As technological developments continue apace in the private funds space, bringing both opportunities and challenges, Linnovate Partners founder and CEO Henry Lin, who is also the CTO of RAISE Technologies, describes how the role of the private equity CFO is transforming, and how third-party providers can help guide them through new territory.
Q: How would you describe the fund service industry today?
There is no doubt that we have witnessed a huge transformation in the providers market, with the focus shifting from global outsourcing centers to technology-enabled service providers. That change really started during covid. As recently as eight years ago, no one was talking about technology-enabled professional services providers and now that is the number one priority in marketing.
The extent to which technology-enabled services are provided is another question, but we see people starting to invest a lot of energy and resources into technology, with corporate services providers and fund services providers all very focused on that. This industry has also been a hot market for consolidation in the last few years as providers move to create more SaaS-based organizations and prioritize that technology investment.
Q: What do private equity managers need and how are providers innovating in response?
When engaging with chief financial officers, it is evident to us that they are always extremely busy. They need support across various areas, and are inherently cautious by nature. Consequently, innovation in this space has been approached conservatively.
However, with the rapid advancement in artificial intelligence and technology usage becoming a reality, the next generation of service providers needs to adopt a proactive approach. If CFOs and fund managers are conservative, providers cannot just react to demand. Instead, we need to focus on bringing innovative solutions to the table and empowering our clients with the next level of forward-thinking options to drive meaningful transformation for them.
The next generation of fund managers and CFOs needs to focus both at the investor level – on returns, transparency of reporting and alternative routes to liquidity. And at the portfolio level – on value creation, financial analytics and M&A support. There are huge opportunities for them to take advantage of technology in delivering on those priorities.
Private equity firms may be investing billions into the technology industry, but when it comes to their own back office and middle office functions, they are cautious. That is not because they don’t want to embrace technology, but because it is a lot of work, they don’t always know where to start and they cannot afford to make mistakes. That means it is up to third-party service providers to drive the market forward.
Q: How can a more tech-oriented perspective better support fund managers?
By enhancing efficiency, transparency, compliance and decision-making. By leveraging technology, we can help to address the complex needs of fund managers with new tools, while maintaining quality and accuracy.
Providing concentric services is a key aspect of that provision, and a tech-oriented service provider must always be service-centric in approach. If they are tech-centric, they become a technology company. Instead, being service-centric means leveraging the technology to deliver effectively for clients, whether that is automating returns tasks like quarterly reports, or automating compliance checks. A service provider must deliver a faster and more accurate turnaround, freeing up individuals within funds to spend more time reviewing deliverables.
Data transparency and connectivity are also critical from a service provider perspective. We must always think about how we can provide a real-time insight and allow the fund manager to access the data points most effectively to meet their needs.
Q: In which key areas?
Tech can help providers better support managers with regulatory risk management and compliance. AI-driven document processing can automate up to 80 percent of tasks, allowing compliance analysts to concentrate on the remaining 20 percent for verification. This approach enables providers to deliver faster and more accurate results to clients.
Using a centralized platform with a decentralized ecosystem approach enhances communication. This involves deploying a single, unified system where you can access data, which interacts with other systems that operate independently. This structure promotes data connectivity, facilitates data integration and increases data accessibility across different systems. For instance, it accelerates report sharing with LPs.
Q: How is the role of the CFO in private equity evolving?
It is no longer just about financial analysis. It has become much more of a strategic transformational role that encompasses a lot of the aspects of the chief technology officer position too.
Today’s CFO needs to be thinking about liquidity events, enhancing investor communication and becoming much more involved at the frontline. There is also more to be done at the portfolio level around financial analysis, value creation and exit planning from a financial perspective. Every aspect of the role requires data connectivity support because without having that information right there at their fingertips, CFOs struggle to get involved in that next level of strategic thinking for the business.
Q: What skills and technologies will CFOs of the future need to remain competitive?
Any CFO in a private equity, venture capital, or a real estate fund has seen their role develop. They are now expected to drive change, develop the financial strategy of the fund and take a broader perspective beyond just focusing on reporting on funds.
The modern CFO needs to be more go-to-market, with a skillset that extends way beyond the finance function. They need to drive execution and be much more proactive. In addition, they need the skills to understand the technology stack and take on some of the responsibilities of the CTO.
The CFO of the future will have to be more adept at making better use of resources to focus on the key functions of their job. That will continue to mean looking at which functions can be outsourced effectively, but also recognizing the functions where independence is useful and having a good oversight of risk to effectively manage and mitigate it.
CFOs will have a greater role in driving M&A and integration across the portfolio in future and in business culture and management support. When financial reports are generated automatically, there is room for the CFO to be more proactive. Their unique visibility across the entire organization will allow them to really shape the direction of the firm.
We really believe we are walking into a new normal and the current version of the CFO as we understand it is going to change. There are huge opportunities for the CFOs of the future, particularly when they embrace the right tech-enabled innovative approaches.
This article was originally published in PEI Private Funds CFO: https://www.privatefundscfo.com/linnovate-partners-on-empowering-private-fund-cfos/
