The Value-Add CFO

The role of the chief financial officer becomes increasingly strategic and used to add value to a firm’s operations. Four CFOs discuss the reality of wearing multiple hats and how they balance new risks against new responsibilities.

PrivcapRE: How have your roles as chief financial officer evolved?

Darren Berk, CFO, Dune Real Estate Partners: We all wear an increasing number of hats as our organizations have changed over time. Depending on how you define the responsibilities that we have, I generally wear several different hats that include responsibilities for cash management, financial reporting, asset valuation, tax, performance measurement, and monitoring covenants with respect to investments or subscription lines. As CFO, you could also have responsibility for IT, setting policies and procedures for travel and entertainment, overseeing and working with senior management to operate the management company. It’s all the things that go into helping run the day-to-day business.

Eugene DelFavero, CFO, Alcion Ventures: I agree that the number of hats keeps growing as our roles evolve. Our roles have also transitioned from more of a reporting role to a strategic role at times.

Brad Nemzer, Controller, LEM Capital: My role has become more operational than I originally expected, and it seems that operational focus continues to grow. There are components such as investor relations, IT, HR, and compliance, but I think overall risk management may be the most significant. The regulatory environment seems to be constantly evolving, and you always want to make sure you’re protecting the company and your investors.

Yehuda Hecht, CFO, Madison International Realty: A short answer is “Yes, the hats are increasing.” The CFO has a lot more responsibility. The compliance overlay is definitely a big part of that. I was very involved initially in setting up Madison’s compliance department, including determining the chief compliance officer within my team. I still participate as an active member of that compliance team. Madison’s IT platform falls directly under my responsibility. I was involved in recruiting and hiring an IT director, with key IT issues flowing to me. We’re very focused on cybersecurity and have conducted related security audits as it relates to our general compliance overlay.

What have been the key drivers behind your expanding roles?

Hecht: Institutional investors are certainly more demanding and want to spend time with the CFO. I remember five or six years ago, you went into a capital-raising meeting with prospective investors and they wanted to make sure there was a CFO and [wanted to] meet you, but now there are six and seven hours of diligence sessions, as LPs want to understand everything about the back office. That speaks a lot to how institutional investors—as well as our internal management—view the importance of the CFO.

DelFavero: I agree, we are getting more and more involved, and we’re seeing the same exact thing from our investors. Five years ago, they weren’t spending a lot time with the CFO. Now they’re putting equal weight, if not more, on the back-office diligence.

Berk: To supplement that, I think all of our roles are growing, especially with respect to the strategic way that we can help our firms. I don’t know that 10 years ago people looked to the CFO role to be as value-add strategically as they do today. Firms look to us to be strategic in how we structure funds to accommodate capital, implement a fund-control environment, in addition to being a part of the investment committee. I think this has changed for us all.

When dealing with investors and potential LPs, what are some of the biggest issues you face?

Hecht: Proactive investor diligence is something we spend a lot of time on. One of the things that we’ve been doing recently is reaching out to investors to understand their tax overlay, what matters to them, and how they prefer to have investments structured. By the time we get into a meeting or on a call with them, we can have something catered to their specific needs that show them how they can come into our fund and invest in a fairly efficient way. You want to be able to articulate that you have a structure in place that’s efficient but is also not too aggressive.

DelFavero: One thing to add is all the different structures we’ve seen from multiple investors wanting to come in[to our funds]. One example was one investor who, rather than coming into the fund, wanted to invest in 25 or 30 feeder vehicles for the fund. Even though it was a sizable investor, we just couldn’t accommodate that, and we had to find a structure that would allow him to come in.

How do you handle the extra diligence and reporting being asked for by LPs?

Nemzer: We receive several unique due-diligence requests from both our current and our prospective LPs. To the extent we’ve been able to, we’ve tried to standardize our reporting on recurring requests to make our process more efficient. However, each LP is different and may have a slightly different reporting preference or look at things through a slightly different lens, so there is a degree of customization. Our investors are our lifeblood, so we put a big emphasis on making sure we have a good process that allows us to provide timely and accurate responses, no matter how detailed the request.

When is it right to say no to an LP?

DelFavero: We’ve never said no as of yet to an investor, but we’ve been constantly looking at ways to improve our internal systems. But it’s getting more and more complex in how to do that, as the investor requests are getting deeper.

