Issue 152 • June 2017 • www.privatefundsmanagement.net

FINANCE • LEGAL • COMPLIANCE • OPERATIONS • TAX

INVESTOR RELATIONS CASTING THE NET

BATTLING BREXIT DATA SET? A PROBLEM SHARED The UK’s new fund regime Time to get ready for the General How administrators can faces tough competition Data Protection Regulation help stretched CFOs What makes an accounting Recognized as a rm stand out from the rest? Top Accounting Firm: Years in a Row As accountants, we prefer to Leading Accounting Firm (Institutional Investor’s Alpha Awards let the numbers speak for 3 2014, 2015, 2016) Independent rm in the New York themselves. #1 Metro Area (Crain’s, 2015)

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www.eisneramper.com EDITOR'S LETTER

Editor Claire Wilson Tel: +44 207 566 4274 [email protected] Senior Editor, Private Equity Toby Mitchenall Tel: +44 207 566 5447 [email protected] Americas Editor, Private Equity Marine Cole Tel: +1 212 633 1455 Making a perfect match [email protected] Staff Writer Rebecca Akrofie Tel: +44 207 167 2037 The private funds industry may have be- increased exponentially. We spoke with a [email protected] come increasingly regulated and institu- number of service providers to find out Private Equity Reporter, US Annabelle Ju tionalized, but the one constant is the how they were dealing with changing cli- Tel: +1 646 380 6194 [email protected] importance of relationships. There’s no ent demands (p. 18). Production Editor doubt having the right connections, or Cybersecurity has been on regulators’ Julia Lee Tel: +44 207 167 2030 [email protected] being able to create them, remains crit- radars for a few years, but with less than Contributors ical to success. a year to go until firms must comply with Rob Kotecki Vicky Meek In this month’s investor relations spe- one of the most far-reaching pieces of leg- Design and Production Manager cial we look at how to keep limited part- islation to date, the General Data Pro- Denise Berjak Tel: +44 207 167 2036 ners happy from a number of different tection Regulation, there’s never been a [email protected] angles. We asked two first-time fund better time for firms to get their houses Head of Advertising Alistair Robinson managers who recently closed their vehi- in order. More than half of delegates at a Tel: +44 207 566 5454 [email protected] cles above target how they convinced in- recent Thomson Reuters event in London Advertising Manager vestors to take a chance on them (p. 24). said they were only 25 percent ready for Anthony Hackett Tel: +44 207 566 4273 We also discuss the changing nature of the regulation’s entry into force. Lawyers [email protected] the sales pitch with industry insiders (p. highlighted the importance of starting Subscription Sales EMEA 28). immediately, so find out what your firm Matteo Coppadoro Tel: +44 207 566 4280 Technology also has its part to play. can do to get ready for compliance with [email protected] Asia Pacific As demand for data swells, GPs are in- the legislation (p. 16). Andrew Adamson Tel: +852 2153 3848 creasingly turning to reporting software Also this month, we look at the new [email protected] to keep investors happy. We look at the UK limited partnership rules that came Americas Andre Anderson benefits, and the drawbacks, to embrac- into effect at the beginning of April. They Tel: +1 646 545 6296 [email protected] ing these solutions (p. 36). were designed to bring the country’s law Customer Services Elsewhere, we zone in on administra- in line with that of other European juris- Fran Hobson Tel: +44 207 566 5444 tion. The role of the chief financial offi- dictions, but with Brexit on the horizon [email protected] An Nguyen cer has been evolving for a long time and and the possibility the UK will lose its Tel: +1 212 645 1919 [email protected] now some are even getting involved in marketing passport, will the changes be For subscription information please visit deals. Juggling an ever-increasing work- enough to encourage fund managers to www.privatefundsmanagement.net load has resulted in more CFOs turning set up in the country (p. 8)? Group Managing Editor to third-party service providers to com- We also assess the impact the Financial Amanda Janis [email protected] plete some of their less core duties. We Choice Act could have on private fund Editorial Director Philip Borel caught up with a CFO and a few fund compliance (p. 10) and how Jay Clay- [email protected] administrators to find out how the dy- ton’s appointment as chair of the Secu- Head of Research & Analytics Dan Gunner namic between the two has changed over rities and Exchange Commission could [email protected] the past couple of years (p. 12). change the future direction of the agency Publishing Director Paul McLean Sticking with that theme, we look at (p. 11). [email protected] how fund administrators themselves are Chief Executive Tim McLoughlin [email protected] adapting to their changing workload. Enjoy the edition Managing Director – Americas The demands of today’s back office bear Colm Gilmore [email protected] little resemblance to those of the pre-cri- Claire Wilson Managing Director – Asia sis days. The complexity of running a Editor, pfm Chris Petersen [email protected] private equity firm and its funds has [email protected]

June 2017 • Issue 152 • private funds management.net 1 CONTENTS • JUNE 2017 • ISSUE 152

features commentary

12 Passing the book 8 Jurisdictional jostling Private fund managers are outsourcing an increased amount of The UK’s Private Fund Limited Partnership administration, but the reason depends on who you ask hopes to compete with structures in other domiciles, but it’s facing stiff competition 14 Valued opinions 10 Decision time for the Financial Outsourcing duties can allow deal teams to focus on what they do best, Choice Act but choosing the right service provider is no easy task, Houlihan Lokey The bill would be a game-changer for professionals tell pfm compliance

16 The clock is ticking p.16 11 Jay walks in Not ready for the EU’s new A private fund lawyer is now chairman data regulation? There is of the SEC, but more gaps must be filled still time as long as you are before the agency’s direction becomes clear methodical and start now

18 Transforming the landscape also in this issue Complex demands are driving a move to fund 4 Regulator eyes unicorns administrators. How are 5 Texas TRS to audit fees they adapting to meet industry needs? 6 JR Morgan joins Andrews Kurth 7 FCPA still on the regulatory radar 34 Five minutes to comply How firms can ensure they are compliant with pay-to-play rules Timer: data regulation urgency

special report: investor relations

24 A first time for everything

Resources on the ground, a solid proposition and persistence are the New York: 16 West 46th Street, 4th Floor / New York, NY 10036-4503 keys to closing your first fund / +1 212 633 1919 / Fax: +1 212 633 2904 • London: 140 London Wall / London EC2Y 5DN / +44 20 7566 5444 / Fax: +44 20 7566 5455 • Hong Kong: 14/F, Onfem Tower / 29 Wyndham Street / Central, Hong Kong / +852 2153 3240 / Fax: +852 2110 0372 • PFM is published 10 26 The long and winding road to a first-time fund times a year. To find out more about PEI please visit: www.thisisPEI.com Two successful debut fundraisers offer their tips on how to flourish • Printed by Hobbs the Printers Ltd / www.hobbs.uk.com • © PEI 2016 • No statement in this magazine is to be construed as a recommendation to buy or sell securities. Neither this publication nor any part of it may be reproduced or transmitted in any form or by any means, electronic or 28 Serve dessert first mechanical, including photocopying, recording, or by any information To attract LPs, managers need a message that’s short and sweet. But storage or retrieval system, without the prior permission of the publisher. Whilst every effort has been made to ensure its accuracy, the publisher PPMs now carry extra weight as they fulfill legal and marketing roles and contributors accept no responsibility for the accuracy of the content in this magazine. Readers should also be aware that external contributors may represent firms 31 On the hoof that may have an interest in companies and/or their securities mentioned in their contributions Impromptu meetings are a good way to connect with LPs. Pfm herein. • Cancellation policy: you can cancel your subscription at any time during the first looks at how managers can make the most of them three months of subscribing and you will receive a refund of 70 per cent of the total annual subscription fee. Thereafter, no refund 32 Reporting from the future is available. Any cancellation request needs to be sent in writing (fax, mail or email) to the LP demand for fund-by-fund performance data is making managers subscriptions departments in either our London turn to technology for more efficient ways of keeping them happy or New York offices.

2 private funds management • Issue 152 • June 2017 MULTIPLES

The month in numbers

The clauses LPs insist on in a limited partnership agreement 87% Key person clause 82% $368.2bn Level of management fee $ Blackstone’s total AUM at the end of Q1 2017 80% Structure of the carry distribution waterfall

Source: Private Equity International

$6.2bn $0.2bn The firm’s Q1 2017 Its net management realizations and advisory fees

Source: Blackstone Q1 earnings

Percentage of women in legal and compliance jobs

Legal compliance assistant 69 31 32% Of all private equity staff are female Legal compliance 43 57 associate 33% Head of risk and 38 62 compliance Are in investment roles

Head of legal/chief 26 74 legal counsel 66% 0 10 20 30 40 50 60 70 80 90 100 (%) In support functions Women Men

Source: Private Equity Recruitment Hiring Matters Q4 2016 Source: Private Equity Recruitment Hiring Matters report Q4 2016

June 2017 • Issue 152 • private funds management.net 3 NEWS • DIGITAL DIGEST

SEC targets outsourced CCOs Private funds managers using third-par- ty compliance teams may be at in- creased risk of a regulatory exam under new disclosure requirements. From October, outsourced CCOs must be named on Form ADV, which is used by private fund managers to regis- ter with the SEC. Vane hope: for billion-dollar valuations The agency said the requirement will Grand desires: duchy’s popularity up help it to identify all advisors relying Regulator eyes unicorns on a particular service provider, and EQT creates Luxembourg hub Unicorn valuations have been added to improve its ability to “assess potential The firm is creating a fund hub in Lux- the Securities and Exchange Commis- risks” linked to using certain teams. embourg to avoid Brexit-related uncer- sion’s hit list after the regulator observed Compliance sources say this could tainty. a range of methodologies used to calcu- increase the chances of firms that out- The firm said the move secured late them. source being inspected, because the reg- “the predictability needed to ensure a The regulator said this lack of unifor- ulator relies on a risk-based approach top-quality product and service level.” mity has resulted in “significant differ- to determine whether it will examine “We are looking at ways of fu- ences” in outcomes across funds. a firm – the higher the risk rating, the ture-proofing every single part of EQT; “They want to see some kind of a uni- more likely an exam will take place. consolidating the GP presence is one form valuation policy,” said a panelist at way,” said Peter Veldman, head of fund a webinar hosted by Voltaire Advisors. management at EQT. Another participant, Rajan Chari, a “By having the hub in Luxembourg, partner at Deloitte, said it was import- we also secure that future funds are ant to reflect the market’s perception of managed under the Alternative Invest- the company during the valuations pro- ment Fund Managers Directive within cess. Unlike when it values established the EU which is an important aspect for companies, a fund has to determine us. On balance, Luxembourg is the best what a market participant would think, long-term solution for EQT.” who those market participants are and The uncertainty caused the firm to what the ultimate exit for the invest- “put the UK on ice” in the run-up to ment might end up being. Pencil it in: testing times for compliance the vote in June.

