The global tax landscape is continually shifting, and businesses are feeling the pressure. The complexities of regulatory change, shrinking margins, and evolving technologies force many companies to rethink their tax operations.

Among those up against it are private equity (PE) firms. The pressures of value creation, multi-asset strategies, and how many funds are managed means fierce competition. Margins are shrinking because costs are rising. It costs more to grow assets under management and maintain functions; however, firms can protect assets and maximise returns with the right investment in operations.

Why risk is getting riskier

Changes in tax legislation and regulation happen at breakneck speed, which can challenge compliance. And the more digitised the model, the harder it is to remain compliant.

PE professionals feel more pressure than other business sector professionals. Why? For one, PE and their portfolio companies have their own tax functions. Add to that the complexities of dealing with tax spanning multiple industries, sub-sectors and jurisdictions. But there is an argument that PE firms have relatively small tax functions, so they rely more heavily on their advisers’, meaning visibility is low. As a result, their perception of risk is generally much higher than expected. That doesn’t mean the threat is going away. On the contrary, PE portfolio companies [or firms] lacking the resources required to deal adequately with tax risk are naturally considering sourcing models, talent acquisition and how technology can be used in their favour.

Keeping up with advancing tech

Technology plays a vital role in the transformation of operational models. Yet even though PE firms are aware of this, not all are keeping up with the technological curve, citing an absence of a sustainable plan for technology and data.

The transition towards a more tech-driven operating model is underway across the sector, yet it remains in its infancy. As a result, it will be some time before more sophisticated technology becomes the norm.

The sticking point is that technology is not a priority for many PE firms since they focus on reducing costs, streamlining the business, shrinking headcounts, and simplifying operations. As it stands, most of the compliance work is carried out by third parties. Many PE firms cannot analyse data and use systems proactively. While the data is there, the systems that transform that data into meaningful insights are not. There is still a long way to go before data automation from a tax and finance perspective becomes standard in the PE ecosystem.

Finding the talent to fill the gaps

A simple solution would be for PE firms to hire the right people to overcome these barriers and get the transformation underway. If only it were that easy… The challenges of attracting and retaining skilled employees are well known. As a result, the cost to attract, hire and retain people is increasing. Much of this comes down to how PE firms structure their teams and their choice of an operating model.

Reimagining the approach to sourcing

A competitive, changing regulatory and legislative, and post-pandemic landscape are all piling on the pressure for PE firms’ companies. On top of that is the challenge of the new digital tax requirements. As a result, it’s time for PE firms to reimagine their tax and finance functions and co-sourcing framework to ensure they have the right people on board and that business can run smoothly. The role “talent” plays in this evolution is clear; the challenges in play, however, don’t seem to be going away any time soon……

Comment – Daan Aardse

Global Tax Director | Advent International

“We must reimagine our tax operating model to keep pace with rapidly evolving regulation, technology, and talent demands. Outsourcing and co-sourcing of selected activities is a need more than ever, as well as investment in new technology. The bridge from the current state to the future state tax operating model will absolutely involve technology. The options available are wide-ranging and are evolving at speed. Some of these tax technology developers are now even backed by PE.

We are examining our tax processes and determining which are more business-critical and where the most significant challenges and risks lie. We consider areas such as tax policy, planning and governance; fund structuring and investor onboarding; fund tax compliance; and data and technology. Based on this assessment, we are developing our outsource, co-source, and insource strategy.

Tax is considered strategic within our firm and has a seat at the table. Tax is talking and partnering with the people who are running the business. This was very different five years ago when the tax was much more considered “back office”. A lot has changed since then”.