would have a single, standardised set of data that supports all investor requests. In reality, this is very difficult to achieve, as different investors tend to want the data sliced and diced in different ways.

Detailed data is often requested by LPs in bespoke, prescribed or standardised formats as part of their diligence on firms’ internal processes. This puts greater emphasis on finding new, efficient ways to present data for LPs and other stakeholders. Sending over spreadsheets is no longer enough; it’s more impressive to create a dashboard for a deal team to show the trends, rather than just present a table of numbers.

The future CFO role will be about sourcing data from portfolio companies, the back office and fund admin, and then pulling that together to create visual dashboards and meaningful analytics. The private equity firm needs to combine all that individual company data in a way that can be visualised, analysed and shared with investors and the front office.

It is increasingly down to the CFO to take ownership of this data visualisation function and act as the main point of contact for investors. New technology is playing a role here: more sophisticated software tools are being developed to supplant the traditional spreadsheet-based approach.

Everyone is working towards that goal of real-time information for investors in an easily digestible format, but no one is doing that today, so it remains the holy grail. Going forward, the end point for the CFO has to be a transition into serving as a chief analyst for the entire portfolio – that appears to be the clear direction of travel.