The operations function is an integral part of any successful Private Capital firm. The remit of a typical CFO or COO role has undoubtedly increased in recent years, through the introduction of new regulations and technologies, investor complexity and information demands, and more recently in response to Brexit and the Covid-19 pandemic. Now more than ever, we are seeing the value in improving operational capabilities and efficiencies through investment in people, process, technology and data.

The evolution of Private Capital operations

The role of operations within a typical Private Capital firm has evolved significantly. Operational leaders and their teams have had to adapt to a series of changes that have transformed the function. For example, beyond traditional fund and corporate accounting, private equity CFOs are strategic leaders, tasked with overseeing their firm’s financial and operational data, inputting into the capital management decisions, and in turn managing increasing LP demands and interactions with portfolio companies. This trend looks set to continue.

In a survey of private equity CFOs and COOs, when asked how the allocation of time should change with respect to the finance functions, 70% of respondents wanted to see an increased focus on technology and portfolio analytics, whilst 40% indicated they would like to decrease the time spent in fund accounting, regulatory and compliance activities.

The Covid-19 pandemic has further impacted over-stretched operations teams. Notwithstanding the overnight switch to remote working and the associated demand for technology to support this, significant changes have been driven by LP requirements. Investors increasingly require a more granular level of data to add clarity around portfolio performance and support scenario analysis around the impact of Covid-19 and associated risks.

Easing the pressure

Private Capital firms facing these issues may need to urgently consider increasing the level of investment in operations to improve both efficiency and quality of delivery. One tried-and-tested approach is to invest in new technology, which can help reduce manual errors and improve the quality and quantity of available data to support decision making.

According to the 2021 Private Funds Insight report, the pandemic caused many in the industry to accelerate technology adoption. Just over 50% of those surveyed had increased their investment in digital technologies, although many in the industry noted that the sheer number of solutions on offer can make this a daunting undertaking. If multiple specialist providers are selected in a ‘Best of Breed’ approach, it can also result in siloed data that will inevitably increase complexity.

Once technology has been deployed, Private Capital operations leaders need to secure high levels of user adoption and embed new ways of working. Following the assignment of system owners and super users to support implementation, users across the firm need to be trained to use the new system and learn how to maximise value from the additional functionality. Robust training will enable a greater return on the technology investment and unlock additional efficiencies.

The time is now

Reliance on the Private Capital operations function has never been greater. There is an urgent need for routine and to reduce time-intensive tasks so that teams can focus on value-add activities and service the ever-increasing demands of LPs.

There is also the issue of potential margin erosion to consider, with over 70% of CFOs reporting that their firms have experienced investor pressure to reduce management fees. Senior leaders must build a robust business case in order to secure investment that will drive meaningful change.

However, there is a careful balance to strike when it comes to the needs of teams and individuals within the operations function. Deploying new software to handle repetitive tasks may provide development opportunities for existing employees, but it also risks overburdening an already stretched department with layers of change. With the Private Capital industry positioned for significant growth in the coming years, there is an urgent need for investment into tools that will reduce manual, repetitive tasks, enabling professionals to focus on value-add activities.

Jonathan Connelly

Managing Consultant

Jonathan is a specialist in Private Capital operational excellence. Jonathan joined Holland Mountain from Grant Thornton UK LLP, where he worked as a financial services audit manager advising a portfolio of clients that included FTSE 250 investment trusts, REITs, private equity managers and related funds. He has experience in private equity valuation methodologies as well as working with FCA regulated and US reporting businesses. Jonathan is a chartered accountant (ACA, ICAEW) and holds a bachelor of science degree in Mathematics with Economics from the University of Exeter.