Berk: I don’t know that it’s about saying no, but sometimes it’s managing expectations as to what we can and cannot do while trying to give them what they need. At one time, we had customized requests on capital accounts from a handful of investors, which were time-consuming to prepare. We took the similarities in the different forms we were completing and worked with our fund administrator to just make that part of the capital statement that everybody received; all the limited partners were satisfied with the new format, and the customized reporting for multiple limited partners was able to be reduced.

DelFavero: We did the same thing with our quarterly reports. If we get a lot of investor requests for a certain type of information, we tend to incorporate some of that information in our quarterly reports—whether it’s in the letter or in the quarterly report itself—so they’re seeing it on a quarterly basis.

Berk: And once you show investors that you have already made the information available, they’re happy to take the information and use it themselves. But you have to be careful and understand that what you prepare may become a recurring process, since you have provided it once.

Hecht: The one area where we do need to push back sometimes is on timing. Very often people want information sooner than what we typically can provide. What we do in cases like this is agree to provide a draft of net-asset-value estimates to investors who have their own specific deadlines, so they can have something that’s pretty solid for their financial reporting but doesn’t put undue pressure or risk on the level of reporting that we already have.

What about today’s regulatory environment? How do you balance that need for much greater compliance?

Nemzer: We put significant emphasis on documentation when we make decisions as a company. Expense allocation is a good example of that. We always stress the importance of documenting our thought processes around our decision-making.

DelFavero: We were able to hire an outside chief compliance officer, and I agree, the biggest change we experienced as a firm is more to do with documentation. We’ll do a much more thorough documentation; or coming out of investment committee, there’s now a formal memo showing we all approved an asset and acquisition. It’s become more formalized. And being a small organization with only 23 people and five partners, that took a lot of getting used to.

Hecht: Documentation is huge for us as well. We’re focused on fair values, and now we have a hard-copy execution form that the entire established fair-value committee needs to physically sign off on and acknowledge that they approve the fair-value conclusions. It creates credibility and accountability for what we think would be the centerpiece of any type of compliance review or audit we would undergo, as it relates to documentation.

What have you changed when it comes to ensuring greater documentation?

Nemzer: Periodically, our compliance team will request certain documents from a selected period of time to review our adherence to our compliance manual and the internal policies that we’ve set forth. Areas such as expense allocation testing, valuation back testing, and review of dead deal costs are fairly regular and common examples of that. The results of that periodic testing allow us to take a step back and evaluate how we can continue to strengthen our reporting and compliance and be as transparent as possible to investors.

DelFavero: One of the things we’ve been doing with our CCO is having him sit in every valuation meeting and every investment committee meeting. We include him in everything possible that’s going on in the firm, just as a safety measure, so he’s hearing it and can be aware of any potential issues that we may be missing.

There’s a reported war on talent in the institutional real estate industry. How are you all dealing with talent retention?

Berk: This is something we always think about. It would be difficult for me if I were to lose one of [my team], and so I have to constantly think of ways to manage the increasing workload and keep people excited about how interesting the job is. I don’t think just paying people more works, because at some point people will think their career growth isn’t stimulating despite the income. So I try to create ways to get them involved in different things—parts of the business that aren’t germane to their day-to-day role, even if they’re just a silent listener. The more they understand about how we operate as a firm, the more they feel a part of the whole organization. That’s a big retention approach I’m very cognizant of.

DelFavero: In today’s market, there is a lot of competition for talented people. Occasionally I’ll hear some of our people are getting outside calls, and we’re trying to find ways to make sure they’re engaged and they’re happy, because it’s not all about the money. It’s about the firm, it’s about the culture, and how we can keep them. Money isn’t the only issue; it’s also about career growth.

Hecht: As a CFO, I wear a lot of hats, and there is a lot to do. The CCO feels the same way. We have to be thoughtful in delegating to get people more involved. What I try to communicate to my team is we need to do a good job identifying ways for you to get more involved. But also, if you see the opportunity, come to me and tell me, “Hey, I see you have four things on your plate. I think I’d be really good at the fourth item. Let me give that a shot.” The other part of this is to keep communicating with your personnel. Very often there’s no transparency about where your organization is going. So talk to your team about where different opportunities may go and how they can get involved in something new, even if a potential opportunity is as far as 18 months or 24 months down the road.