Private equity asset growth top priority for 2018
Private equity funds are drawing funding levels not seen since the mid-2000s, as investors seek diversified returns. Asset growth remains the top strategic priority for all firms, according to a new study of sector CFOs; although talent attraction and retention remains a key priority for smaller firms.
The private equity (PE) market has boomed in recent years, with assets under management reaching the $3 trillion mark, and fund raising at all-time highs. Meanwhile, capital from pension funds and sovereign wealth funds is seeking out additional growth through private markets. Competition is subsequently intensifying for high-value targets, however, with strategic buyers also scouting for strong propositions – a mixed blessing for PE firms.
In a bid to understand how pension funds are reacting to changes in market conditions, EY recently surveyed 110 CFOs at PE funds across the globe. The CFO role is a pivotal one at PE firms, with a wide remit – from technological transformations to talent decisions.
Overall the firm found that the top strategic priority for CFO respondents remains asset growth – irrespective of assets under management (AUM) at the respective firms. However, increased pressure on talent is showing – particularly at smaller firms, which see talent management above that of the composite result. Cost management, cited as a top strategic priority by 41% of those surveyed, comes in third – with smaller firms appearing more concerned than mid-range players.
The differences between the three size categories of firms’ strategic priorities, reflect their different relative market positions, with smaller firms <$2.5 in AUM, being focused more on talent and cost reduction and less on technological transformations, while mid-sized firms are keen on talent, with cost management being of lesser concern. Larger firms are seeking to further boost their advantage, through technological transformations.
The study found that around three quarters of firms are being pressured by their limited partners on margins, with investors appearing increasingly keen to see lower costs and more transparent fee structures. The trend reflects wider market conditions affecting the asset management section, with regulatory pressure and self-service options, among others, pressuring managers.
In terms of actual impact on margins, around 31% say that their margins have undergone erosion, while the majority (50%) say that they have managed to resist current pressures with no fee reductions as yet. Around 19% of the CFOs surveyed have leveraged expenses cuts and improved top-line growth to limit reduction impacts.
Raising Funds
The study shows that fundraising enjoyed strong growth again, with 2017 being noted for more than an aggregate $637 billion in dry powder across 900 separate investment vehicles. The increase is 5% from last year, and now totals more than the total raised in the year prior to the financial crisis in the late 2000s.
55% of respondents are expecting fundraising to continue into 2018. Investors remain keen for the segment, with equities continuing to be seen as offering lower returns than the private markets. The high level of interest is projected to see total value of fundraising increase at 60% of funds that expect to see increases this year.
Increased margin pressures are, in part, focusing CFOs and their teams to spend time on so-called value-added functions. Including technology and investor relations. Interestingly, while talent is more often defined as a strategic priority, human resources is seeing less time invested.
However, the study also notes that different sized categories have different focuses, with people and outsourcing being favoured at small- and mid-sized firms for fund accounting and tax matters, while larger firms contend to win through focus on technology, particularly in portfolio analysis and fund accounting – while tax and regulatory matters are handed over to their teams.
Commenting on the results, Mike Lo Parrino, Partner, EY said, “While ideal operational maturity may be defined differently for private equity firms by size, it is clear that this needs to be their focus in order to compete for talent and investment capital. CFOs are increasingly confident that they will be taking major strides toward operational efficiency in 2018.”
