Racing Ahead Regulators Push on with Policy Changes

Issue 154 • September 2017 • www.privatefundsmanagement.net

FINANCE • LEGAL • COMPLIANCE • OPERATIONS • TAX

RACING AHEAD REGULATORS PUSH ON WITH POLICY CHANGES

BATTLE STATIONS LOCKED IN HOW TO RESPOND TO THE IMPORTANCE OF A CYBER-ATTACK KEY-MAN CLAUSES

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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 Coming into focus [email protected] Staff Writer Rebecca Akrofie The UK summer has been uncharacteris- as a gold standard regulator. Not only is it Tel: +44 207 167 2037 [email protected] tically hot and sunny, so it is ironic that the only EU watchdog to extend the sec- Production Editor Julia Lee I’m opening this edition with the Brit- ond Markets in Financial Instruments Di- Tel: +44 207 167 2030 [email protected] ish phrase “it never rains, but it pours.” rective to private fund managers (p. 11), it Contributors While the seasonal slowdown has be- is also imposing a strict investor report- Zak Bentley Claire Coe Smith come something of a myth, sources from ing regime on alternative asset firms (p. 9). Rob Kotecki David Turner across the industry agreed that the past Plans are also in the pipeline to roll out Design and Production Manager few months have been particularly busy the Senior Managers Regime, which cur- Denise Berjak Tel: +44 207 167 2036 compared with last year. rently applies to banks and is similar to the [email protected] A couple of CFOs put it down to where US compliance rule, to all FCA-regulated Head of Advertising we are in the market cycle and the desire managers including private equity firms. Alistair Robinson Tel: +44 207 566 5454 to make hay while the sun shines, while Beyond regulation, we delve into the [email protected] service providers said they were being fund administration world. As business- Advertising Manager Anthony Hackett kept busy as their clients ramped up their es continue to merge, acquire or be ac- Tel: +44 207 566 4273 [email protected] fundraising and dealmaking activities. quired we look at what is driving con- Subscription Sales EMEA While it’s uncertain for how long the solidation in the market, and find out if Matteo Coppadoro Tel: +44 207 566 4280 good times will keep rolling – whispers there’s still a space for the boutique op- [email protected] about an impending downturn are get- erator (p. 14). Malcolm Pobjoy of Vistra Asia Pacific Andrew Adamson ting louder on both sides of the Atlantic spoke to us about the institutionalization Tel: +852 2153 3848 [email protected] – the one thing that is becoming clear is of the asset class – and how fund manag- Americas the future vision of financial regulators. ers are adapting (p. 28), while Tom An- Andre Anderson Tel: +1 646 545 6296 In the US, Jay Clayton’s influence over gell of WithumSmith+Brown discusses [email protected] the Securities and Exchange Commis- the double-edged sword of new reporting Customer Services Fran Hobson sion is gradually beginning to show. His requirements for fund managers on (p. Tel: +44 207 566 5444 [email protected] first big policy measure – extending the 36). Peter Cogan of EisnerAmper tells us An Nguyen Tel: +1 212 645 1919 act which allows firms to register private- about the increased complexity of private [email protected] ly for initial public offerings – is one that funds accounting (p. 32). For subscription information please visit www.privatefundsmanagement.net supports capital formation as opposed to In our accounting special we also look enforcement action (p. 12). The re-emer- at changes to partnership auditing rules Group Managing Editor Amanda Janis gence of Hester Peirce as a candidate to (p. 24) and how firms should tackle uni- [email protected] fill one of the empty commissioner spots corn valuations (p. 30). We also caught up Editorial Director Philip Borel is also telling; the Republican’s previ- with a lawyer with a sideline in wine, and [email protected] ous nomination during the Obama ad- cover changes to UK tax laws that could Head of Research & Analytics Dan Gunner ministration was blocked because of her have implications for fund managers. [email protected] staunch anti-Dodd-Frank Act stance. Publishing Director Paul McLean [email protected] In the UK with Brexit looming, and Enjoy the edition Chief Executive with it the increased likelihood of Britain Tim McLoughlin [email protected] becoming a ‘third country’ and requiring Claire Wilson Managing Director – Americas a passport, the Financial Conduct Author- Editor, pfm Colm Gilmore [email protected] ity has taken steps to protect its reputation [email protected] Managing Director – Asia Chris Petersen [email protected]

September 2017 • Issue 154 • private funds management.net 1 CONTENTS • SEPTEMBER 2017 • ISSUE 154

features commentary

12 Winds of change 8 Clause for thought The nomination of a Dodd-Frank critic as commissioner and the Do key-person provisions achieve what they private filing of IPOs are two signs change is coming to the SEC are supposed to?

