How larger PE firms differ on finance staff

Larger private equity firms emphasize hiring professionals in the finance, IT and operations areas of their business, according to a report by McKinsey, which surveyed 24 general partners about their internal operations.

Firms that have more than $15 billion in assets under management generally employed more full-time employees than firms that have less than $15 billion AUM. Financial roles accounted for 17.6 percent of employees at larger firms, compared to 9.2 percent for smaller firms. Some of the positions identified as being a part of finance were accounting, treasury and tax positions. The survey showed similar gaps for IT and operations.

David Fann, co-founder and chief executive of investment advisor TorreyCove Capital Partners, said the hiring differential could be due to larger firms having to deal with more complex issues and products.

“Most firms with over $15 billion of assets generally have multiple products across a wide spectrum of strategies, focused on several geographies and often different types of investor types (institutional, sovereign wealth funds and individuals),” Fann told pfm. “The issues large platforms have to deal with include more regulations/regulators, reporting requirements, currencies and borrowing structures.”

Another reason for the higher staff numbers at large firms could be the demand that investors are starting to put on an increase in reporting, which Fann says in turn puts pressure on chief financial officers.

“Part of the pressure on CFOs is in terms of the transparency requirements on fees and expenses,” he said. “Limited partnership agreements have certain reporting sets of obligations that the fund needs to exchange.”

Indeed, reporting requirements have been increasing recently.

Last year, California implemented a law known as AB-2833, which protects public investment funds investing in private equity by requiring alternative investment funds to be more transparent about the fees paid by public funds. In August, the Institutional Limited Partners Association released a reporting template to serve as a guideline for general partners to release more consistent and standardized reports to their portfolio companies.

“More recent fundraises are incorporating more strenuous or rigorous reporting requirements, largely configured by AB-2833 in California or by what ILPA is suggesting general partners provide, which is greater transparency around fees, management fees offsets, carried interest and all of those requirements that are relatively new in the private fund management space,” McKinsey said.

The report found that the addition of more staff did not equate to more efficiency: “In PE, the largest firms are in many ways less efficient than their smaller peers.”

A way that firms can look into increasing their efficiency is by applying digital advancements across their back and middle office functions. McKinsey said that private equity has been behind when it comes to implementing digital components to their firms, but they have started to embrace this as a possible way to drive growth.

Integrating digital technology into aspects of a company can help with meeting client needs, analytics and completing repetitive, low-value tasks, the consulting firm said. On average, companies around the world – not including the private investing industry – have digitized almost 40 percent of their work, McKinsey found.

“A digital transformation holds the promise of creating expected economies of scale, so GPs can grow more profitably,” according to McKinsey. “More firms are willing to acknowledge that goal today than during what for many GPs was the stick-to-your-knitting times of the past.”