AllAboutAlpha | Apr 29, 2013 02:09AM ET
Ernst & Young’s new report on the future of private equity operations within the alternatives world focuses on the changing role of two figures: the COO and the CFO.
The report is lavishly illustrated with photographs of mountain climbers in various challenging positions. My fellow admirers of the philosopher William James will perhaps be reminded by these photos, as well as by something James wrote about the “will to believe” in such circumstances. If, before a dangerous crevasse on the slope of a mountain, you doubt your own ability to make the necessary leap, you will hesitate in the face of the chasm so long that you will jump at last only in exhausted desperation, and then you will “roll in the abyss,” justifying the doubt. Confidence, on the other hand, can have a happier sort of self-validation.
Private equity firms are “now more poised than ever to capitalize” on the opportunities generated by the global financial crises of recent years, and the shake-up it has created everywhere. Accordingly, many PE firms have accelerated their growth plans and expanded their range of investment strategies. For example, “as part of an overall trend of seeking longer-term investor capital, some firms [have] established separately managed account platforms for their most significant investors.”
They have widened their geographical scope as well, so that firms with a U.S. focus formerly, for example, have of late sought out assets in Brazil, China and the Middle East.
All of this has created a demand for a more robust infrastructure for these operations: reporting, technology, treasury services, and other mid or back office functions are all the weight bearing beams of PE firms.
The Rise of the CFO
In terms of the domain of the CFO in particular, Ernst & Young says it has seen firms navigate through three phases:
The role of the CFO includes guiding a growing firm through each of these phases of a sophisticated finance function. Over time, development of the PE industry will make the CFO more visible to the external stakeholders and will give him greater decision making clout internally.
The Specialists and the COO
Meanwhile, as a separate development, a firm has need of a wider range of specialists than ever before, including specialists who can’t properly be classified as either front office or back office (or even perhaps mid office). The new specialists can be described in three groups:
It’s the PE firm’s COO whose job it is to “enable these functional groups to execute on their specific objectives, while maintaining a controlled, collaborative environment with effective information-sharing.”
E&Y conclude with the observation that there will always be new mountains to climb, “the transformation of an organization’s operating model is not a process that will ever really be ‘complete.’”
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