Published in Buyouts Magazine by Kirk Falconer
A crush of LP and regulatory compliance reporting and accounting work is pushing private equity CFOs and back offices to the breaking point. That’s according to Stephen Coats and Peter Haskopoulos, managing partners of Petra Funds, a provider of back-office services backed last year by Charlesbank Capital Partners.
Time-consuming and costly fund administration by GPs is growing, Coats and Haskopoulos told Buyouts, because of elevated demand coming from multiple sources.
A main source of demand, they said, is investors. Many LPs are stepping up reporting requirements – including hard evidence of firms integrating ESG and DEI criteria into teams, strategies and portfolios – as well as fuller data disclosures for the purposes of benchmarking and monitoring.
“As LPs have become more sophisticated, they now regularly request bespoke notices, reports, partner capital account statements and DDQs [due diligence questionnaires],” Coats said, “creating an enormous burden on GPs. We went from everybody wants to have an ILPA template to everybody wants ILPA- plus.”
Another source is regulators, whose requirements and strictures are set to increase after the SEC’s finalization of new private fund proposals last year.
Billed as the most sweeping regulations since the Dodd-Frank Act, the rules aim to enhance transparency. They cover everything from reporting of fees, expenses and performance and fund audits to equal LP access to information and conflicts of interests in fund charges and GP-led secondaries.
SEC proposals add “a whole new layer” of demand, Coats said. “Whatever it ends up looking like, we know that at least directionally it’s moving toward more and faster reporting, not less and slower.”
Still another – and less well appreciated – driver of mounting GP paperwork is the recent “explosion” in private debt, Coats and Haskopoulos said, as new credit shops emerge and private equity managers acquire, launch and build in-house credit platforms.
Back offices are impacted by the fact that debt investing is different from, and by its nature more complicated than, equity investing, they said. As such, it requires distinct organizational resources, often making middle offices imperative.
Credit represents “a different dialect of the fund administration accounting language,” Haskopoulos said. In the case of private equity firms starting credit funds, for example, existing operations are “not necessarily set up to really grow and scale” alongside transactional volume.
The combined weight of demand on CFOs and back offices is “creating a need for more infrastructure,” Haskopoulos said. As part of this, many GPs are taking stock of the effectiveness of long-standing systems and processes.
“There’s a bit of institutionalization going on whereby GPs are not just thinking about how they historically set things up, but how they should set them up,” Coats said. “That’s never happened before because everyone was just too busy and had their head down.”
One result of this rethink may be greater GP interest in outsourcing back- office functions to external specialists, such as Petra.
A 2023 survey by Ocorian found 98 percent of managers reporting growth in the level of their outsourcing in the past two years. An equally big share plan to up the level further over the next three years.
Another option is lift-outs of back offices, including entire teams, and placing them in the hands of external services providers. Large GPs are paying more attention to this alternative, Coats said, as they realize that traditional internal infrastructure is “no longer serving their needs.”
The search by GPs for remedies to overwhelming paperwork is fueling the expansion of Petra, founded in 2021 by Coats, an ex-Riverstone partner and CAO, and Haskopoulos, an ex-Riverstone managing director and CFO.
Petra was designed to be a one-stop shop for private equity and private debt firms, large and small. It is able to handle or coordinate every back-office function – such as fund accounting, GP accounting, investor relations support, compliance, ESG reporting, insurance and IT – on a customized basis.
Key to Petra’s model is its role as an adjunct to the client, something the founders’ experience at Riverstone trained them to do. “The only way to make yourself an extension of a CFO is to think like the CFO thinks,” Coats told Buyouts in a prior interview.
Because of elevated demand on back offices, clients of Petra rose to 65 as of March from 45 during its first full year of activity in 2022. Over the same period, employees increased to 180, from roughly 40. US and European offices, of which there were originally two, now total five.
GPs are tapping into the full range of Petra solutions, Coats and Haskopoulos said, with lift-outs showing particular momentum. To date, four lift-outs have been completed, among them the in-house operations of Riverstone and Denham Capital. Four more lift-outs are underway. “We think it’s going to be a big part of our business going forward,” Haskopoulos said.
Other well-known names in the fund administration services space are 4Pines Fund Services, Alter Domus, Apex, Aztec, Gen II Fund Services, Ocorian and Standish Management.