ALSO IN THE HEADLINES fees, expenses and carried interest, and in third countries, and achieve- launched in January 2016. ment of its objectives. The Institutional Limited Partners Association has released the second The European Commission has start- President Donald Trump ordered a phase of its transparent reporting ed its review of the impact of the review of regulators’ authority to template for private equity firms. It Alternative Investment Fund Man- label private equity firms and other focuses on developing best practice agers Directive. It will survey al- non-bank financial institutions as in reporting data to LPs and com- ternative investment fund managers risky institutions. Treasury Secretary pliance with Limited Partnership across 12 EU countries on experience Steven Mnuchin is responsible for Agreements. The first phase, which in applying the AIFMD, impact on the review, which will assess how reg- provided private equity firms with investors, impact on alternative in- ulators mark firms “risky”. a standard reporting process for vestment funds and AIFMs in the EU

4 private funds management • Issue 152 • June 2017 NEWS • DIGITAL DIGEST

Texas TRS to audit fees Blackstone opens retail channel The Teacher Retirement System of Tex- Blackstone has entered into an agree- as is ramping up its private equity fees ment with three independent bro- and expenses transparency efforts. ker-dealers to launch its retail investing The $133.4 billion pension fund, channel. which has 12 percent of its assets in pri- The firm, which manages $368 billion vate equity, plans to audit the fee data in assets, signed agreements with three provided by its private equity fund man- IBD firms to provide real estate and agers, according to meeting materials. hedge fund products to retail investors, TRS chief audit executive Amy Bar- London: mirroring other jurisdictions according to a source familiar with the rett said previously private equity fee matter. The channel may include addi- transparency is an issue at the pension UK launches PFLP tional products, including private equi- and nationwide. A regime that will reduce the costs and ty, in the coming year, the source added. During the fiscal year ended August administrative burden of operating a There are three more IBD firms that 31, TRS paid $207 million in private UK limited partnership came into force investment committee has approved equity carried interest. on April 6. but which have yet to sign agreements, TRS was the most successful US pen- The Private Fund Limited Partner- the source added. sion plan in the 2016 list compiled by ship, the result of changes to the 1907 The move will allow retail investors to the American Investment Council with Limited Partnership Act, was designed invest below the minimum commitment a 15.4 percent annualized 10-year net to bring the UK in line with other ma- size required by traditional private equi- return. jor fund jurisdictions. ty products or institutional platforms. One of the benefits of the regime is the inclusion of a ‘white list’ which details actions an LP can take without jeopardizing their limited liability. PFLPs will not be required to file ga- zette notices of changes relating to the partnership’s business or its terms. The wind-up process has also been simplified; LPs can now authorize a third party to wind up the partnership on their behalf if the GP has been re- Austin: powers to audit fees moved (see p. 8). Building up: real estate and hedge funds

MJ Hudson, an alternative assets folio companies to avoid inheriting opening a wholly foreign-owned in- consultancy and law firm, will estab- liability for law-breaking prior to vestment management enterprise in lish a Luxembourg Alternative In- their acquisition, according to a law Shanghai, subject to registration with vestment Fund Manager platform so firm. International antitrust, export regulators, the firm said in a state- it can continue operating client funds controls, anti-money laundering and ment. Patrick Liu has been appointed in Europe if there is a hard Brexit. anti-corruption law enforcement are as head of China. The firm follows It will resemble the firm’s UK Fund priorities for the US government, Fo- UBS Asset Management and Fidelity, Management Solution, which func- ley and Lardner said in a client note. who already have WFOE licenses. n tions as an AIFM for client funds. Global investment manager Neu- Do you have a news tip? Private equity firms should conduct berger Berman will offer private Email [email protected] robust due diligence on target port- fund products in China. The firm is

June 2017 • Issue 152 • privatefundsmanagement.net 5 NEWS • LEGAL VIEW

THE AMERICAS McDermott Will & Emery has added join from K&L Gates, an internation- three private equity lawyers in the US. al law firm. King & Spalding, an international firm, Joshua Samis will work at the Chicago has hired James Woolery as a office as a partner in its corpo- Todd Toral has joined Jenner & Block partner and head of the firm’s rate and transactional prac- in Los Angeles from DLA Piper as an M&A and corporate gov- tice, joining from Kirk- alternative investment funds litigation ernance practices in land & Ellis, where he partner. He also represents banks and New York. He joins was a partner. Ivan insurance companies. from Hudson Execu- Presant, an M&A tive Capital, an activist partner coming from EMEA investment firm which Greenberg Traurig, he co-founded. Prior to and Jeffrey Meyers, Orrick has appointed Gabriel Mon- this, he practiced at Cad- who advises private equi- zon-Cortarelli to lead its M&A and walader, Wickersham & Taft ty investors and infrastruc- private equity teams in Milan and the as deputy chairman and co-chair ture funds with a focus US. Monzon-Cortarelli will work of the firm’s corporate department. on energy, are joining the across Orrick’s Milan and New York office. New York offices. He joins Andrews Kurth has appointed JR Mor- Orrick from Seyfarth gan as an investment management coun- Michael Gallagher Shaw, where he was sel in its corporate department. joined Duane Morris a partner and led the Morgan joins the firm’s Austin, Tex- in Philadelphia as a firm’s Italian practice. as, office. He focuses on compliance private equity trans- and regulatory matters, as well as alter- actions partner from Proskauer Rose appoint- native investment fund structuring in Pepper Hamilton. ed Paul Lucas as a part- the US, Ireland and Luxembourg. ner in its corporate practice He was most recently the found- Potter Anderson Corroon has in London. Lucas specializes in ing partner of his own firm, Morgan, appointed Joy Barrist as a real estate fi- real estate finance and advising private which has offices in New York and Aus- nance partner. Barrist’s practice includes equity clients, funds and other financial tin. He was previously an investment real estate acquisition financing for pri- institutions. He joins from Linklaters, management associate at Schulte, Roth vate equity firms. She joins from Ben- where he was a managing associate and & Zabel. esch Friedlander Coplan & Aronoff, a later counsel. US law firm. She had previously prac- Shearman & Sterling has appointed ticed at Pepper Hamilton for 12 years, Three partners have joined Baker McK- Brien Wassner as an M&A partner in where she was made partner. enzie in London. Alex Lewis joins from its New York office. Ropes & Gray, a US-headquar- Wassner advises on private equity Stoel Rives has appoint- tered firm, where he was an investments, mergers, stock and asset ed Steven Boender and associate. Prior to this, he acquisitions, going-private deals and Kevin Burnett as part- was a senior associate at joint ventures. He joins from Milbank, ners in its corporate Ashurst. Tweed, Hadley & McCloy. team in Portland, Or- egon. Both advise on Melanie Howard joins Cody Carper joined Willkie Farr & Gal- private equity trans- as an M&A partner lagher as an oil and gas partner in Hous- actions and financing. from Clifford Chance. ton. He advises private equity firms on Boender also specializes Her practice includes ad- energy partnerships and joint develop- in securities compliance, vising on take-private trans- ment agreements. Carper was previously while Burnett specializes in actions, and will add a health- a partner at Kirkland & Ellis. His clients corporate transactions in the natural care transactions focus in her new role. include Blackstone and Sanchez Energy. resources and technology sectors. They Her previous clients include Citigroup.

6 private funds management • Issue 152 • June 2017 NEWS • LEGAL VIEW

David Duncan joins as an M&A partner from Allen & Overy. His previous clients Legally include Bank of America Merrill Lynch, Royal Dutch Shell and Arqiva. speaking Claire Wilson analyzes McDermott Will & Emery has hired Gi- ancarlo Castorino, Ettore Scandale and the administration’s Emidio Cacciapuoti, accompanied by a effect on the FCPA team of four counsel and 10 fee earners in Milan. The three join from the city’s King President Trump may have poured & Wood Mallesons office. The team fo- scorn on the Foreign Corrupt Practic- cuses on private equity, M&A, banking es Act, but legal sources say it’s as im- and finance, and fund formation, in Ital- portant as ever that firms ensure they, ian as well as cross-border transactions. and their portfolio companies, don’t ignore it. “government officials,” the firm says. ASIA Pending investigations into breach- “Liability also is enhanced by the es of the FCPA, which makes it illegal frequent use of consultants in for- In Beijing, White & Case has appoint- for US companies and their supervi- eign countries. FCPA liability attach- ed Andre Zhu as a private equity part- sors to influence foreign officials with es to dealings by these third parties ner. He joins from global rival Skadden, any personal payments or rewards where the PE fund either knew, or Arps, Slate, Meagher & Flom, where he and vice versa, will continue despite had reason to know, that the arrange- was counsel for two years. political change, according to Ed- ment would result in the payment of Zhu advises GPs and LPs on cross-bor- ward O’Callaghan, partner at Clifford a bribe.” der public and private mergers and acqui- Chance. President Donald Trump has sitions, including US going-private trans- “Both the Department of Jus- dubbed the FCPA a “horrible law” actions and private equity transactions. tice and the Securities and Exchange that stifles American businesses try- Commission have invested a lot in its ing to work abroad. He has already Gibson Dunn & Crutcher has hired a oversight and enforcement, both in abolished a rule to crack down on for- four-strong team for its Hong Kong of- terms of personnel and expertise. It’s eign bribery by US energy companies fice from rival Ropes & Gray. The team difficult to stop the train, so don’t roll and canceled ethics training for White is led by Paul Boltz, who was Hong back compliance programs,” he told House staff. Kong managing partner at Ropes & delegates at a Thomson Reuters con- But statements emerging from key Gray. Joining him are private equity ference in London in April. lawmakers suggest they will continue transactions partners Brian Schwarz- Identifying the act as a key risk fac- to apply the law to the letter, at least walder and Scott Jalowayski. All three tor for private equity firms, law firm for the time being. The Deputy Assis- practiced together in Morrison Foerster’s Foley and Lardner says the FCPA can tant Attorney General Trevor McFad- Hong Kong office, before leaving to join have an impact at both a firm and den said shortly after Trump’s inaugu- Ropes & Gray’s then newly opened office portfolio company level. ration that the DOJ would continue in the city in 2008. A fourth private eq- The ways in which private equity to hold individuals accountable for uity transaction partner, Michael Nick- funds operate increases the risk of di- corporate misconduct. lin, is also making the move. rect application of the law to their op- Law firm Jackson Lewis concurred erations, compared with other busi- in a client note. “The DOJ will con- Serena Tan has joined Morrison Foerst- nesses. tinue to look favorably on corpora- er in Hong Kong as a corporate partner. For example, the payment of bribes tions that have good compliance pro- Tan advises private equity firms on fund to secure investments from sovereign grams, co-operate during government formation and fund management mat- wealth funds is potentially a criminal investigations, self-disclose wrongdo- ters, and comes to the firm from Debev- act as the FCPA considers all employ- ing, and take steps to remediate iden- oise & Plimpton. n ees of sovereign wealth funds to be tified problems.” n

