Chris Gale 00:03
Welcome. This is episode three of PFA Solutions’ private capital talent series. We’ve invited TMF Group’s Kwame Lewis and our own PFA’s vice president of product strategy and client delivery, Ryan Burger, to talk about why the front office wants CFOs to do more with less, and how CFOs can get what they need and not end up regretting it.
Let’s dig in. Kwame, can you tell us a little bit about yourself? You came from PwC and then held a position as a private equity CFO. You’re now co-leading North America funds work for TMF Group fund services and starting out a brand new unit to help CFOs be their best selves. And you win chamber music competitions playing the clarinet.
Kwame Lewis 01:15
And that’s just my day job. Thank you so much for having me. I’m really, really excited about this conversation. Yes, I am actually a classically trained music clarinetist. I’ve played in orchestras. And I was telling Chris, I used to be the president of a board of all those orchestras. It’s the only other thing I’m good at other than accounting and talking about private equity funds and that type of thing.
Lots of exciting stuff happening at TMF Group in North America for funds, absolutely. I was running the fund administration business. But now my hat’s off to my very capable partner, Christopher Smith. Now I’m focused on doing everything else, which is really exciting, including valuations, ESG, CFO support services, and just helping managers be their best selves, exactly as you said, Chris.
Chris Gale 02:20
How does someone in the CFO role successfully partner with the front office and ask for what you need to advance? What’s the best way of doing it? Sometimes the front office feels like they’re doing a big favor to the CFO. They say, “Is carried interest and compensation really that complicated? Do you really need automation for this?”
Kwame Lewis 03:25
Like any relationship that you have, communication is key. Obviously, with the front office – another professional name for them is the deal guys, those guys who basically do the fundraising, the investment selection, and all of that – that’s their day job – they’re out there looking for good deals, making sure that there are good returns for the investors, etcetera. But there is also the big machinery of dealing with the LPs, dealing with the investors, providing statements, providing information to them as they need, like tax information, K-1s ones, etcetera. It’s really a trying to communicate and educate those guys in terms of what you need to effectively work with the investors. Of course, as you might imagine, that costs time, it costs money, and it impacts their bottom line. Remember, in a private equity firm, it is a business. That’s where that tug occurs in terms of getting the right resources to effectively do your job in the back office.
I have a few things I have done as a CFO. The first thing is just having a goal for the entire organization. Front, middle, back – what’s the goal for the organization? To provide transparent information to investors? Understanding the process flows within the private equity firm, like AUM, fundraising, and so on. There are a lot of processes and goals that go into that. The first thing you want to do is kind of outline that goal.
The second thing, as I said, is that communication is very, very important. You need to communicate as an organization. One of the things I used to do was to call leadership meetings in the firm, where all the leaders of the front, middle, and back offices would get together and talk through just the overall goal and strategy of the private equity firm to try and make sure that everyone is aligned in that goal.
Another thing I would do is document. I’m an auditor, as you mentioned, from PwC. Documentation is key for me. It’s key for any organization. Businesses need central repositories of their processes, so everyone knows they’re on the same playlist in terms of what the organization is doing and what you’re trying to achieve. Strategy, obviously, is also very important. Having goals entails challenges. Obviously, executing is the last part of it – executing those processes and improvements. You just have to get a ticket, step back, and spend time with all the leaders within the firm to achieve the goal of the firm.
Chris Gale 06:35
The goals are communication, documentation, strategy, and execution. Can you tell us more about how you connect the goal to what it is that you need? I’m thinking automation, but how do you draw that connection?
Kwame Lewis 07:09
Basically, the back office needs resources and people. For every fund that you raise, you need to have someone to track all of the investors that come into the fund, someone to do all the accounting, someone for the reporting, someone to deal with the auditors, tax folks, and other vendors that come along, someone to deal with PFA Solutions’ Ryan Burger who is trying to put in process-improvement stuff. That’s almost the main job of the CFO because there are always other things that have to get done for LP reporting, management reporting, and carry. There are just so many things. There are a lot of resources needed to effectively run your organization as a private equity firm.
In terms of the age of firms, this problem started in the 60s, 70s, and 80s. They started with spreadsheets – Ryan’s enemy. Everything was on a spreadsheet. It’s manual. That’s fine for one small fund. But as time progresses, you raise three funds and the funds continue to get larger. You have co-investments. You have SPVs. It starts to really become this large animal. It doesn’t cost the other side money obviously. That bleeds into the bottom line of the partners, the team professionals. That’s where I try to work together with those five points I made, trying to really communicate, and be on the same page of where we want the firm to go, how are we going to get there, and what resources are needed to get us there. It really helps the firm.
Chris Gale 09:19
If we move away from the private capital CFO, we think of the resources that a person might draw from, either through hiring, outsourcing technology, or some blend where they’re working through those five points, maybe internally. Are there certain things you’re looking for? Are there certain pain points you’re looking to address? You hear complaints from CFOs about churn on the fund services side and how technology has been oversold and has too many gaps every time an edge case shows up.
