How Private Equity Firms Are Scaling Back-Office Operations
Private equity has been one of the fastest growing asset classes over the past decade, expanding nearly 15-fold from 2000-2022 to reach $8 trillion in assets. While this growth has brought opportunity, it has also created a domino effect of operational challenges for emerging and established fund managers. From grappling with talent acquisition and retention challenges to building a cost-effective and scalable back-office infrastructure, CFOs are challenged to do more with less, especially as the pace of regulatory and limited partner requests accelerates.
These pressures are forcing firms to reevaluate how they allocate resources. According to EY’s 2023 Global Private Equity Survey (downloadable through the link provided), 59% of private equity senior management cited increasing outsourcing of certain back-office functions as a tool to manage workloads. The traditional reflex of an emerging manager is to make that first permanent hire when they launch their fund or an established GP to add headcount to handle growing strategic demands, both of which may prove to be an unnecessary burden on management fees. Instead of adding permanent headcount, firm leadership now has the benefit of using experienced service providers to drive efficiency in fund operations. These outsourcing arrangements not only help with hiring challenges but also free up internal resources to focus on more strategic initiatives.
Hiring the Right Talent
When faced with expanding workloads and regulatory complexity, many firms first instinct is to hire internally. But this model has limitations. While 76% of large firms identify talent retention as critical to their competitiveness and 60% of smaller firms emphasized the need to hire the right talent in the EY survey, attracting and onboarding qualified candidates quickly remains difficult in practice. Post-Covid changes in workforce behavior have further complicated staffing efforts.
Even with a successful hire, new personnel may not be the right fit and ultimately meet GP needs for a cost-effective, efficient and scalable back-office solution. Emerging managers could risk misallocating initial capital on an unsuitable CFO hire, only to find themselves focusing more time on finance and operations. Established managers forced to face a more complex environment and mounting investor requests may lack the strategic support to address those challenges. They may also find that they need additional assistance to ultimately wind down their funds.
Outsourcing as a Strategic Lever
As a result, GPs are increasingly turning to outsourcing. Per the same survey, over 50% of small to mid-sized private equity firms plan to outsource back-office talent within the next three years. This offers firms flexibility and access to deep expertise at an attractive price point compared to the fixed costs of full-time staff.
These firms are prioritizing service provider partners who bring both back-office expertise and operational support. The oversight and strategic finance and operations work can be shifted to a trusted outsourced partner in various ways throughout the firm’s lifecycle. With the right partners, GP management can redirect its focus toward strategic priorities like fundraising, investor relations, and portfolio management.
Petra’s Approach
Petra prides itself on having a seasoned team of CFOs in senior leadership positions who have worked at institutional, global asset managers with complex fund structures and SPVs. Because of this, our team understands the growing complexity GPs face. Our senior professionals work hand-in-hand with GPs across fund accounting, operations, compliance, and reporting, allowing them to scale efficiently without sacrificing control.
We deliver the infrastructure, processes, and expertise to help GPs make informed decisions when starting their firm, launching a new fund, requiring an enhanced level of financial oversight, or needing strategic advice. Whether on a full or part-time basis, our team provides GPs with confidence in their back-office operations so they can focus on fundraising, team building, and growing investments in their portfolio companies.
Reach out to Brian Harpish to learn more about Petra’s Outsourced CFO offering.