June 2017 • Issue 152 • privatefundsmanagement.net 7 COMMENTARY • FUND DOMICILES

anti-money laundering regime is ranked Jurisdictional jostling first in the world by Moneyval, the The UK’s Private Fund Limited Partnership hopes to compete Council of Europe’s monitoring body. It with structures in other domiciles, but is facing stiff competition has launched two new fund structures in the past six months; the first does not require regulatory approval and the sec- ond, the Private Investment Fund, has by CLAIRE WILSON Private Fund has a 48-hour authoriza- a one-day registration process, making tion process, making it a faster alterna- it the quickest fund to bring to market. A simplified UK limited partnership tive to the PFLP. The jurisdiction was The PFLP only launched in early structure launched in April, aiming to selected by SoftBank to host its re- April, so it is still early to gauge the level reduce the costs and administrative bur- cord-breaking $100 billion fund. of interest from managers. den of operating a private equity fund. Ireland has the best regulatory condi- “Given the administrative improve- The Private Fund Limited Partnership tions, legal and tax framework and busi- ments made and the increased clari- goes a long way towards putting UK ness conditions of European countries, ty offered to LPs in respect of their in- limited partnerships on a similar footing according to global fund managers sur- volvement in the management of the to other common fund structures. veyed by law firm Matheson. In total, partnership’s business, it seems highly Changes include the inclusion of a 67 percent said they would domicile in likely that the PFLP will be well received ‘white list’ of activities a limited partner the country if they were starting afresh. and widely adopted instead of the prior may undertake without jeopardizing its Its most popular structure is the Qual- UK limited partnership offering going limited liability status, and the abolition ifying Investor Alternative Investment forward,” Shervin Shameli, partner at of the obligation to publish a gazette no- Fund, which can be adapted to fund MJ Hudson, tells pfm. tice when an LP transfers its interest. managers’ needs. Whether the PLFP will sway unde- Its introduction couldn’t come at a Guernsey was one of the first coun- cided firms in the Brexit era is another better time; law firm sources told pfm tries to be recommended by the Euro- matter, especially given the efforts oth- managers have been actively considering pean regulator for an AIFMD passport er countries are making to entice fund other EU fund structures as a result of due to its robust regulatory regime. Its managers. the Brexit vote, which could mean the UK leaves the single market and loses the right to market freely to investors Eye on the Celtic tiger within the EU. But while the new struc- ture brings the UK’s offering closer to some European peers, competition from Where asset managers would domicile their funds if other jurisdictions remains strong. they were making the decision now Luxembourg is in the EU and offers political, legal, regulatory and fiscal sta- Ireland 71 bility. The country offers a range of pri- vate equity fund structures that accom- Germany 45 modate any set of tax and governance Luxembourg 45 requirements – from an investor and initiator perspective. Among these is the UK 33 Reserved Alternative Investment Fund, which can be launched more quickly Netherlands 27 than other funds as it does not need ap- proval from the regulator. France 23 Jersey has introduced a range of new 0 10 20 30 40 50 60 70 80 products designed to enable it to com- Managers placing jurisdiction in their top three European domiciles (%) pete with other jurisdictions. The Jersey Source: Matheson

8 private funds management • Issue 152 • June 2017 FRANKFURT ROADSHOW Luxembourg: The Global Fund Centre 21 June 2017 Frankfurt Marriott Hotel

#ALFIFrankfurt17 www.alfi.lu/frankfurt17 COMMENTARY • REGULATION

allow them to invest in private assets. Decision time for the The two tests used to establish wheth- er someone is accredited – income and Financial Choice Act net worth – will remain in place, but The bill would be a game-changer for compliance the values they must reach to pass the test will be fixed indefinitely. Under Dodd-Frank, the SEC must adjust by CLAIRE WILSON these figures every four years. Anyone currently considered an accredited in- he bill that could eliminate the vestor will continue to be so under the Volcker rule and many oth- FCA, lawyers at Debevoise said in a er Dodd-Frank provisions has client update. Tstarted its journey through Congress. The House Financial Services Com- General solicitation mittee has held a hearing on the re- A presentation at a college or university, vised Financial Choice Act, original- non-profit, angel investor group, ven- ly penned in 2016 by Republican Jeb ture forum or trade association will no Hensarling, and the bill is expected to longer be considered an act of general reach the House floor within weeks. solicitation under the FCA, so long as It has generated hype on both sides the sponsor complies with a number of of the political divide. Republicans, rules, such as not charging fees beyond keen to loosen financial regulation, Hensarling: spoiling for choice administration costs. say it will lift the stagnant economy, while Democrats are concerned it will Form D result in the re-emergence of “risky The Securities and The SEC has for years been mulling and predatory Wall Street practices” changes to Form D introducing strict and have vowed to fight it. Exchange Commission penalties for firms that start any activi- Beyond the elimination of the Vol- would be required to ty that could be considered general ad- cker rule, which states banks can only vertising and solicitation before filing hold 3 percent of Tier 1 capital in pri- confirm the definition of Form D. This might have presented a vate investments, the FCA contains a ‘private equity fund’ challenge to private fund firms, as it provisions that will affect private fund within six months of the can be unclear what activity is classi- managers and their operations. fied as “general advertisement or solici- law’s entry into force tation.” Under the FCA, these changes Registration exemption would not go ahead. The act exempts private equity fund opposes this change, saying registra- We do not yet know how far the managers from the registration and re- tion has enforced transparency and bill in its current form will progress porting obligations of the Investment ensured compliance with mandatory through the legal system. As we went Advisors Act. This would likely also be reporting procedures. to press, Hensarling was looking to true of private real estate fund manag- move to a vote by the Republican-ma- ers, although there is no definition of Accredited investors jority Financial Services Committee private equity fund in the draft doc- The definition of accredited investor after one hearing. The Democrats’ po- ument. The Securities and Exchange will be expanded under the FCA to in- sition was that they wanted to vote on Commission would be required to clude licensed brokers and investment it as separate bills but have said they confirm the definition of a ‘private eq- advisors. The SEC will also be able to would support some of the provisions. uity fund’ within six months of the create a regulatory regime for individ- What we do know is the FCA could law’s entry into force. The Institu- uals to prove that they have the knowl- have far-reaching consequences for tional Limited Partners Association edge, education or job experience to private fund managers.

10 private funds management • Issue 152 • June 2017 COMMENTARY • REGULATION

enforcement actions than the agency’s Jay walks in chairman. Under its former chief, An- Private funds lawyer Jay Clayton is now chairman of the SEC, drew Ceresney, now at Debevoise and but more staff must be hired before its direction becomes clear Plimpton, actions and financial recov- eries hit a record high. It’s unknown if his successor – yet to be appointed – will take such a hard line. by CLAIRE WILSON appointment said the extent of his An initiative launched by the act- conflicts could significantly reduce ing chairman of the SEC, Michael he US Securities and Exchange the number of successful actions. Piwowar, could also affect future en- Commission may have filled a Not only has he represented many of forcement actions. He ordered a review high-level vacancy on May 4 Wall Street’s biggest names, includ- of the enforcement division’s power to withT the swearing-in of a private funds ing Goldman Sachs and JPMorgan, he issue subpoenas and negotiate settle- lawyer, but he is not the only key ap- also has a huge portfolio of private and ments without commissioner partici- pointment required by the regulator. public equity investments. Clayton’s fi- pation. The initiative’s opponents say Jay Clayton has revealed little about nancial disclosure form showed he has it could reduce the number of com- his plans for the agency or his views interests in 54 private funds including pliance exams. Clayton has not said on deregulation, a key objective of the big names like Warburg Pincus, TPG whether he intends to continue this re- administration. During his confirma- Capital and Bain Capital. He will be view, or even what he thinks of it. tion hearing in March, he said cyber- unable to vote on matters involving Jay Clayton’s appointment has solved security will remain a key focus and the managers of these funds for two one of the SEC’s staffing issues, but -un he questioned whether disclosure was years, despite being obliged to divest til other vacancies are filled it is difficult “where it should be.” Otherwise he re- his holdings within 90 days of his con- to assess what impact he will have on its mained tight-lipped on reform, such as firmation. future direction. Private fund manag- the Republican proposal to strip back The head of the enforcement divi- ers should not assume a new, looser at- the Dodd-Frank Act. With so little in- sion is another key role, and its holder titude to deregulation and should make formation available, it’s hard to predict has a bigger impact on the number of sure they continue to toe the line. whether having Clayton at the head of the agency will ease scrutiny of the pri- vate funds industry. The SEC was not just looking for a new chairman – a number of agency officials left at the end of the Obama administration. Who fills these posi- tions will also have a big impact on its future direction. There are two empty seats on the five-person commission and a third will be vacated on June 5. Commis- sioners’ views on enforcement penal- ties will dictate the severity of pun- ishments the agency doles out. As we went to press, no nominations had been made. Conflicts of interest prevented for- mer chair Mary Jo White from vot- ing on some enforcement actions, but Bench-clearer: three of the five commissioner seats are, or are about to be, vacant some Democrats opposed to Clayton’s

June 2017 • Issue 152 • privatefundsmanagement.net 11 FEATURES • OUTSOURCING

and more time on portfolio analysis and investor relations – which they believe add value to the strategic di- rection of the organization. There is also a fledgling trend for CFOs to get involved with deals, at least in the US. According to fund ad- ministrator Augentius, this has been a factor behind its increased workload recently. “I have noticed that several of my male counterparts who have their MBA are getting involved with deals. I’m not sure if it’s a gender thing, or an MBA thing, or both,” Blinn Cire- lla, CFO at Sawmill Capital, tells pfm. But this isn’t the case everywhere, Chris Merry, chief executive at Eu- rope-based fund administrator Ipes, says. Offloading duties: third-party fund admins can free up time for CFOs “Tasks undertaken by chief finan- cial officers vary from firm to firm. In a small firm, they may be heavily in- volved in the deals process, while at a Passing the book firm with a larger headcount they may take more of a back seat, or not be in- Private fund managers are outsourcing an increased volved at all.” amount of administration, but the reason for the trend Growing demand for data from LPs, depends on who you ask, Claire Wilson discovers both at the portfolio company and fund level, means the CFO has no choice but to demand more from service provid- he role of the chief financial the decision to outsource was simple: ers, Cirella says. Every quarter the firm officer is widening. Now “any- time. Participants in the survey said must provide portfolio-company-level thing but deal sourcing” falls they wanted to spend less time on reg- data to several LPs for each company, Tinto the remit of many CFOs, accord- ulatory and fund accounting matters each with its own data-formatting re- ing to speakers at January’s PEI CFOs quirements, making it highly time con- and CCOs Forum in New York. suming. The evolving workload has increased Fund managers “One of our LPs has a process where outsourcing of traditional day-to-day have adopted we are required to upload data to their tasks. More than half of the firms in a an outsourcing data gathering website. It’s a nightmare recent EY survey in conjunction with to fill out because it doesn’t follow tra- sister publication Private Equity Inter- arrangement for a ditional accounting and requires fund national said they now outsource their reason: the onus level and portfolio company level data. tax, fund accounting and technolo- is on the fund I would be very happy if a fund admin gy matters, with at least one-third of administrator to could take care of this for me!” Cirella those that don’t currently outsource adds. planning to start doing so. add real value Those service providers that invest A top motivating factor behind Charles Le Cornu in technology and build systems that

