Why your CFO function has become a key fundraising signal

There was a time when private markets CFOs and their teams were viewed as little more than glorified accountants. That time has gone.

Today, LPs are not just underwriting investment performance. They are underwriting the strength, resilience and maturity of the manager itself. And the finance function has become one of the clearest signals of whether a firm is ready for institutional capital.

Rigorous interrogation of operational strength has become an essential component of investor due diligence – if managers can’t prove they run an institutional-grade finance function, they won’t be deemed fit for institutional capital.

The situation has been exacerbated by the ongoing trend of investors deploying more money with fewer managers. If an institution is writing a $50m check, they don’t just want to be sure they’re backing a firm that can generate returns. They want to know it will still be in business to deliver them.
 

Under the microscope

Managers should expect detailed questions at a fund, general partnership and management company level. In effect, LPs are stress‑testing four things: control maturity, operational repeatability, management company survivability, and investor protection at scale. Everything from cash controls to budgeting and from cyber security to expenses will be scrutinized to test survivability and investor protection at scale, and the level of detail is intense.

Any hint that a firm is using Excel for tracking invoices and payments, forecasting or expense management is an immediate red flag. And if a manager thinks they can still banter their way through diligence, they’re wrong – LPs want written documentation covering every policy and procedure.

They will also want to know that the right capability is in place to safeguard their money and the future of the firm. In practice, that means a layered finance capability – controller work, management company accounting, CFO-level judgment, and proper oversight and governance – from the moment managers begin targeting institutional capital.

Stay realistic

Building that whole capability internally on day one, including a senior CFO, a controller, and a fund accountant, is impractical for most managers making the transition to institutional capital. Budgets often don't stretch that far, and at an early stage, they shouldn't have to.

But managers do have to be realistic about what is required to fundraise successfully in the institutional world. This is not something that a lean investment team, however talented, should consider tackling themselves.

If the firm can’t run itself properly, performance doesn’t matter – LPs won’t get comfortable enough to fund it. A credible finance function is the backbone of any successful and sustainable firm. Without it, fundraising ambitions will crumble.

Act now

When should a manager invest in institutional-grade finance infrastructure? As early as possible. But this does not have to mean investing in an expensive in-house team. Bringing in an outsourced CFO solution early can put the right foundations in place early, while preserving runway.

The outsourced approach provides access to seasoned professionals with decades of relevant experience at a fraction of the price of a full-time, in-house equivalent. This is in terms of salary and other factors including benefits, office space, and technology costs. The model is also scalable. Additional resources can be seamlessly deployed as a firm’s needs increase.

Critically, outsourcing is not just about cost avoidance either. It’s about reassuring LPs that a firm has a level of institutionalization that is appropriate for its maturity. Put simply, it’s a vital fundraising signal.

Investor attitudes

Crucially, the outsourced CFO approach has largely won investors’ seal of approval.

Allocators often understand that while no one individual is 100% dedicated to an individual firm, with an outsourced model, whatever time is required to get the job done will always be made available. Time will never be a roadblock – there is always someone else waiting in the wings to pick up the slack.

Meanwhile, because outsourced CFO organizations work with many different managers in different asset classes and at different stages of maturity, they can offer strategic advice and unique insights. They are a perennial sounding board.

There are exceptions, though. Some large LPs still demand an in-house dedicated resource. But managers should be wary of hiring against a promise rather than a signed commitment. There have been instances of firms hiring expensive individuals based on the promise of a $50m check, only for the ultimate investment to slide to $5m. In those cases, a premature hire doesn’t just fail to help fundraising – it actively shortens runway and increases business risk.

A common mistake, for example, is firms feeling the need to pay for the Rolls Royce of tax accountants or auditors, in order to win an institutional investor’s approval. It just isn’t necessary and may well be inappropriate for the manager’s scale. Avoid being seduced by the flashy. Do what makes sense for where you are in terms of your capital raise.

These are conversations we have with our managers all the time. As an outsourced provider, we operate as part of the team, not at arm's length. For the manager, that means access to the depth and quality of resource an early-stage budget couldn't otherwise stretch to. For the LP, it provides evidence that the operating model behind the strategy is genuinely institutional.

There are no shortcuts to institutional fundraising. Investors have unwaveringly high expectations of the CFO function. But they are not simply looking for a name on an organization chart. They are looking for a finance operating model that can protect capital, support growth, and withstand scrutiny. For many managers, an outsourced approach is the most credible way to show they are ready.