In this guest post, my friend Scott Rosenthal discusses the role of an Outsource CFO and the reasons why fund managers might like to engage one. Do feel free to get in contact with Scott or myself if you would like to discuss any of this further.
There is a growing segment of the hedge fund and private equity fund service provider population called the Outsource CFO. Outsourcing has become very popular in recent years, in regards to back office, middle office, compliance (including outsourcing the investment advisers CCO), trading, and most other areas that a hedge fund needs to operate. What could be considered the final frontier of the service provider population is the Outsource CFO. The Outsource CFO model assists the start-up or smaller fund manager, who may not have the budget or the need for a full time CFO. So, instead of hiring someone who may not have the appropriate experience in order just meet the budgetary restrictions, fund managers can now opt to hire an Outsource CFO.
So why use an Outsource CFO?
Many prospective investors will require that you have policies and procedures in place, conduct operational due diligence, and require that there is someone else involved in the operation of the firm other than just the founder/portfolio manager. The days of a guy/girl and their Bloomberg are over – which is not necessarily a bad thing – as the current investor requirements are meant to ensure that all investor capital is protected from potential fraud or just a simple oversight/error in the books and records of the firm. A portfolio manager, who may be very experienced and competent at deploying capital, may not have the necessary experience to ensure that the fund administrator is keeping the books and records accurately, or ensure that the audit and tax work is done in a proper and timely manner, or have experience reviewing fund formation documents or service provider agreements to ensure that that terms and conditions are correct for the strategy of the fund manager. The Outsource CFO has experience in these areas and can give a great deal of comfort to prospective investors and enable the fund manager to concentrate on what they do best – investing the investors’ capital.
There are multiple types of Outsource CFO firms in the industry. Larger firms can provide a team but will not necessarily provide the personal service or partnership that you would hope for from a CFO. Larger firms can also be expensive, almost to the point of a base salary for a full time CFO. Sole proprietorships may be cheaper but cannot provide any back-up support, as there is only one person available to do the work – if that person is not available then the work suffers.
Lastly, and perhaps more importantly there are the boutique Outsource CFO firms that provide both the back-up support of the larger firms and the agility to partner with your firm and offer the rates that a start-up fund or small manger can more easily afford. The other advantage of the boutique Outsource CFO firm is their potential flexibility in terms of both the services provided and the fees that are charged. While some fund managers may be looking for just the bare minimum service, others may be looking for more of a full-service Outsource CFO – although still not quite a full time CFO at a full time salary. The Outsource CFO firm can also assist clients by drawing on the wealth of experience from both their prior experiences, as well as the current client base of the firm.
Scott Rosenthal is the founder of the boutique Outsource CFO firm Scoven Hedge Fund Consulting. Prior to founding Scoven, Scott was a CFO at 2 start-up firms and a Senior Controller at Soros Fund Management. He also worked at Citco Fund Services (USA) for almost 6 years, and spent time at Rothstein Kass & Company (now KPMG). If you would like more information on Scoven Hedge Fund Consulting, please contact Scott Rosenthal at firstname.lastname@example.org.