12 private funds management • Issue 152 • June 2017 FEATURES • OUTSOURCING

allow data to be “sliced and diced” in a and procedures in response to the variety of ways will be very valuable to growing threat of cyber-attack, and the stressed CFO, Cirella says. 79% it now takes a much more proactive “I know two fund administrators approach to risk management and who have put considerable time and Of respondents to an cybersecurity, something it has also money into their system to accommo- EY/PEI survey said been able to pass on to its clients. date the ILPA template. This was a very sub-standard service “[Cybersecurity] is something we wise place to spend time and money. at Sanne have monitored and we have There is no way my team can provide level and quality developed future-fit solutions allow- this data, so if we had a potential LP were ‘a constraint’ on ing our clients to be abreast of change who demanded it (and they were im- outsourcing and remain leaders in their fields,” Le portant enough to us) I would have to Cornu says. hire a fund admin to meet the demand. As fund managers become more This is a whole new service offering.” comfortable with outsourcing, there In the future, CFOs will be man- 27% has been a notable increase in the lev- agers of service providers, including el of trust they put in their chosen compliance, cybersecurity and fund Of CFOs surveyed third-party service providers, view- administrators, and in turn fund ad- wanted to outsource in ing them as an extension of the team. ministrators will become a commodity, Gone are the days of clients reviewing meaning they will have to distinguish 2017 every piece of information reported by themselves from the competition. a fund administrator. “I think range of services (and price “Fund managers have adopted an point to some degree) will likely be outsourcing arrangement for a reason: what rules the day,” Cirella says. 68% the onus is on the fund administrator to Ipes’s clients have been turning to add real value, whether that be provid- third-party administrators because of Of respondents said ing exceptional systems capability, regu- the growing complexity of running a outsourcing provides latory expertise or compliance,” he says. private fund, Merry tells pfm. This in- industry expertise It’s clear CFOs have much to gain cludes regulation, increased frequen- from outsourcing their administrative cy of co-investments and investor tasks – not only can they free up time demands for more information – pres- to devote to other, more desirable tasks, sures that are unlikely to ease. increase. There’s no standard reporting but they can leverage the benefits of “There are already various regulato- template or requirement, so you need their service providers’ technology. ry requirements in place – accountan- to offer a bespoke solution.” For those that are yet to outsource, cy, regulatory reporting, Foreign Ac- At Sanne, an administrator across the key roadblock is a lack of trust in count Tax Compliance Act, Alternative multiple jurisdictions, increased work- third-party service providers. These Investment Fund Managers Directive, load has been the result of regulato- typically relate to the ability of vendors Common Reporting System demands ry adjustment after the financial crisis. to deliver a consistently high-quality – and they’re going to continue,” Mer- This changed the role of fund admin- service; in total 79 percent of partici- ry says. “Further down the track there’s istrators, Charles Le Cornu, co-head of pants in the EY survey said that sub- also a potential change to UK regula- private debt and capital markets, says. standard service level and quality was tion, following Brexit, so that will create “The same themes are noted consis- a constraint to outsourcing, while 68 further complications.” tently. Regulatory change and inves- percent viewed their inability to man- The consistent demand for co-invest- tor appetite for transparency of infor- age complexity as an issue. ments add another layer of complexity, mation have seen the role of the fund Administrators that can challenge he says. “On the investor side, co-in- administrator becoming increasingly those perceptions are likely to thrive vestments will remain popular and important and more varied,” he says. as CFOs look for ways to free up their demand for reporting is also going to The firm has beefed up its policies time to spend on other pursuits. n

June 2017 • Issue 152 • privatefundsmanagement.net 13 GUEST COMMENTARY

which is reducing the burden on deal Valued opinions teams. Preparing and producing in- ternal valuation memos requires sig- Outsourcing duties can allow deal teams to focus on what they nificant time and thought. Although do best, but choosing the right service provider is no easy task, say deal-team members possess the knowl- Cindy Ma and Milko Pavlov of global investment bank Houlihan Lokey edge and skill to perform this task, it is generally not the best use of their time. Rather, a third-party valuation provid- provides comfort that critical assump- er can take on much of the responsibil- tions are defensible. Ultimately, these ity for constructing and documenting dynamics lead to smoother interactions the valuation while leveraging the nec- between the asset manager and audi- essary insight from deal team members tors, investors and regulators. to properly frame the valuation. This process allows deal-team members to What happens if you select a focus on aspects of their job that have Qvaluation firm but realize you a greater impact on the asset manager need to change providers? and its investors, such as deal sourcing CM: The selection process for a and portfolio management. third-party valuation provider should The use of a third-party valuation be carefully conducted and well provider can reduce the burden on the thought-out. Unlike other circum- back-office function of an asset manag- stances in which valuations are per- er by providing additional support for Ma: assess whether the third party can formed, the valuation of securities valuation conclusions that is indepen- enhance the asset manager’s capabilities held within an asset manager’s port- dent from those involved with the in- folio tends to be a recurring exercise vestment decision-making process. The What is the key to picking the that represents a long-term partner- provider can also interface with exter- Qright third-party valuation ser- ship between the asset manager and nal parties such as auditors and regu- vices provider? the third-party valuation provider. In lators to defend its conclusions, reduc- Cindy Ma: The key to selecting a instances where an asset manager de- ing the time spent on these activities, third-party valuation provider is in as- cides to replace a provider, there can be which can be a significant drain on in- sessing the provider’s ability to truly en- multiple implications. ternal resources. hance the internal capabilities of the as- Asset managers often hold securities set manager. Whether it is having the for a long period of time, and an exist- Based on those points, would ability to scale alongside the asset man- ing provider will have built a significant Qthird-party providers be neces- ager’s platform with necessary resourc- amount of knowledge about the subject sary for larger firms with dedicated es, bringing to bear asset class and/or investments. Therefore, the deal team internal valuation groups? industry expertise that overlaps with the and back-office team will be required CM: Many large asset managers hire a asset manager’s investment strategies, or to spend incremental time and effort to third-party valuation provider to review providing real-time insight into capital quickly bring a new provider up to speed, internally generated valuations. Regard- markets – not all valuation providers which could represent a significant less of the size of the asset manager, inde- are equal. These qualities are particu- switching cost for the asset manager. pendence issues and conflicts of interest larly important when an asset manag- still exist. Investors, particularly insti- er is dealing with Level 3 assets, where Once the right third-party pro- tutional investors that have committed valuation is far from a straightforward Qvider is chosen, what are the large sums of capital to an asset manag- exercise. Choosing the right third-par- benefits to the fund manager? er, gain comfort in having an indepen- ty valuation provider not only ensures CM: Utilizing a third-party valuation dent third party involved in the process. that the selected valuation methodolo- provider can benefit an asset manag- Further, it may be difficult for a CFO gies are appropriate and sound, but also er in multiple ways, not the least of or controller, without the proper asset

14 private funds management • Issue 152 • June 2017 GUEST COMMENTARY • VALUATIONS

class or industry expertise, to challenge to make capital allocation decisions the deal team in a constructive manner based on reliable reporting from under- on the assumptions utilized in a specif- lying asset managers. The involvement ic valuation. This is where a knowledge- of a third-party valuation provider not able third-party valuation provider can only gives LPs comfort in the underly- enhance the internal process. ing NAV of the asset manager but also assists in the asset manager’s ability to Wouldn’t a third-party provid- meet ever-compressing reporting dead- Qer cost more? lines. CM: Asset managers face a unique is- sue with regard to valuation. They are How have GPs reacted to that asked to build out a robust internal in- Qpressure? frastructure, incur the cost of audit re- CM: In this competitive fundraising views and incorporate third-party val- environment, general partners typical- uation providers in the process. This ly seem willing to acquiesce to limit- Pavlov: AIFMD is creating headwinds is often referred to as a triple taxation ed partners’ demands in order to raise and, unfortunately, it does not appear capital. Additionally, GPs want to be to be going away. able to ‘check the box’ across the board Directive has created some headwinds That said, an offset to this cost is that as the operational due diligence of as- in the area of valuation. However, we the involvement of a third-party valua- set managers continues to be more de- have not yet seen any major enforce- tion provider gives auditors more com- tailed. The involvement of a reputable ment action, which will provide a bet- fort with the valuations, meaning a sig- third-party valuation provider is some- ter picture of how the EU regulators nificant valuation exercise should not thing that can set one asset manager are perceiving the valuation elements be included in their scope of work. Pro- apart from another. of the directive. n viding robust documentation to audi- tors prevents them from having to start What about the regulator’s in- their procedures from ground zero and Qcreased interest in private equi- Cindy Ma is the managing director and should lead to fewer ‘deep dives’ within ty valuations? the global head of Houlihan Lokey’s a given portfolio from their perspective. CM: The SEC has made a concerted Portfolio Valuation & Advisory Services MP: Using reputable valuation provid- effort in recent years to focus on alter- practice, focusing on illiquid, private ers gives significant comfort to limited native asset managers, including pri- and complex securities valuation. partners that they are investing their vate equity. It has developed sophisti- She is on the International Valuation money with managers that are running cated data analytics around these asset Standards Council Standards Board, with both best-in-class infrastructure managers in order to identify poten- a former partner of Ernst & Young and advisors. tial problem areas, such as valuation. and a fellow of the Royal Institution Recent SEC examinations have led to of Chartered Surveyors. She holds the How have LPs evolved in their high-profile cases that stress the impor- designation of CFA. attitude toward private equity Q tance of a robust valuation governance Milko Pavlov is a director in Houlihan valuation? framework and highlight the benefits Lokey’s Financial Advisory Services CM: The trend among limited part- of the involvement of a third-party val- department based in London. He ners in private equity funds is one of uation provider. This is true for asset focuses on illiquid, private and complex enhanced transparency and reporting managers outside of the US as well, securities valuation and leads projects requirements, of which valuation is a since general partners that raise a cer- across the EMEA regions. key component. LPs, especially seed tain amount of capital from US insti- and anchor investors in private equity tutional investors are subject to Dodd- funds, are more likely now than ever to Frank and the SEC. SPONSORED BY require the involvement of third-par- MP: On the international front, the Al- HOULIHAN LOKEY ty valuation providers. LPs are looking ternative Investment Fund Managers

