Intertrust N : China’s private capital funds seek outsourcing solutions as demand for data grows

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As market complexities increase, CFOs of private capital funds in China are being asked for more data and reporting from their investors

Large inward investment from foreign institutional investors continues to drive demand for private capital opportunities in China. However, against a backdrop of increased regulation and complexity, investors are demanding more data and reporting from the funds in which they are invested, putting strain on the CFOs of these private capital funds.

To understand more about the changes in the market, Intertrust Group conducted research with Global Custodian to ask the chief financial officers (CFOs) at private capital funds what trends they are seeing in the industry. The report, The future private capital CFO - Unleashing potential in the ESG era explores the key findings of the survey.

Rising cybersecurity concerns

China fund managers are taking more steps to protect data against increasing cybersecurity threats.

61% of private capital CFOs in China anticipate that investors (also known as limited partners, or LPs) will require live or daily information about cybersecurity. This compares with 46% wanting the same frequency of data on portfolio performance and 54% for operations. It highlights the growing concern LPs have around data security and cyber-attacks on the funds and portfolio companies in which they are invested.

This is not unique to China and seems to be a global trend with CFOs globally expecting similar data demands from LPs on cybersecurity (60% requiring daily or live updates).

ESG going mainstream in China

Not surprisingly, demand for information on Environmental, Social and Governance (ESG) and Diversity & Inclusion is also growing as this topic goes mainstream in China. Fund managers and their LPs are now facing the combined effect of new ESG disclosure reporting requirements in China, coupled with reporting requirements in their home jurisdictions.

This is driving increased expectation around reporting requirements with 41% of CFOs anticipating that they will be required to report on these subjects to LPs on a weekly basis in the coming decade.

Increasing demand for data, but not real-time

At the height of the pandemic, when companies were facing unprecedented trading conditions, investors were asking for real-time updates. It was a dynamic and uncertain environment, and investors needed information to satisfy their own financial disclosures and reporting obligations. In Intertrust Group's report last year, The future private capital CFO: Evolving in a digital age, it was found that 80% of China CFOs were expecting their LPs to want live or daily updates on portfolio performance. However, the latest survey results show that CFOs are now anticipating a decrease in demand with just 46% expecting this frequency of reporting to continue. This is likely due to easing concerns around pandemic-related risks.

A more complex private capital market in China still requires data transparency

While it may not be real-time, the latest research shows that CFOs at private capital funds in China still expect their LPs to require more reporting on a more frequent basis.

Markets have stabilised since the height of the pandemic and opportunities remain plentiful. However, other risks are emerging: regulatory intervention in the technology and education sectors; borrowing curbs in the property sector; continued border closures and geopolitical tensions. These all add to market complexity and result in investors still demanding regular reporting from their fund managers, albeit not always on a real-time basis.

Outsourcing will become key in managing data in China

Given the increasing market complexity, CFOs of private capital funds in China are being challenged on how they can gather and track data, analyse and present it to their investors. Given the volume and frequency of these demands, fund managers will either have to invest in new technology and human resources across the organisation or choose to outsource.

In the survey, 34% of CFOs said they would either outsource further functions or retain their current balance between in-house and outsourcing. This is slightly greater than the global figure of 33%.

Outsourcing is becoming a popular option because it removes the ongoing cost of upgrading and maintaining software. It also helps ensure data reporting requirements don't become a distraction from the core business of fund managers - generating superior returns for their investors.

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