14 Clubbing together 9 Con-templating the future Consolidation in fund administration businesses could leave small It is crucial for UK private equity firms to firms worse off. We explore the recent surge in acquisition activity learn from their US counterparts when it comes to standardized reporting templates 17 The enemy within Fund managers hold huge amounts of sensitive information, so 10 What to do when the worst tackling the sharp rise in cyber-crime is a priority happens: cyber-attack Two recent security breaches mean it’s time 22 Bringing the back office to the front to examine how private fund firms should act if they become victims The hot topics at sister title Private Equity International’s Investor Relations & Communications Forum special report: accounting also in this issue

24 Ending in tiers 4 RE firm fined over conflicts IRS rules for partnership audits are poised to take effect in 2018 but GPs still have serious questions about the new regime 5 Strong demand keeps fees high 6 People moves 30 Hunting the unicorn The SEC is watching start-ups ‘worth’ more than $1bn, so private 7 Industry view fund managers must ensure their valuations are compliant 40 And finally... 31 In the frame The Mandatory Performance Framework could be coming to private funds accounting, but will the accompanying qualification catch on?

34 Five minutes to comply Internal rate of return calculations are facing renewed scrutiny by New York: 16 West 46th Street, 4th Floor / New York, NY 10036-4503 / +1 212 633 1919 / Fax: +1 212 633 2904 • London: 140 London Wall the SEC. What are the key features of compliant IRR reporting? / London EC2Y 5DN / +44 20 7566 5444 / Fax: +44 20 7566 5455 • Hong Kong: 9F On Hing Building / 1 On Hing Terrace / Central / Hong Kong / +852 2153 3240 / Fax: +852 2110 0372 • PFM is published 10 times a year. To find out more about PEI please visit: www.thisisPEI.com • Printed by Hobbs the Printers Ltd / www.hobbs.uk.com • © PEI 2016 • No statement in this magazine is to be construed as a recommendation expert commentary 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 mechanical, including photocopying, recording, or by any information storage or retrieval system, without the prior permission of the publisher. 28 The institutionalization of private equity Whilst every effort has been made to ensure its accuracy, the publisher How to deal with new investor demands 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 that may have an interest in companies and/or ® 32 Booking the value their securities mentioned in their contributions herein. • Cancellation policy: you can cancel The rising complexity of private funds accounting your subscription at any time during the first three months of subscribing and you will 36 SEC's reporting modernization rules mark new era receive a refund of 70 per cent of the total annual subscription fee. Thereafter, no refund MIX is available. Any cancellation request needs to The requirements will give the regulator lots of analytical power Paper from be sent in writing (fax, mail or email) to the responsible sources subscriptions departments in either our London FSC® C020438 or New York offices.

2 private funds management • Issue 154 • September 2017 MULTIPLES

The news in numbers The figures that matter to private funds managers this month

Silence of the PPMs Inside the LP mind Almost half of managers with less than American Investment Council $1bn in assets have an ESG policy members can access an exclusive feature of CEPRES’s due diligence and portfolio analysis platform 16% 3,355 42% Number of funds across which commitment decisions have been processed 42% No ESG reference in PPM or LPA

Reference in PPM but not in LPA

Reference in PPM and in LPA Source: MJ Hudson $11trn Value of transactions

SEC unveils 2018 budget request The commission anticipates the number of investment advisor exams could rise 5% percent next year

20% 5% $1.6bn 100 Expected increase in Further increase in Requested budget for Staff reassigned to advisor exams in 2017 advisor exams in 2018 2018 fiscal year the examinations unit in 2016

Check the credit lines, ILPA tells LPs Quarterly reports to investors must be explicit on the use of subscription credit lines, says lobby group

