Thanks to investors’ appetite for allocating more to private equity firms, CFOs should position their firms skillfully to win the competition for capital, suggests an Ernst & Young survey. Following its second annual CFO survey of the global private equity industry, EY has published a report titled: “Positioning to win- 2015 global private equity survey” and states that CFOs must move beyond tactical actions to strategic priorities.
Investors’ preference for private equity
According to the EY survey, in sharp contrast to the past several years, now investors have clearly indicated that they are most likely to allocate capital to private equity compared to other alternative asset classes:
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As a testament to the performance and resilience of private equity funds, both during and after the financial crisis, today the majority of investors are allocating more than 10% of their capital to private equity, and almost two of every five investors are allocating over 25% to private equity. Moreover, almost half of investors plan to enhance their allocation to private equity in the next two years:
Thanks to the industry-wide portfolio value increasing steadily and there being plenty of dry powder to invest, the level of private equity assets under management is as high as it has ever been. The EY survey notes that across the industry, private equity firms are preparing for an influx of capital with almost three-quarters of the firms surveyed expecting to attract significant capital in the next two years:
The EY survey notes that the combined effect of a growing pool of investor capital and private equity firms’ push to capitalize on opportunities has created a competition for capital in which CFOs will play a critical role.
More transparency – best for both parties
According to the EY survey, investors want to know that the private equity firm they invest in is living up to its fiduciary responsibilities. Investors also added “proven operational excellence” to their definition of “performance.” The survey notes that a lack of transparency and limited investor rights long have been the norm in private equity, and many limited partnership agreements precluded investors from requesting the information they needed to adequately monitor their investments and the private equity firm’s operations. However, the survey found that this is changing rapidly, with more and more firms pushing very important information to their investors:
The EY report notes that building and maintaining excellence requires CFOs to move beyond traditional operations, a transition that began several years ago. Today CFOs are asked to master the intricacies of operational and regulatory risks, portfolio monitoring and valuation, and direct interactions with investors. Additionally, in recent years, CFOs have been spending more time than ever dealing with regulators, including the U.S. Securities and Exchange Commission. On the global front, the European Union’s Alternative Investment Fund Managers Directive (AIFMD) also increases the compliance burden, though several private equity firms and investors have yet to grasp its impact on their business activities:
Path to operational excellence
The EY report notes that private equity firms which report in a transparent, timely and reliable fashion will demonstrate operational excellence. The survey highlights that reporting is the most prominent area for firms to gain a competitive advantage.
According to the survey, investors want to increase their comfort level by developing a complete understanding of how private equity firms operate behind the scenes. To meet this enhanced requirement, CFOs at private equity firms can adopt or incorporate new technologies to help them analyze, collect and report portfolio data in a more timely and efficient manner.
The EY report notes also that almost two-thirds of investors sought customized reporting from their private equity firms throughout the year.
The EY survey concludes that the private equity firms which best respond to the increased volume, complexity and transparency of customized reports will differentiate themselves in the eyes of investors.