Kwame Lewis 10:01
The first thing I started with was technology. Technology is fantastic. We need it. It’s a mindset change because, again, the firms have been doing it a particular way, manually in a spreadsheet, for 15 or 20 years. Technology also is not in the skillset of current people. Implementing a system? The project management skills and IT skills may not be there. That’s the main pain point, right? You have to either do your day job and get financials and reporting out, or take a step back and be able to figure out how to implement a system. Choosing the system is another skill set. You have to go out there and talk to different vendors. Everybody is telling you that their system is the best. You have to figure out what system to put in place. The second half is implementing it and getting your staff to do it, too, which means taking time away from their day jobs. That’s the pain point with any type of technology implementation. It just takes time and skill.
The other side of it, in terms of the day job itself, is being able to do what I was talking about – financial statements, account statements, etcetera. It takes a lot of time. Time means people. That means you need to hire a second, third, and fourth accountant, right? Firms can then turn away a little bit from actually doing deals and focusing on spending resources on the back office where they need to hire people to do all this accounting and operations. That’s where the fund administrator comes in. You can actually outsource some of those operations to a fund administrator. They scale up and down. They worry about HR headaches. They will worry about the costs. The tech and all of that will be done by the fund administrator, thereby freeing you up to do more things internally. The fund administrator can do everything. They are not going to go to the Monday morning meetings and be directly part of the operations of the firm. You still need a CFO, and they still need a controller to bridge the gap between it the fund administrators, the auditor, and other vendors. It truly is a mix of outsourcing, keeping stuff in-house, and technology. That’s just what I think about every day. That’s what I try to help CFOs think through. What is the strategy? What does that perfect balance look like?
Chris Gale 12:48
One of my friends is in the fund accounting space. I have many friends in the fund accounting space. If I talk to her about software, she groans. Software will be good at only one thing. But edge cases don’t work with the software. There’s a fear of being oversold. How does PFA address that? What questions would you invite CFOs to ask to get the right solutions?
Ryan Burger 13:50
There are hundreds of solutions out there. A website called PE Stack has an inventory of more than 250 different vendors in the private equity and venture capital space. There are about 50 more that they’d like to add. There are a lot of point solutions that focus on a very specific area. I think it’s phenomenal that we have that many vendors in the space and that we’re continuing to grow. We want to innovate. We want to use technology.
Providers need to home in on whatever problems they’re looking to solve. While it would be phenomenal to have one solution address everything in investor relations, everything on the accounting side, and everything on the investment side – we’re not there yet. There are too many nuances. They’ll continue to be point solutions for given tasks. Then obviously spending the time to integrate presents challenges. It’s really just sitting down, really making sure that they ask all of the detailed questions of their internal employees that are going to be the users of the system, understanding the edge cases, and making sure the vendor understands those.
In our case, we like to see those spreadsheets and go through them before we end up signing on clients. We know what we’re getting into, they know what our solution solves for, and, during all of our demos, we try to make it interactive where we ask them questions, especially on the carried interest and compensation side. We try to make it interactive while we’re doing the demo. We ask them about their vesting schedule, how they allocate carry, who’s dilutable, who’s credible, and whether there are other nuances or holdbacks or escrow tax components that we have to think about. We try to make it two-way and really look at the spreadsheets.
Chris Gale 16:21
Back to the five points. On the goal of communication and documentation, what problems precisely are you seeking to solve?
Kwame Lewis 16:43
That is the goal. The goal for me, as a CFO, would be to improve my operations overall. It’s usually all done manually right now, which means that it’s subject to error. It’s subject to lots of people doing it, spending a lot of time, a lot of late nights trying to get out this financial statement and whatnot. There are a lot of interactions with the LPs manually because they’re asking for certain things. All of those things can be solved with technology. The goal for me would be to implement technology solutions that ease and make operations much more efficient. I would absolutely turn to PFA Solutions and their technology.
Ryan Burger 17:40
Spreadsheets aren’t necessarily our enemy. We all love spreadsheets. But there are a time and a place to rely on spreadsheets as your golden source of truth. We love to integrate Excel data into our platform as well as download information out. But our view is that this approach is risk prone and not a scalable solution. It’s great. But it comes with a cost, obviously, from a risk and scalability perspective.
Kwame Lewis 18:12
And a controls perspective, as well. There are always errors. There have had many stories of errors repeating. Something is hard coded. Something didn’t change when you rolled it forward. It presents a lot of errors. It’s a nightmare. Having tech solutions in play is fantastic. The problem is, getting from spreadsheets to the tech solution is a journey. You have to figure out any journey, identify a goal, and plan to actually get from point A to point B with the least disruption.
Chris Gale 18:48
Why is carried interest potentially a pain point?
Kwame Lewis 18:58
Carry is the goal. It’s the reason why we get up in the morning, the reason why we invest in all these companies, and, obviously, why we provide returns to our investors. Tracking carry is very, very important. It’s kept in a very small circle within the firm. The CFO administers it in a spreadsheet on his desktop, speaking with the highest levels of the firm, and the managing partners of the firm in terms of allocations, best practices, and that type of thing. It has historically been seen as a very, very tight-knit group looking at carry. We did a survey recently. About 68 percent of CFOs still track their carry allocations in spreadsheets. Because of that, they’re very, very concerned about carry. If there are any errors, it’s a big deal. That’s why people don’t want to move on to a technology platform. The thing is, technologies are perfect for carry because they handle the calculations for you and the vesting schedules, and give it transparency.