June 2017 • Issue 152 • privatefundsmanagement.net 15 FEATURES • REGULATION

percent ready, but you can be in good shape by 2018.” For European firms that are current- ly compliant with existing data pro- tection rules, preparing for the GDPR should be a gap-filling exercise as there is a lot of overlap with the rules cur- rently in place. The task is, of course, greater for those new to EU data laws. One of the first priorities should be a data audit – document the personal data the organization holds and note where it was obtained, with whom it is shared and for how long it has been held. It’s a good time to put mechanisms in place that ensure, by default, only Sands of time: don’t desert your GDPR obligations personal data necessary for each spe- cific purpose is processed and that it is stored for no longer than necessary, the panel said. They also recommend- The clock is ticking ed firms identify all processes where Not ready for the EU’s new data regulation? There is still time as personal data is involved, and the compliance risks those present. long as you’re methodical and start now, Claire Wilson discovers “Try to embed good practice with- in the organization while you do this. Privacy impact assessments should be- he General Data Protection of 4 percent of global annual turnover come a part of the process of develop- Regulation may not sound ex- or €20 million, whichever is greater. ing new products or launching new citing, but a panel on it at the “Not only will non-compliance dam- services,” a financial regulation lawyer Trecent Thomson Reuters Regulation age a firm’s reputation, it may also send from a global bank said. Summit in London quickly gathered a it under,” one US-based general coun- The GDPR requires a high stan- large crowd. And that crowd was over- sel told pfm late last year. dard of consent for processing person- whelmingly unprepared for the regu- With 12 months to go until the com- al data, so firms should do a review of lation’s implementation in May 2018 pliance deadline, the three-lawyer pan- the adequacy of privacy documents – more than half of the audience said el was quick to allay delegates’ fears and data consent forms. Data holders their firm was only 25 percent ready. over the current state of their prepared- must actively acquire consent – it is The same proportion believed the first ness, but did stress the importance of no longer acceptable to assume it enforcement action would take place making a start as soon as possible. granted if they do not hear from the within six months of its entry into “Most clients won’t be ready by source. Proving the legal standard of force. 2018. The important thing is to take consent has been achieved is the re- The EU legislation is more far-reach- steps to implement the key areas of the sponsibility of the organization, so it’s ing than any other global data protec- regulation because some aspects of it important to document policies and tion rule. Any firm holding data on will take much longer than others,” procedures. customers in the bloc will be impacted one of the lawyers said. “Prioritize the “It could also be time to renegotiate regardless of where the firm is based, very high impact issues that the regu- your contracts with service providers to and the penalties for non-compliance lators care about.” make sure their use of date you provid- or a breach are severe; the equivalent A second added: “You can’t be 100 ed is compliant and they have measures

16 private funds management • Issue 152 • June 2017 FEATURES • REGULATION

in place to ensure that it remains so. chance of being scrutinized by reg- “Perhaps we’ll see armies of law- It’s potentially a huge exercise,” the ulators and becoming entangled in yers scanning privacy notices. Though bank-based lawyer said. Fund manag- court proceedings. Data controllers hopefully not!” one of the law firm ers must appoint a data protection offi- and processors will have to be ready to partners said. cer to be responsible for implementing attend court proceedings in countries The regulation is likely to be a and monitoring compliance with the where the individual resides. game-changer for private fund firms GDPR, and to carry out assessments The panel said it expected a deluge and their portfolio companies. If you of data processing in certain circum- of people wanting to exercise their haven’t started your preparation yet, stances. If there isn’t one already in the rights and forecast an increase in class there couldn’t be a better time to do firm, it’s time to start looking. Once actions relating to data breaches. so. n this person is in place, accountability should be clearly established. “Privacy is the problem of the whole business. It could be that with the addi- Ace your preparation tion of a data protection officer report- ing lines change, perhaps the legal or The Information Commissioner’s Office, which upholds information regulatory and compliance teams are rights in the public interest in the UK, has produced a 12-step guide currently responsible but in the future to preparing for GDPR reports of breaches or issues will be giv- en to the data officer instead. Establish Awareness: key stakeholders within your business need to be aware of the who is responsible to avoid muddles,” a transition to the GDP law firm partner said. Information you hold: all personal data your business holds needs to be National and European regulators documented, noting where it came from and who it is shared with will be responsible for enforcing the GDPR. One audience member asked Communication privacy information: your privacy notices should be reviewed, if this would result in variations in the with plans to make amendments in time for when GDPR comes into force approach to breaches of the rules, and Individuals’ rights: your procedures need to cover individuals’ rights, whether it would be difficult for -en including the deletion or provision of personal data on request forcement action to be taken against firms outside EU jurisdictions. Subject access requests: access requests will need to be handled more quickly But the panel said enforcement was under GDPR. You will need to prepare to deal with these new timescales being taken very seriously. The UK’s Legal basis for processing personal data: your business needs to identify and Information Commissioner’s Office, document the legal basis for the data processing that you carry out for example, has often been seen as a ‘soft touch’ but is now pitching to re- Consent: review how consent is sought, obtained and recorded, and establish main as a European supervisory agen- whether any changes are required cy post-Brexit. The ICO wants to show it is serious, Data breaches: under GDPR, businesses will face potentially heavy fines for suffering data breaches. Ensure that any data breaches can be detected and and it is taking privacy very seriously, investigated the panel agreed. Its tone in relation Impact assessments: the ICO has produced guidance on Privacy Impact to the GDPR is much stricter than Assessments, which will help you understand when they should be in the past, and it has the capacity to implemented at your business pursue enforcement of the rules. Data protection officers: your business will need someone to take responsibility for data protection compliance. This may be a Data Protection Officer, or the The GDPR also gives individuals role may be found elsewhere within the business the right to be represented by a pri- International: businesses that operate internationally should determine which vacy rights association in the event data protection supervisory authority they are governed by their data is leaked, presenting anoth- er enforcement risk – it increases the

June 2017 • Issue 152 • privatefundsmanagement.net 17 FEATURES • FUND ADMINISTRATORS

Pathfinders wanted: admins in growing demand amid mounting workloads

Transforming the landscape Estrada, head of private equity fund ser- Complex demands are driving a move to fund administrators. vices at State Street. “Providing detailed information on portfolio company and How are they adapting to meet industry needs? By Vicky Meek fund performance would be challenging enough if firms were managing just one type of closed-ended plain vanilla fund, hen it comes to manag- coupled with significant IT outlays. Yet but these days, private equity comes in ing mounting workloads, for many others, the financial and risk all kinds of packaging, making report- private equity offices find management cost of running a back of- ing ever more complex.” theyW need outside help. fice entirely in-house is becoming in- Despite these increasing demands, The demands on today’s back office creasingly prohibitive. the industry has so far been slow to bear little resemblance to those of the In a 2016 SEI survey of GPs, for exam- adopt outsourcing models in many ar- pre-crisis days. From the need to keep ple, 82 percent said that compliance costs eas. While custody and tax functions up with complex regulatory require- were rising faster than other operating ex- are now outsourced by more than half ments to new structures, bespoke LP-GP penses, including half that said they were of private equity firms, according to the agreements and investors asking for look- rising much faster. The same survey asked SEI report, many other areas are still through transparency on fund portfolios, LPs about their expectations and found in-house. Yet this is changing. the complexity of running a private equi- that 66 percent expect firms to report ac- “The AIFMD and FATCA are hav- ty firm and its funds has increased expo- cording to Institutional Limited Partners ing a big impact,” says Chris Mer- nentially. Where once spreadsheets might Association standards and just less than a ry, chief executive of Ipes. “In the have sufficed, now data collection and re- third require data mapping into portfo- mid-market we’re seeing firms consider porting requires much more sophisticat- lio monitoring systems – a level of gran- outsourcing to keep up with regulato- ed systems and processes. ularity that would have been unheard of ry and tax developments. The fact, for For some, mainly the larger global a decade ago. example, that AIFMD requires autho- asset managers, the answer has been to “Investors are increasingly looking for rized firms to have a third-party depos- build out large accounting, reporting, transparency in private equity as though itary means that some firms are having compliance and legal counsel teams, each LP had its own fund,” says Cesar to talk to service providers like us for

18 private funds management • Issue 152 • June 2017 FEATURES • FUND ADMINISTRATORS

the first time. It’s a foot in the door.” Top 10 fund administrators by PE assets Fund services provider JTC’s senior under administration director Daniel Essoo agrees. “AIFMD in particular is prompting many firms to SS&C GlobeOp, $452.0bn review their operations and revisit how they manage back-office functions.” “This is a huge driver for new busi- ness for fund administrators, in partic- ular as the directive hasn’t been rolled out in a harmonized way across Europe and so keeping up with different juris- dictional requirements is a challenge. Many firms are having to restructure how they operate.” The other key driver for outsourcing SEI, $217.8bn State Street Alternative Investment Solutions, $371.2bn is pressure on management fees. As the traditional two-and-20 model has in- creasingly become subject to negotia- tion by LPs, the ability of firms to build out expensive human resources and IT systems has reduced. By contrast, fees paid to third parties such as fund ad- ministrators and other outsourcers are often drawn from the fund rather than from the management fee. All these trends appear to point to- ward the increased uptake of out- sourced fund services over the long term – and not just among the mid-market and smaller players. “Larger firms tend Augentius, $116.5bn MUFG Investor Services, Citco Fund Services, $165.0bn $127.1bn to build out their own teams in today’s market,” says Paul Lawrence, glob- al head of funds at Intertrust. “But as third-party fund administrators con- tinue to become more professional and their capabilities increase, we’ll reach a point where even the larger firms out- source a significant part of their fund administration, including compliance Northern Trust, $78.3bn SANNE Group, and risk management, because these $106.4bn Gen II Fund Services, $150.4bn will not be viewed as areas that add value to the firm as a fund manager – they’ll start to critically evaluate the cost-effectiveness of doing all back-of- fice functions in-house.” Vistra, $65.8bn Yet there is still some way to go before in-house becomes obsolete. By their own admission, fund administrators and Source: eVestment

June 2017 • Issue 152 • privatefundsmanagement.net 19 FEATURES • FUND ADMINISTRATORS

Out or in: which functions are outsourced that provides future flexibility. “We are developing a platform that can be ag- Function Outsourced (%) Hybrid (%) Internally (%) nostic to the type of product or vehicle Custody 61 8 20 structure that private equity firms of- Tax 53 24 19 fer,” he says. “Yet we also need to con- Fund accounting 30 19 50 tinue to solve today’s issues of how to provide transparency on workflow, such Email retention 30 13 53 as compliance with FATCA and the Data warehousing 29 16 48 CRS, automate more processes and en- Compliance 13 23 61 able GPs to provide a better experience Valuation 12 24 58 for their investors.” CRM 12 90 70 This clearly requires a shift in the Investor reporting 9 17 69 type of staff required by fund admin-

