Assets Under Management AUM

Regulatory pressures, complexity and competition place greater pressure on private equity CFOs

To understand how chief financial officers (CFOs) of private equity (PE) firms cope with the ever-changing investment landscape, we interviewed 30 CFOs in the United States and Western Europe, representing companies whose the size varies between 2 and 40 billion US dollars in assets under management (AUM). The survey, conducted by Mergermarket on behalf of S&P Global Market Intelligence, provides insight into the changing demands and responsibilities of today’s CFOs.

CFOs expect greater growth in assets under management despite headwinds

In 2021, dealmakers signed deals worth more than US$1.2 billion, nearly six times more than a decade ago. The relentless growth of these transactions has been accompanied by an increase in demand for assets and a rapid increase in transaction multiples, driven by fierce competition from competing firms, strategic buyers and deep-pocketed institutional investors.

Despite macroeconomic and geopolitical headwinds – including inflation, interest rate hikes, trade wars and disruption of global supply chains –more than half (53%) of CFOs said their company would raise new funds in the next 12 months. Of these, almost a third (31%) say the supply will be larger than their last fund raised, while 44% say their next fund is likely to be of equal size.

Keeping up with regulatory changes is a major source of anxiety for CFOs

When asked what keeps them awake at night, 41% of respondents ranked changes in the regulatory/fiscal environment
as the first or second problem that causes them the most anxiety. As one US company’s CFO put it, “There are faster-than-expected policy changes and faster decisions to be made in a short period of time. Cost pressures are also increasing due to the weakness of the world economy”.

Among other concerns, competition, investor demands and technology loom large

Competitive pressure is also a top concern for CFOs: 20% of respondents ranked it as their top concern, while 27% cite competition as their second concern. “Industry competitors are steadily advancing. There are new entrants competing for investor capital. There is competition to retain investors, in addition to competition for targets,” says CFO of a large American company. Another 20% say that dealing with investors
causes them the greatest anxiety. “Dealing with investors is a concern due to new investment models and allocation techniques,” says a US-based CFO with over 10 years of experience. “Investors sometimes insist that we also change our investment criteria. But we cannot change our procedures based solely on their assumptions.” Digital transformation misfortunes are ranked by 13% of respondents as a main concern and 23% as a secondary concern. A CFO in Germany noted that “digital changes are sometimes too overwhelming. We invest a lot in technological solutions; when they suddenly become obsolete, it raises many decisions in our investments. »

The Road Ahead: How CFOs Plan to Spend Their Time Over the Next 12 Months

How do CFOs plan to reallocate their time over the next 12 months? Our survey shows that portfolio analysis, technology monitoring and regulatory matters will take up more of their time in the coming year. More than two-thirds (67%) of respondents say they expect to spend more time portfolio analysis
— the most important share for any CFO function. “We will perform a more in-depth analysis of the portfolio to identify the most recent issues and risk factors affecting the performance of the underlying companies,” explains the chief financial officer of an American company. The CFO of a UK firm said: “There are now additional market risks which will make portfolio analysis much more important over the next year.”

For 43% of CFOs surveyed, regulatory issues are also expected to take up more of their time budget over the next year. “Devote more time to regulatory oversight is essential”, says the financial director of a Dutch company. “Regulations change more often, and we need to step up our preparation to avoid any problems with the authorities. as well as tighter controls on foreign direct investment everywhere. All this increases the time allotted for selecting targets. “By devoting more time to assessing the regulatory environment, we will be better prepared when looking for opportunities, selecting the right geographies and opting for specific sectors,” says one company’s CFO Italian.

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