Private markets firms, it is often pointed out, are quick to promote digital transformation in their portfolio companies but much slower to adopt technology in their own operations. It should come as no surprise, therefore, that affiliate title Private Funds CFO’s Insights Survey 2022, conducted in partnership with TMF Group, found a range of opinions on the efficacy of tech solutions as a means of streamlining processes.
“The back office role is coming into the 21st century,” insists Kwame Lewis, TMF Group’s co-head of fund services for North America. “Doing everything on Excel probably isn’t going to cut it anymore.”
Lewis points out that investor portals are already widespread in the industry. The survey found that 75 percent of firms have an investor portal and a further 19 percent plan to introduce one within a year. “Investor portals are something that almost everybody has to have,” says Lewis. “Investors expect to be able to go to a portal to access their information.”
However, smaller firms in particular have to carefully assess whether tech solutions justify the expense. “We have a small portfolio, so when we’ve looked at software or applications that would allow us to gather information from our portfolio companies, it just isn’t worth the cost,” says Blinn Cirella, CFO at Saw Mill Capital. “I don’t know what that tipping point is when it becomes cost-effective.”
Excel retains trust for waterfalls
Of all the areas of technology, firms are most cautious about changing their tried-and-tested methods for waterfall calculations. Two-thirds of respondents said that they do not use any technology for calculating waterfalls. Many industry leaders consulted by Private Funds CFO are adamant that automated solutions are incapable of handling the required level of complexity and would in any case still need to be checked in Excel.
“Each waterfall has slight nuances that I think typically work well in Excel,” says one CFO, who explains their firm would be “reluctant to lock in a software solution that may not last long or work well with such nuances”.
Another CFO at a mid-market firm agrees that “when it’s just basic, obvious, plain, simple – and you’ll do it in Excel anyway to double check it – [a technology investment] doesn’t really justify the cost”.
The source adds that “the more complex the waterfall gets, the more risk there would be of paying carry too early or too late”.
However, there are tentative signs that firms are becoming more open to introducing technology. The proportion of firms that either use technology or plan to adopt technology for waterfalls grew from just 16 percent two years ago to 34 percent this year.
In contrast to other areas of technology, there is no disagreement about the importance of strong cybersecurity technology. “When cybersecurity goes wrong, it goes really, really wrong,” warns Lewis. “Even if you lose just a small amount of money, having investors hear about that can kill your reputation.”
Some 55 percent of respondents said that investor questions and requirements on cybersecurity had increased in the past year (no respondents said these questions had decreased). “In due diligence now, the questionnaires have probably two pages of questions about IT and cybersecurity, which is really pretty new,” says Cirella. “You might have had a couple of questions in the past, but now there are a lot more in-depth questions about IT and cyber.”
The mid-market firm’s CFO agrees with Cirella that due diligence questionnaires are increasingly detailed regarding cybersecurity. “Five or 10 years ago it was, ‘Do you have a programme? Do you know what cybersecurity is?’ Now it’s a lot more detailed, ‘How do you lock down this? Where do you do this? What do you allow on your machines? What programmes do you use?’”
Indeed, 87 percent of survey respondents said they are ‘always’ or ‘sometimes’ asked if they have a cyberattack readiness policy during diligence.
But a CFO at a technology investment firm adds that investors do not only interrogate firms on cybersecurity as part of due diligence. “A lot of our investors will have their operational team contact us on a regular basis and they’ll want to talk about what we’re doing on cybersecurity to train employees and mitigate threats.”
In response, two-thirds of respondents said their firms had increased investment in human and technological cybersecurity resources. Respondents were almost unanimous in reporting that the rise in remote working had made them more conscious of cybersecurity, both within the firm and in outsource providers.
“As far as cyber goes, there is so much low-hanging fruit; it is so easy to put some really simple cyber-measures in place,” says Cirella. “There are some easy things that you can do so you don’t have a panic attack every time you’re at a cybersecurity webinar.”