Research management 5 13 70 istrators. Many are bringing in experts, for example, for their IT systems. “As Portfolio analytics 5 6 80 an industry, we are hiring more tech- Note: Results exclude ‘not applicable’ or ‘don’t know’ Source: 2016 SEI Private Equity Survey nology people,” says Essoo. “Yet unlike hedge funds, we’ll always need a high other third-party services providers are Consolidation is not the only story, degree of human interaction in private unable to provide the complete package however. The industry is also having equity because of the bespoke nature for private equity. Part of this has to do to adapt by investing heavily in IT and of the investments – they are all differ- with the origins of many in the market. different skillsets to provide the kinds ent. Even if automation increases, we’ll “Different fund administrators come of services private equity firms need still need people; it’s just a question of to the market from different angles,” now and in the future. The develop- what they do. I think technological de- says Giles Travers, director of alterna- ment of technology is disrupting many velopments will increase the value that tive investment funds at SEI. “You’ve industries and fund administration is fund administrators can offer at a hu- got the banks, who have historical- starting to see this, too. man level.” ly provided custody services to hedge “We’re in the early stages of this, but So, while fund administrators ar- funds, but who have started to move as an industry, players are required to en’t yet claiming to be all things to all into private equity; the smaller inde- invest in technology and search for ways firms, there is clearly a lot to play for pendent boutiques, which tend to have of making better use of data to automate in private equity. Total assets under a professional services background; processes and deliver more cost-effec- administration grew in 2016 to $2.16 and then you’ve got players like us that tive solutions to clients,” says Lawrence. trillion, a 44 percent increase over are global outsourcers, but whose ori- “This is evolving, but we need to get 2015, according to eVestment figures, gins were in fintech provision.” to the point where firms are confident with growth in private equity busi- As a result, consolidation is a big enough in the resilience of the data and ness among administrators expected to trend in the fund administration busi- systems that they don’t need to shadow be by far the highest of all alternative ness. Some of this is driven by private the processes at their end.” fund types. equity investment in the sector, as the Part of the issue is that there is no The fund administration sector is fragmented nature of the business and single technology solution that meets changing – and quickly. “Our indus- strong cashflow characteristics make the needs of the constituent parts of try is having to adapt to meet and pre- the industry an interesting buy-and- the private equity business, requiring empt the changing needs of our private build play, while others have listed to administrators to stitch together dif- equity client base,” says Merry. “There raise capital for acquisitions. Earlier this ferent systems to create a platform that is a lot of growth potential, but we year, JTC acquired New Amsterdam works across, for example, all the ac- do have to ensure we are ahead of the Cititrust, for example, and in April, Es- counting needs of a firm. curve to benefit from that – competi- tera completed its deal to acquire Mor- The next stage, says Travers, is inte- tive pressure is a lot higher now than it gan Sharpe Administration. grating operational systems in a way used to be.” n

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24 A first time for everything 26 The long and winding road 28 Serve dessert first 31 On the hoof 32 Reporting from the future

SPECIAL REPORT • INVESTOR RELATIONS

xxx n investors; normally a fund investor would just do their due diligence on the manag- er, but in the case of this fund they also had to do due diligence on the assets we held.” The team did a lot of work with poten- tial investors, helping them with the pro- cess. “We were also able to demonstrate how the team worked together, and draw up a proxy track record, showing how the assets would have performed if they were acquired by this fund structure in the first place, and how the experience of the team more widely would contribute to the success of the fund,” he says. The team also faced another issue: a lack of investment experience in the US. Out of the blocks: how to get your first fund off to a flying start While the firm has long invested in Aus- tralia and Europe, it has only been target- ing the US for about three years. To ‘get to grips’ with the market, the A first time for everything firm hired people with a US infrastruc- Resources on the ground, a solid proposition and a lot ture investment history who understood the AMP Capital philosophy and could of persistence are the keys to closing your first fund. sell it to the clients. It also made an ac- Two managers share their experiences with Claire Wilson quisition in the US during the fundraise. The firm was aware, however, that it here’s no denying the impor- investors, how they tackled bumps in the would be approaching investors as a new tance of investor relations at ev- road and what advice they would give to investment team, and took steps to en- ery stage of the fundraising cycle. others in their shoes. sure it avoided some of the pitfalls fresh- TMore than half of limited partners sur- AMP Capital’s flagship global infra- man managers often come across while veyed recently by alternative assets advi- structure platform closed in December fundraising. The team identified inves- sory firm Stevenson James said a good 2016 at $2.4 billion, 20 percent over its tors that could help bring the fund to a IR team would be the deciding factor target. The platform was created by turn- first close and during the initial conver- between general partners if other factors ing an open-ended European fund into sations, asked the investor what it was were equal. a closed-ended vehicle, and launching it looking for, rather than explaining what But when a firm is raising its first fund, as the Global Infrastructure Fund. Assets it could offer. IR strategy is even more important. Ask- acquired by the open-ended vehicle were “It meant that in our first meeting we ing investors to take a gamble on you and transferred to the new platform, which could tell them how we could meet their your fund when you have no track re- set it apart. needs. As we have already deployed capi- cord is a huge challenge. Investors will be “Most new funds are blind pools, but tal we were also able to show how our in- looking at multiple opportunities and le- we had a seed portfolio of assets,” Man- vestments had performed and how they veraging relationships with existing GPs. ish Aggarwal, principal at AMP Capital, matched with their required investment They will not cut you any slack because tells pfm. “This gave us a differentiating outcomes,” Aggarwal says. you’re new to the market. factor in terms of track record and abil- The firm also established its opera- Pfm spoke with two first-time manag- ity to draw investors at the time of their tional procedures before the first inves- ers that recently closed their funds above commitment. However, it also added a tor meetings. It was then able to answer target to find out what they did to draw complication when we were marketing to questions about who would administer

24 private funds management • Issue 152 • June 2017 SPECIAL REPORT • INVESTOR RELATIONS

the fund, who would be looking after the for controlling or minority stakes, and Asia, where we weren’t expecting much legal business and who the accountant the desire for evidence of active manage- demand,” Israel says. would be. ment from region to region. Environ- The fund was starting from scratch “We invited our service providers to mental and social governance require- with no seed assets, and investors that meet potential investors while they were ments and other operational concerns hadn’t previously worked with the firm doing their due diligence. We were able also varied. Some investors were interest- had to conduct extensive due diligence. to answer all those questions, and also ed in how the fund bought assets, oth- To get around this, the fund leveraged show how we work with the operations ers in how it sold them or how the team relationships with existing investors in team. One client told us they’d never had would add value to the asset. Australia and Asia. It raised 30 percent that level of detail before,” Aggarwal says. “The narrative that you take to the of the fund’s target fairly quickly which Now the fund has closed, the GIF market varies from region to region and enabled it to hold a first close. The firm team plans to maintain its investor rela- there are different approaches that you also committed its own capital alongside tions through a program of open com- have to take to each market. Competing the cornerstone investment. munication – meeting them regularly products are different across regions, the “This allowed us to build momentum and ensuring the firm is responding to level of sophistication is different. It’s an- and start investing, it showed our inter- investors’ reporting and information pro- other reason it was beneficial to have peo- ests were aligned with our investors while vision requirements. ple there on the ground, rather than us- the commitment from existing LPs act- “We’re also asking them how we can ing a placement agent,” Israel adds. ed as an endorsement. It also allowed us help their stakeholders, their trustees for Its experience on the road also quashed to demonstrate the fund’s strategy,” Isra- example, and how we can make sure that some assumptions that the firm had el says. they too have faith in us. We want to do made about appetite for its offering. A dedicated team now oversees in- this without overstepping of course,” Ag- “The world seems to change. Some vestor relations, post-close. They ensure garwal says. regions or investors we thought would LPs’ reporting requirements are met, but be keen to invest weren’t, while others also hold regular meetings and events to Hybrid structure that we didn’t expect to be so interest- make sure contact between investors and Australia-based QIC’s Global Infrastruc- ed were – this was certainly the case in the firm is consistent.n ture Fund reached a final close in March, 34 percent above target at A$2.35 billion ($1.76 billion; €1.61 billion). The fund Proportion of debut private equity funds that met their target size combines attributes of both open-ended % and closed-ended structures, which was 100 15 one of the factors that pushed it across 19 the finish line. The visibility of its team 31 28 43 and its investor engagement strategy in 75 new markets also played big roles. It was the first time the firm had raised a global infrastructure fund, so it lever- 57 50 aged information from its real estate busi- 62 54 48 ness to draw up a list of target investors. 40 “We didn’t use a placement agent for the fund, we established teams in differ- 25 ent regions. Being on the ground meant we could have multiple conversations 28 18 20 18 17 with potential investors and helped us to 0 gain their confidence,” Ross Israel, head 2012 2013 2014 2015 2016 of global infrastructure at QIC, says. Below On target Above Those teams found there were differ- Source: Private Equity International ences in transaction preferences, appetite

June 2017 • Issue 152 • privatefundsmanagement.net 25 SPECIAL REPORT • INVESTOR RELATIONS

The long and winding road to a first-time fund Two successful debut fundraisers offer their tips on how to flourish

Ross Israel NETWORK Head of global infrastructure at QIC “Be quick to build Based in Brisbane, Israel connections and trust that co-founded the firm’s global your strategy is within your infrastructure team in early capabilities and is achievable” 2006 and has oversight on all the team’s investments

NO IS BETTER COMMIT THAN MAYBE “Put your own “Be prepared to make a money in to judgment call and search show that for a hard no. A ‘maybe’ is a you’re aligned death by a thousand cuts” with investors’ interests”

PERFORM “If you’re a first-time fund, demonstrate how your past performance would translate KEEP IT SIMPLE under the structure you’re raising now” “Don’t try to be an innovator in terms of the fund structure – keep it simple and market- orientated”

26 private funds management • Issue 152 • June 2017 SPECIAL REPORT • INVESTOR RELATIONS

UNDERSTAND INVESTORS “It’s important to appreciate the cultural aspects of different SUCCESS! investors. Make sure your team takes the right approach”

PERSEVERE “There will be setbacks and knockbacks, but don’t let them deter you. The fundraising trail can be a slog but if you have a compelling offer, and can articulate that, you’ll get there in BE READY the end” “Be prepared to answer challenging questions about the fund and how it will work in practice. Make sure your investor relations, investment and operations teams are working together so clients are clear on what you will offer them”

Manish Aggarwal Principal at AMP Capital Based in the firm’s London office, Aggarwal is responsible for transaction execution, due diligence, asset management and managing finance and business operations

June 2017 • Issue 152 • privatefundsmanagement.net 27 SPECIAL REPORT • INVESTOR RELATIONS

Cherry on top: a clear, attractive message should light a fire in LPs’ minds

Serve dessert first Group. “LPs have made a lot of deci- To attract LPs, managers need a message that’s short sions before they reach for it now.” and sweet. But PPMs are carrying extra weight as they Market participants cite two reasons for the shift. Firstly, the PPM has be- fulfill legal and marketing roles, Rob Kotecki finds come a dense document, loaded with legal and compliance language. “I’d say the length of these documents has he first step to raising a fund in their strategy. If the message hits home, increased 30 to 40 percent in the last the good old days was to draft LPs will sift through the rest of the ten years or so,” says Aaron Rudberg of a slim, straightforward private pitch book and the PPM. Baird Capital. It’s become an unwieldy, Tplacement memorandum to send to po- “The PPM isn’t as important as it formal introduction to a fund, when tential investors. That was before reg- once was,” says Janet Brooks, a place- LPs are pressed for time to screen in- istration, before the Securities and Ex- ment agent with The Monument vestments. change Commission took an interest in Secondly, fundraising now involves pitches and before due diligence ques- plenty of preliminary discussions. “The tionnaires poked into every corner of a hot fundraising market has prompted portfolio company. Now the PPM has The era of being some GPs to use the PPM as more of fattened up to address any doubts about creative with pro forma a formal legal document rather than a track record or conflicts of interest. performance is over marketing tool, since they’ve already GPs must instead use the first few had a number of conversations with slides of a pitch book to tell a succinct, Michael Elio LPs and effectively sold the opportuni- compelling story, stressing the firm’s ty – well before the release of the PPM,” performance and the repeatability of says Brooks.