Carry is a big part of compensation for investment professionals in private equity firms. They come to my office every year. Every year, in compensation discussions, they ask me, “How much clarity do I get?” Transparency is something that technology can give. And they have a really cool portal that we can go into access carry. Otherwise, I have to go dig it up into a spreadsheet, as opposed to being able to have this portal and that transparency with your deal professionals. It gives them more knowledge within the whole organization, as well.
Chris Gale 21:05
It could become a form of communication in and of itself.
Kwame Lewis 21:08
Yes, a form of communication in and of itself. You can go in like a normal HR portal. You can go right in and look and track your carry tracking documents. That’s another big thing. The carrier needs to sign in for documents after 5 or 10 years because it takes that long to get carried out. They’re looking for their documents. It’s great to have something all in one place in the repository. They really have a good tool to do that. It’s really impressive.
Chris Gale 21:56
Are there particular things that you would call outs that are concretely important, especially in carry and compensation?
Kwame Lewis 22:44
The CFO is moving away from just being a finance professional to being one of the leaders of the firm. And, as you lead a firm, you develop goals. It is not only about getting accounts. It’s now about people, it’s about strategies, about growing the firm, like any corporate enterprise. You want to focus on people, how you keep your people, how you keep them engaged. Obviously, we are coming out of this pandemic, so there are hybrid workers as you come back to the office, and other people’s strategies. Being transparent about carry is something that you would want to use as a carrot to keep people engaged and to keep people at your firm. We want to be the best firm, the best private equity firm to work at. We’re very people-centered. We’re very transparent about everything, including carry. I would put it into that framework. That’s a good strategy. As for execution, I called Ryan and he got me set up on PFA solutions ASAP. I’m going to work with him to build that out and to have that transparency. And it’s all documented right in the process. I think that’s how I would approach carry with partners and getting carry automated.
Chris Gale 24:20
That is really interesting in terms of enabling the right talent in the organization. As a business leader, that is really interesting. Can you tell us more about CFOs becoming who they want to become in their leadership team?
Kwame Lewis 24:56
For CFOs to become what they want to become, they need people to help them. At TMF Group, that’s exactly what we do. That’s what my role is. I help CFOs. Think through that strategy, then execute. You want to address carry, but just physically don’t have the time to do it. We can come in, we can help you strategize, and find the right solution – PFA Solutions. Then we can actually execute it, in terms of working with the vendor, working with Ryan, and actually getting the solution up and running. That’s exactly what we would do at TMF. We do the fund administration. But now, in this new line of business, we want to help CFOs do whatever they need to do to be their better selves, helping them implement technology solutions, helping to think through strategy, helping to come up with the messaging take back to their front office.
Chris Gale 25:58
You just took a technical matter having to do a carry and you connected it to an overarching business goal. That is fantastic. Tell us more about this new role at TMF.
Kwame Lewis 26:33
I look at it as the pillar of fund administration. Providing the financial reporting, providing the investor reporting, that’s the pillar. Then there are all these services that help CFOs and fund managers to be better. Valuations are one example. Valuations are done by the deal. It’s done by the back office. It’s a process. It takes away from doing other things. We can help you with that. We could take that off your hands with support services, like completing lists of items that you just don’t have the time to get to. We could come in on a short-term basis and help with that. That includes tech implementations, the vendor selection process – all of that – we could come in and help you do that.
Everybody’s talking about ESG. It’s a hot topic. But the actual execution of ESG is low in firms. It’s still in its very, very nascent stages. We will come in, we help you assess your ESG policies, build an ESG policy, and implement it for you. There are multiple other things that we do, as well, a lot of ancillary services, including portfolio company services. That helps portfolio companies and their back offices and finance functions stand up and improve. We help the CFO improve all those services.
Chris Gale 28:17
Ryan Burger 28:21
All of that resonated with a recent survey that you did where portfolio analytics, valuation, technology, and investor relations were all top priorities where CFOs wanted to spend more time. The other side of the equation was they weren’t focused enough on those areas, especially on portfolio analytics, and the technology side, so it completely resonates across the data that just came out.
Chris Gale 28:54
This last question follows up on that it looks like it. How much demand are you seeing for fund services providers to assist private equity firms with portfolio companies and their finance functions?
Kwame Lewis 29:12
A lot, actually. There are two levels. One is portfolio monitoring, getting that information, getting that data for your portfolio companies, and putting it into some type of format, visually or otherwise, to assess across your portfolio, how your companies are doing. The second level is the actual portfolio company. Depending on their back office, they may need some guidance and strategy to improve their systems: ERP systems, payroll, and inventory. They need help on that level as well.
Chris Gale 29:59
Fantastic. Really appreciate everybody for joining Kwame and Ryan. We’ll be back in touch for the next episode. Thanks again.
Kwame Lewis 30:11