‘CFOs are embracing their role as strategic leaders’

The 10th instalment of EY’s yearly Global Private Equity Survey singles out talent management, enhancing back-office processes and ESG as top priorities for operational leaders in 2023.

“These concerns should not be viewed as purely problematic,” comments EY’s Kyle Burrell, a partner in the firm’s financial services division and author of the survey. “They showcase that the CFOs and COOs of private equity are embracing their role as strategic leaders and are clearly focusing on building out their internal infrastructure as well as their teams to support their firms’ growth.”

The survey reveals the opinions of 112 private equity and venture capital firms across the globe. Their answers were divided into three categories by AUM: over $15bn (35%), $2.5-15bn (37%) and under $2.5bn (28%).

Who’s got talent?
According to the survey, talent management continues to be a key priority for GPs. “The ongoing prioritisation of talent management in PE is the result of a confluence of events,” comments Burrell. “2021 saw the industry’s largest fundraising to date. This coincided with the ‘Great Resignation’ and the increasing need to attract Millennials and Generation Z into the industry.”

To his point, GPs’ top priorities in talent management, as per the survey, are the increase of diversity and ensuring an inclusive culture, with nearly half of all respondents across all firm sizes affirming this. Actual recruiting and the establishment of effective hybrid working rank third and fourth, respectively.

In their talent strategies, firms are generally increasing their base compensation and bonus schemes but are not using carry as a lever to incentivise juniors to come onboard. Additionally, there is a strong focus on non-compensation benefits, further highlighting concerns around inclusive cultures and the work environment.

For professionals in a GP’s back office specifically, increased base compensation is the most prominent measure, with 66% of all large-, 59% of all mid- and 44% of all small-cap firms responding in the affirmative. In second place is an increase in discretionary bonuses, while awarding carry takes third spot.

According to EY, upon performance review the primary indicator for CFOs is their value provided to investment professionals, followed by scenario modelling and economic forecasting, and the creation and review of strategic transaction opportunities for their firm.

Engine works
GPs are foreseeing substantial growth during the next three years, with 44% of respondents affirming it to be accelerated, 43% calling it “moderate” and only 11% anticipating similar growth, while just 2% foresee a reduction.

To stay on top of these rapid developments while combating a talent shortage, more than half of all large firms ($15bn-plus AUM) will increasingly outsource. For midsized and small firms, these numbers amount to 11% and 23% respectively.

According to the survey, fund accounting and tax are the two biggest services that firms of all sizes outsource, with technology taking third place, especially in the middle and lower end of the market. They are followed by valuation and regulatory services.

As technology transformation ranks fourth among top strategic priorities, firms plan to automate more. Some 34% of all large firms responding affirm this, with 31% of all mid-cap and 10% of small firms in agreement.

Consequently, a third of all large-cap and a fifth of all mid-cap firms expect heavy spending on technology for their back office during the next three years, with 52% and 63% respectively anticipating a more moderate approach.

ESG and regulation
“PE firms take a central role in shaping ESG. Through their portfolio companies they have an incredible amount of influence,” says Burrell. And while EMEA and Asia pay particular attention to ESG, LPs everywhere have increased the pressure on their GPs to tell a consistent ESG story. Of all respondents, 54% in the Americas, 70% in EMEA and 71% in APAC feel increased pressure from their LPs on ESG.

In conjunction with this, the regulatory landscape continues to pose challenges. Only funds with more than $15bn AUM feel confident in the majority about their firm’s regulatory understanding, with 64% affirming this. Mid- and lower range firms scratch the 50% mark.

Across all three types of assessed firms, half feel they are prepared for regulatory changes but are aware of gaps. Among the largest firms, a fifth feel very well prepared, a share that gets substantially smaller as the respondent firms shrink in size to 5% and 6% respectively.

What’s ahead
Looking into the next year, the macroeconomic environment – including a global recession and an oversaturated market – is the biggest concern for operational leaders, especially as nearly a quarter (22%) of all respondents have experienced margin erosion during the past two years.

To combat further margin erosion against this macroeconomic backdrop, GPs look to new technologies (with 72%, 45% and 24% of all respondents affirming this) and increased outsourcing (62%, 48% and 44%% respectively).