As market uncertainty continues to strain fundraising, dealmaking, and distributions to investors, chief finance officers are looking for new ways to support portfolio management and value creation, and to enhance investor relations functions. At the same time, CFOs are looking to cut costs, increase efficiency, and do more with less.
CFOs recognize that implementing artificial intelligence tools and technology solutions offers immense potential to reduce operational costs and improve efficiency at the firm level. GPs are also under scrutiny from investors and regulators to reduce fund expenses, so evaluating tools that reduce expenses borne by LPs has become a necessity.
The challenging market environment has several implications for firms and funds:
- New investors are putting pressure on GPs to reduce fund expenses.
- Longer investment hold times mean lower gross internal rates of return (IRRs) and unmanaged fund expenses can have a significant drag on net IRRs.
- Longer investment hold times coupled with more time between fundraises mean firms are confronting step downs in management fees while also struggling to raise new capital.
- As margin expansion becomes an increasingly important driver in portfolio company value creation, firms are reconsidering fees and expenses charged to portfolio companies.
Since they are integral to fundraising, deal execution, operations and compliance, and portfolio management, CFOs enjoy a unique vantage point — and can offer a crucial perspective on where to apply AI to reduce costs and improve efficiency, across the firm.
On the one hand, CFOs clearly recognize the potential benefits of implementing AI.
A Citizen Bank Report, AI Trends in Financial Management, that surveyed CFOs and private equity finance leaders found:
- 97% of PE financial leaders were using AI for operational efficiency, including fraud detection, process automation, payment automation, risk assessment, and financial analysis.
- 69% of PE firms were very confident in their ability to leverage AI benefits in the next 5 years.
- 85% of PE firms planned to increase their current level of AI investment in the next 5 years.
On the other hand, Private Funds CFO’s Insight Survey 2024 found that when CFOs were slower to implement AI, it was because they had a hard time understanding workflows, outputs, practical use cases, or security risks.
Despite the hurdles to AI implementation, the mandate for private equity CFOs is clear: Find ways to reduce expenses and increase efficiency, but do so safely.
GrantThornton’s recent report, Financial services CFOs embrace tech to drive growth, highlighted that 71% of CFOs in asset management and banking are already working to streamline operations through technology investments.
How finance teams in private equity are using AI
Leveraging data analytics: Data science professionals supported by AI solutions can now gather, categorize, and organize multiple data sources for finance teams to support budgeting, forecasting, and financial planning.
Automating reporting: Deal teams often act as the keeper of financial data for portfolio companies, which is usually maintained manually in spreadsheets. Managing special reporting or information requests on top of normal capital calls and distributions, periodic financial reporting, and annual audits can be challenging for everyone involved. AI tools can draft recurring reports, ensuring finance professionals deliver information on time and in accordance with the fund documents, while freeing them to focus on analysis and responding to bespoke investor requests.
Lowering operational expenses: Private equity CFOs are focused on expense management, both at the firm and fund levels. Implementing AI solutions may provide opportunities to reduce expenses in both buckets. CFOs should look across their fund operations to identify which expensive routine processes or systems may be ripe for automation. Candidates for AI transformation may include negotiating routine agreements, replacing customer relationship management solutions (CRMs) used for deal sourcing, or enforcing consistency across siloed deal teams when it comes to consultants and diligence providers.
Streamlining payroll processes: For firms that still manage payroll and employee benefits in-house, AI-powered solutions can provide an edge. For example, AI-powered tools can automate routine workflows, like employee expense reimbursements, by connecting employee calendars and expense reports to company policies, automating the review, approval, and reimbursement process.
Flagging compliance violations: AI tools that can connect the firm or funds’ general ledger to fund expense policies and compliance policies and flag violations have the potential to significantly decrease audit expenses.
Monitoring data anomalies: AI can be a valuable tool for preemptively averting legal, compliance, and regulatory issues and addressing risk management challenges. For example, by delving into historical data patterns, AI models uncover irregularities like errors, fraud, or unusual financial trends. This anomaly detection method can enhance data integrity, ensuring finance professionals trust the accuracy of their analyses.
Automating regulatory compliance: AI can help automate regulatory compliance tasks for firms as they continue to face intricate and continually evolving regulations. By constantly monitoring regulatory updates, AI tools can help a firm automate the interpretation and implementation of compliance measures accordingly. This minimizes compliance risks and penalties by enabling the firm to learn from historical data and regulatory texts.
CFO’s role in championing AI for private equity firms
The CFO’s role in their firm’s digital transformation goes beyond adopting AI tools for the finance function. The CFO has a unique opportunity to evaluate the ROI of firmwide investments in AI and to champion efficiency throughout the firm, empowering teams to apply AI solutions to reduce fund and management company expenses.
CFOs can also help the firm assess the financial and operational risks associated with AI implementation and perform much-needed cost-benefit analyses to guide the firm’s decision-making.
CFOs tend to be naturally skeptical and concerned when it comes to AI effectiveness, privacy, security, and compliance. Collaborating with other stakeholders, CFOs can help inform policy and procedure development and explore supplemental risk mitigation solutions, including enhanced professional liability and cybersecurity insurance.