28 private funds management • Issue 152 • June 2017 SPECIAL REPORT • INVESTOR RELATIONS

That means it’s essential to craft a pitch that woos LPs from the start. “Given the amount of dry powder and If you don’t have a the number of private equity firms out clear elevator pitch that there today, you’ve got to be able to ex- they can repeat to their plain what differentiates you and how investment committee you plan to compete in the market,” and their colleagues, it’s says Rudberg. “If you don’t have a clear elevator pitch that they can repeat to unlikely LPs will dig into their investment committee and their your fund colleagues, it’s unlikely they’ll dig into Aaron Rudberg your fund.” The elevator pitch’s first formal ap- pearance will be in the slide deck or pitch book that’s presented prior to, or Rudberg: explain how you stand apart at, the first meeting. “The PPM lives in our data room, but our slide deck is our primary mar- keting tool now,” says Kimberly Kile link them through a consistent strate- So while the initial message is up of ABS Capital Partners. The mes- gy. “GPs want to sell their abilities as front, the rest of the content in the sage can’t be buried inside pitch books, an investor, but LPs are equally inter- pitch book and the PPM still has to which due to the SEC’s disclosure re- ested in their abilities as a fund man- detail the firm’s actual performance. quirements have also become longer. ager,” says Michael Elio of StepStone Sometimes this means touching on In-house IR staff and placement Partners. “And today, you need to losses in the opening pitch, which can agents agree that the elevator pitch prove your mettle as both.” lend credibility. needs to appear at the start of the pitch The second theme was how the strat- “Fundamentally, the messages that book to appeal to LPs’ limited time egy could be repeated over time, and in resonate the strongest have a level of and short attention spans. “We’re at a various market conditions. “Our story authenticity,” says Romano. “And you point where we’re training our partners really has a strong emphasis on repeat- can’t have authenticity without trans- to deliver our message in ten slides or ability,” says Romano. “Can you have parency into the underlying perfor- fewer,” explains Kile. discipline and high selectivity to iden- mance, where you express pride in both Every market participant we spoke tify best in class opportunities if the the successes and the education that ar- with stressed the need to highlight the S&P is up or down? Can the strategy rived in the wake of the failures.” firm’s track record. “Five years ago, the work regardless of the overall state of The basic structure of these market- deck might have been geared towards the market?” And often that ends up ing decks remains the same, addressing selling the firm, the team and the touching on the fund’s experiences in six key topics: firm, team, thesis, strat- terms,” says Sunaina Sinha, a place- markets less favorable that this one. egy implementation, performance and ment agent with Cebile Capital. “Now, finally case studies, but the art comes after the first few pages it’s all about Short pitch, full disclosure in being able to distill that down to a bringing the track record to life.” A succinct message is vital, but the core message. Track record isn’t just a few wins, but pitch books or marketing decks still One way to manage this tension overall performance. “Our biggest em- need to include a more expansive view between being compelling and being phasis is on communicating our reali- of the firm, for investors and for regu- transparent is to organize the deck into zations because you can’t spend unre- lators. “These decks do get longer be- two sections. The first tells the engag- alized gains,” says Michael Romano of cause you can’t just talk about your ing topline story in the first 10 to 15 Lightspeed Ventures. three wins anymore,” says Elio. “The slides to discuss while meeting with As exciting as it may be to discuss era of being creative with pro forma LPs. It’s then followed by a longer sec- a few landmark deals, the story must performance is over.” ond part, with more detail, to satisfy

June 2017 • Issue 152 • privatefundsmanagement.net 29 SPECIAL REPORT • INVESTOR RELATIONS

Partners. “As it makes the PPM more reader-friendly for investors and can be helpful in convening the key mes- sages, particularly so in newer markets where English may be widely spoken, but is not the first language.” But there are two areas where GPs should stress transparency over a pithy phrase or graph. One is the presentation of the track record. “There’s an SEC rule for reg- istered investment advisors, which is basically an anti-cherry-picking rule,” says Scott Moehrke of the law firm Kirkland & Ellis. “This says if you present the IRR of one deal in a fund, you have to present the IRR of all other deals in that fund some- where in the PPM, even if it’s just in the appendix.” Brooks: no argument, PPMs are getting bigger Lawyers have found the rigor in re- porting performance can grate on GPs who aren’t used to that level of disclo- investor diligence and regulatory stan- sure, but it’s here to stay. There have dards. The PPM isn’t as been enough headlines concerning fees In crafting that story, it’s vital to tap and expenses that lawyers find clients the expertise of LPs that are close to important as it once are now more willing to err on the side the firm, along with placement agents was. LPs have made a on transparency. to ensure that the story resonates with lot of decisions before Secondly, fund managers are re- investors. “We interact with our largest they reach for it now quired to delve into every potential LPs before a cycle as part of the pro- conflict of interest. cess,” says Kile. Janet Brooks “As firms mature and have multiple But that doesn’t mean the PPM has business lines and go public, there’s become irrelevant. If LPs are intrigued more potential for conflicts [of inter- by that opening pitch, they will want Like the marketing deck, the execu- est],” says Andrew Ahern of the law to turn to it for the necessary level of tive summary can lay out the argument firm Debevoise & Plimpton. “These detail. “We find that when LPs want on behalf of the fund in greater detail potential conflicts should be spelled to take a fund forward to their invest- than a series of slides, while the exten- out in the PPM, since that’s where the ment committee, they’ll use a lot of the sive disclosure elements appear later in SEC expects these disclosures to be material straight out of the PPM,” says the document. But that doesn’t mean made.” Sinha. the story should be sapped of any life It’s vital to remember the PPM re- And that means the PPM’s content in these pages. mains a legal document and it should needs to be as reader-friendly as it is Consequently there’s now a tendency strike a balance between that compel- legally compliant. Lawyers acknowl- to tell the story in the PPM with more ling pitch and compliance standards. edge that the PPM serves two purposes graphics, photos and literal color. Even so, without a clear, concise value which can be at odds with one another; “This has been well received by the proposition, LPs won’t waste their time it’s a marketing document and a legal LP community,” says Nick Chronias, wading into ever-growing PPMs and disclosure document. of the placement agent First Avenue marketing decks. n

30 private funds management • Issue 152 • June 2017 SPECIAL REPORT • INVESTOR RELATIONS

The off-cycle meeting offers room to get to know the LP personally without the pressures of raising a fund. “It builds goodwill,” says Elio. “So when a portfolio company gets marked down, you’ve got a relationship where you can level with the LP.” And with the turnover at many of the large institu- tions, investors can move to a new group where they would be able to make a new commitment. “[With off-cycle meetings] you’re making a connection with a person, rather than just the institution,” says Mi- chael Romano of Lightspeed Ventures. But what should GPs talk about at these meetings? The consensus is to let Pony up: off-diary catch-ups can persuade LPs their capital is well invested LPs lead the conversation. “LPs don’t have the secrets,” says Elio. “Most of them are subject to Freedom of Informa- tion Act requests, so they’re happy to talk On the hoof about process and preferences.” Provided Impromptu meetings are a good way to connect with LPs. they get a chance to speak. “The best GP I’ve ever seen in these Rob Kotecki looks at how managers can make the most of them meetings opens with a simple question: ‘What do you think about the world? hen not fundraising, most About the market?’” says Alan Pardee, a GPs rely on an annual meet- GPs think they can placement agent at Mercury Capital Ad- ing or a quarterly conference ride in every three or visors. “It sets the tone where the LP feels callW to stay connected with LPs. On oc- listened to, and gives them the chance to four years... and be the casion, a deal partner may visit a key in- share their concerns and priorities.” And vestor at their office if they happen to be most important person the GP can apply what they learned to in the same city on other business. It’s to that LP. The reality is their pitch for the next fund. rarely a priority. investors probably had However, LPs just might not have the But those impromptu meetings might 20 white horses ride into time to meet. Most are stretched thin prove worth the trouble. They offer the their office in the last by monitoring current investments and chance to gauge an LP’s priorities and screening new ones. “The meeting might concerns. They can build closer ties with few months not happen, but they will still give you an investor so when a portfolio company Michael Elio credit for trying to catch up,” says Elio. underperforms, the LP is inclined to lis- “I tell GPs they’re in two business- ten to the whole story. es: the investing business and the fund- “Some GPs think they can ride in ev- A visit or phone call can change the raising business,” says Pardee. “No GP ery three or four years during a fundraise tenor of that interaction. “LPs want to should ever forget they are in a client ser- and be the most important person to feel they can trust you,” says Aaron Rud- vice business with respect to their exist- that LP,” says Michael Elio of StepStone berg of Baird Capital. “They want a true ing and future LPs.” Partners. “But the reality is that investors partner that’s transparent with them, and That makes the point that these im- probably had 20 white horses ride into that kind of relationship is hard to forge promptu visits might not be so ‘off cycle’ their office in the last few months.” when you’re asking for a commitment.” after all. n

June 2017 • Issue 152 • privatefundsmanagement.net 31 SPECIAL REPORT • INVESTOR RELATIONS

Open channels: GPs and LPs can benefit from new data tools

Reporting from the future easier with fax machines because he had LP demand for fund-by-fund performance data is just one place to go. “Now it’s much more complex.” encouraging managers to turn to technology for faster, more But the intricacies of private equity efficient ways of keeping them happy. Rebecca Akrofie reports fund data mean a universal, ready-made product is unlikely to materialize soon. Instead managers have to do their re- nvestors are becoming increasing- focus on building an investor portal over search and adapt the technology systems ly data-hungry and technology-sav- the coming two years – compared with available to meet the specific require- vy. They are demanding more data, 25 percent that will be turning their at- ments of their firm. Imore detail and more transparency and tention to regulatory reporting software A tool that easily connects investors they want that information delivered in – while 40 percent of the participants with managers is a good place to start, a very specific way. Not only that, they have spent money in this area in the past Graeme Faulds, director of private eq- also want malleable data, so they can two years. uity solutions at eVestment, tells pfm. drill down to individual assets’ perfor- The nature of these portals and re- He co-created TopQ, a web-based GP mance, and compare it with external porting tools varies. In an ideal world, performance analyzer that enables pri- market benchmarks. firms would be able to use a univer- vate equity performance data to be ex- It remains a challenge for fund man- sal, off-the-shelf technology solution. changed between fund managers and agers, and not all back-office tools are up Standardized reporting technology is investors. to the task. But more efficient and -in sought-after by fund managers and in- “TopQ acts as a data clearing ware- tuitive technology has developed in re- vestors alike; speaking at January’s PEI house between investors and managers. cent years and GPs have gradually be- CFOs and CCOs Forum, one chief fi- Fund managers can respond to clients, gun adopting these solutions. nancial officer said: “LPs have 300 pass- and share their data through the plat- Investor demand for improved data words, logging in separately for different forms. We have this saying that it allows sets is a key driver of many firms’ tech- managers’ data. It has to stop.” clients to spend more time perform- nology investment. One-third of CFOs A member of the Institutional Lim- ing analysis than preparing analysis. I surveyed recently by EY say they plan to ited Partners Association added it was spent 15 years on the investment side in

32 private funds management • Issue 152 • June 2017 SPECIAL REPORT • INVESTOR RELATIONS

private equity, so TopQ is very much a It is clear investor pressure plays a big tool formed for investors by investors,” part in a firm’s decision to adopt new he says. technology. But firms have their own This sentiment is shared by Matthew reporting issues and technology could DeMatteis, director of research at the improve internal efficiency, which will ILPA. also have a knock-on effect on the ser- “I think there needs to be better con- vice they provide to clients. nectivity between LPs and their manag- “Technology provides GPs with more ers. What we’ve been establishing is the visibility into their portfolio companies, AltExchange Data Standard, which en- making them better managers. All of ables a seamless transmission of infor- this data and technology allows them to mation between LP and GP accounting report to LPs in a more efficient and de- systems. Currently, this transmission of tailed manner,” says DeMatteis. information is highly manual, so an au- Technology can also help managers tomated solution would bring signifi- respond to the increase in queries about DeMatteis: better connectivity is crucial cant efficiencies,” he says. their track record. The AltExchange Data Standard is “They need a better system to analyze a web platform which streamlines the and report,” says Faulds. sharing of information between fund While technology can increase effi- Technology managers, investors and other parties. It ciency and improve the GP-LP relation- provides GPs with includes data such as portfolio company ship, it does bring with it fresh risk for more visibility into their financials, investor organizations and both parties. Firstly, providers have had portfolio companies, contacts, fund formation, cashflows and to reassure LPs and GPs that reporting making them better capital accounts among others. software, and the data it contains, is se- Aside from producing the data stan- cure. managers dards, ILPA has formed partnerships Cybersecurity breaches are more of- Matthew DeMatteis with reporting and data software ven- ten caused by employees mistakenly dors, providing exclusive usage deals clicking on malicious links or not stor- “[The system] was able to more ef- for its members in a bid to improve data ing sensitive information securely than ficiently meet regulatory and investor transparency for its investor members. grand-scale hacking exercises. New LP reporting demands, improve accuracy, “From our perspective, we’re all about reporting software needs to account for timeliness, and increase scalability as empowering LPs and helping them per- this, says Michael Halloran, chief exec- they continued to fund at an accelerated form their duties better. In addition to utive of NES Financial, a US fund ad- rate,” he adds. our internal efforts, we’re aiming to give ministration software firm. Tech solutions are proving to be a them access to multiple tools and tech “Human error is often the source of worthwhile investment, as they can up- vendors, so they can choose the provid- quality issues and potentially a cyber grade the investor reporting process for er that best fits them. We have around breach. This requires firms to thorough- GPs and their clients. But all technology 10 or so relationships and we’re hoping ly understand their vulnerabilities, what is not created equal. Only when private to announce the growth of that over the processes can be automated and what equity firms understand what investors next couple of months,” DeMatteis says. practices need to be implemented to want from reporting – certain types of Private equity is an asset class that has prevent intrusions or mistakes. data, deal-by-deal information, central- a high demand for monitoring different GPs also have concerns about slow ized data portals – can they begin using metrics, but the private nature of the in- software installation processes. “By le- tech to their advantage. dustry makes it a little bit harder to do veraging both our domain expertise But buyer beware: reporting technol- that. and integrated technology platform, we ogy exposes firms to a higher level of LP “The tech community is really trying on-boarded three funds with 485 inves- scrutiny. With no rewind feature on the to address those challenges,” DeMatteis tors in 30 days,” Halloran says of one of digital age, firms must be prepared for says. NES’s solutions. better informed investors. n

June 2017 • Issue 152 • privatefundsmanagement.net 33 FEATURES • REGULATION

Five minutes to comply

Pay-to-play rules prohibit registered investment advisors, including private fund managers, from providing investment advisory services to any state government entity for two years after the RIA or its ‘covered associates’ makes a political contribution to an official of the government entity

What are your peers doing?

IDENTIFYING CERTIFICATIONS TESTING RECORD-KEEPING REMINDERS Covered associates Regularly asking staff Legal teams are Making sure policies are Telling staff include management, to confirm they are checking that staff working and documenting periodically they need employees and compliant toe the line tests to get pre-clearance independent contractors

Action items Goodwin partner Brynn Peltz and associate Karla Perez on how Ace your compliance firms can ensure their policies are compliant

Check the political donations of a covered associate’s Make sure you have the following in place: household as these could be seen as indirect contributions 1 Ensure policies describe prohibited activities and define applicable Require periodic reporting from your covered associates. government entities and officials Reminders during election season can help avoid a Implement a process to pre-clear and 2contribution going unreported track all political contributions A contribution is not limited to cash; giving anything of Make an inventory of all government value could trigger a two-year time-out entities that have invested in, or solicited 3 to invest in, the RIA’s funds Identify all covered associates It is not always clear whether an official or candidate is, or will be, in a position to influence the award of an Determine if any have contributed to 4advisory contract. Make sure the risks are understood officials of any government entities

Remember other laws and policies can impact your ability Conduct training for all covered to manage state and local assets – many pension plans associates 5require managers to disclose political contributions

34 private funds management • Issue 152 • June 2017 FINAL CLOSE • INDEX

Firms in this issue QIC 25, 26 Le Cornu, Charles 12, 13 Ropes & Gray 6 Lewis, Alex 6 ABS Capital Partners 29 Sanne Group 13, 19 Lucas, Paul 6 Allen & Overy 6 Sawmill Capital 12 Ma, Cindy 14 AMP Capital 24, 25 Schulte, Roth & Zabel 6 Merry, Chris 12, 18 Andrews Kurth SEI 18, 19, 20 Meyers, Jeffrey 6 Ashurst 6 Seyfarth Shaw 6 Moehrke, Scott 30 Baird Capital 31, 28 Shearman & Sterling 6 Monzon-Cortarelli, Gabriel 6 Baker McKenzie 6 Skadden, Arps, Slate, Meagher & Flom 6 Morgan, JR 6 Benesch Friedlander Coplan & Aronoff 6 State Street 18, 19 Nicklin, Michael 6 Blackstone 3, 5, 6 StepStone Partners 29, 31 Pardee, Alan 31 Carlyle Group, The Stevenson James 24 Pavlov, Milko 14 Cebile Capital 29 Voltaire Advisors 4 Peltz, Brynn 34 Clifford Chance 6 White & Case 6 Perez, Karla 34 Debevoise & Plimpton 10, 11, 30 Willkie Farr & Gallagher 6 Piwowar, Michael 11 Deloitte 4 Prah, John 36 Duane Morris 6 Presant, Ivan 6 EQT 4 People in this issue Romano, Michael 29, 31 eVestment 19, 20, 32 Rudberg, Aaron 28, 29, 31 Aggarwal, Manish 24, 27 EY 13, 32 Samis, Joshua 6 Ahern, Andrew 30 Gibson Dunn & Crutcher 6 Schwarzwalder, Brian 6 Barrist, Joy 6 Goldman Sachs 11 Shameli, Shervin 8 Boltz, Paul 6 Goodwin Procter 34 Sinha, Sunaina 29 Brooks, Janet 28, 30 Houlihan Lokey 14 Toral, Todd 6 Carper, Cody 6 Intertrust 19 Travers, Giles 20 Ceresney, Andrew 11 Ipes 12, 13, 18 Veldman, Peter 4 Chari, Rajan 4 Jenner & Block 6 Wassner, Brien 6 Chronias, Nick 30 JTC 19, 20 White, Mary Jo 11 Clayton, Jay 1, 11 Kirkland & Ellis 6, 30 Zhu, Andre 6 Cirella, Blinn 12 Lightspeed Ventures 29,31 DeMatteis, Matthew 33 Linklaters 6 Duncan, David 6 Matheson 8 Elio, Michael 28, 31 McDermott Will & Emery 6 Essoo, Daniel 19 Milbank, Tweed, Hadley & McCloy 6 Estrada, Cesar 18 MJ Hudson 5, 8 Faulds, Graeme 32 Monument Group, The Gallagher, Michael 6 Morgan 6 Halloran, Michael 33 NES Financial 33 Hensarling, Jeb 10 Neuberger Berman 5 Howard, Melanie 6 Orrick 6 Israel, Ross 25, 26 Pepper Hamilton 6 Jalowayski, Scott 6 Potter Anderson Corroon 6 Kile, Kimberly 29 Private Equity Recruitment 3 Lawrence, Paul 20 Proskauer Rose 6

June 2017 • Issue 152 • privatefundsmanagement.net 35 FINAL CLOSE • Q&A

The next generation Carlyle associate John Prah mentors young private equity professionals through non-profit organization SEO’s Alternative Investment Fellowship. pfm caught up with him to find out more about his day job and volunteer work

What’s your role at Carlyle? advancing professional and education- QJP : I am a first-year associate in al opportunities for people from tra- the industrial and transportation group ditionally under-represented or disad- [working with] the US buyout fund, vantaged backgrounds. I work with the Carlyle Partners VI. As an associate, Alternative Investment Fellowship. I you’re the most junior on the team. My interview and screen candidates for the daily work involves analysing new in- fellowship and assist with the training vestment opportunities, co-ordinating program, which enhances participants’ due diligence efforts – which is around skills and knowledge of alternative in- half my workload – and portfolio-com- vestments. I am also paired with stu- pany reporting (keeping in close con- dents as a mentor working in private tact with the CFO and other profes- equity, to answer their questions about sionals at the portfolio companies). the industry. The private equity recruitment cycle Prah: screens candidates for private How did you find your way into is quite rigorous, and it can take four equity advancement Qprivate equity? to five months to secure a job. Most JP: I’m originally from Ghana, and candidates are graduates who have in- I grew up in a family of entrepreneurs vestment banking jobs, so they typi- and business owners. During college, I cally already have strong financial an- The private equity majored in economics. Once I started alytical skills. But they also need to be recruitment cycle at Lazard [where he spent three years] able to demonstrate strong investment is quite rigorous. in New York, I began to develop my acumen. The program seeks to develop [Candidates] investment skillset. Working in private that at an early stage with its fellows. need to be able to equity has given me the opportunity to constantly learn, as well as to be exposed You were an AI program fellow; demonstrate strong to new businesses on a consistent basis. Qhow did it help? investment acumen; Working in private equity is really JP: My experience as a fellow in the the program seeks to helpful preparation for my long-term program was very helpful to me. When develop that career goals, which involve establishing I was at Lazard, my work was very a development finance enterprise back life-sciences-industry focused, which is home. I’ve acquired some valuable skills not a major private equity investment including investment evaluation, the area. What was most valuable to me ability to thoroughly assess market op- was bridging the gaps in my skills. I’d portunities, entrepreneurial best practic- had virtually no exposure to private eq- es and refined analytical ability. uity deals, so the program was great for helping me to fill in those gaps. n Can you tell us about your men- Qtoring work? pfm is seeking interesting industry stories. JP: I volunteer with a non-profit called Email [email protected] SEO, which runs programs aimed at

36 private funds management • Issue 152 • June 2017 UNPARALLELED EXPERIENCE SCHULTE ROTH & ZABEL PROVIDES COUNSEL TO MANY OF THE MOST ACTIVE AND INFLUENTIAL PRIVATE EQUITY FIRMS.

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