Recom- 180 mended Recommended 180 maximum 15% - 100% maximum value of 25% number of 1 credit as a Increase in average days it 79 percentage length of a credit should be of capital line outstanding called

September 2017 • Issue 154 • private funds management.net 3 NEWS • DIGITAL DIGEST

UK tax proposal may hit PE Tax on transfers of partnerships, restructurings and general reorganization of UK funds would increase under proposals from the independent UK government advisor, the Office of Tax Sim- plification. The OTS said the extent to which stamp duty is payable on instruments Garage sale: a bone of contention transferring partnership interests should Commission: downing barriers be considered, as should making stamp RE firm fined over conflicts duty an assessable tax, which could in- EC eyes rules overhaul Paramount Group paid a $250,000 fine crease the amount of tax collected in re- The European Commission may change to the Securities and Exchange Com- lation to partnership interests. private funds marketing rules, adminis- mission over claims it failed to reim- Current loopholes mean stamp duty tration requirements and regulatory fees. burse costs to one of its funds following can often be avoided when partnership Changes under consideration in- an asset sale to another of its funds. changes are made, but under the ad- clude harmonizing national marketing Fund III sold a parking garage to the visor’s recommendations, that the tax requirements, practices and what con- Residential Development Fund on the be digitized and combined with stamp stitutes marketing; creating a central understanding it would be reimbursed duty reserve tax, it could become com- repository for information on regulato- for the money already spent on the as- pulsory. ry fees; and linking the size of fees to set. But after independent valuations the amount of supervisory work. The pegged its value at over $64 million, the commission also intends to clarify the advisor decided RDF would not reim- application of marketing rules for on- burse Fund III. line distribution. For notifications, it The SEC said the decision was not is considering a central hub, as well as disclosed to Fund III stakeholders, add- simplifying the update notification pro- ing the advisor had fiduciary duties to cess and amending the criteria for when both funds, but its owning a larger stake an updating notification is required. in RDF created a conflict of interest. The move follows a consultation which Paramount agreed to the settlement found variations between member states without confirming or denying the caused barriers to cross-border alterna- charges. London: awaiting new tax law tive investment fund distribution.

ALSO IN THE HEADLINES would see their track record after a deal ply for an exemption certificate in which with due diligence platform operator the Treasurer can grant pre-approval for The private equity real estate industry has CEPRES. The operator has put together a multiple purchases in one application. taken its first steps towards standardized best practice series of due diligence analy- Funds will be subject to a series of legal reporting with the publication of a digi- ses, comprising the ones most commonly tests, including a national interest test on tal dictionary. The Global Definitions run by LPs on its PE Analyzer when de- the investor, the target business and rele- Database includes a common glossary cide on a buyout commitment. vant industry. of non-listed real estate terms, both global and region-specific. Private equity funds with foreign investors Private fund managers should ensure an are no longer required to notify the Aus- administrator’s termination policy is American Investment Council members tralian government of each individual ac- clear and comprehensive before its ap- are now able to analyze how an investor quisition they make. Instead funds can appointment, according to the Alternative

4 private funds management • Issue 154 • September 2017 NEWS • DIGITAL DIGEST

UK PE under threat of new rules PE revamped in Ireland Private equity firms in the UK may be A proposed change to Irish law would subject to senior management conduct make it easier for private equity fund rules starting next year, if the regula- managers to establish operations there. tor extends a code of conduct to all The Investment Limited Partnership FCA-supervised firms. (Amendment Bill) 2017 would allow The Senior Managers & Certifica- for aspects such as carried interest and tion Regime applies to senior manag- complex fund accounting, which are ers of financial services firms and aims not directly available in the existing to strengthen investor protection and Fees: still piling on structure. market integrity by “making individuals “The main challenges of the current more accountable for their conduct and Strong demand keeps fees high private equity set-up is that they are competence.” Increased LP appetite for private equity usually corporate structures,” one lawyer Senior managers would have to be and infrastructure following the finan- said. “There are lots of aspects of a part- certified annually for their “fitness, skill cial crisis has kept GP fees at a high level nership that don’t fit into a corporate and propriety” for their positions. and investors at a pricing power disad- structure. Given a choice of Luxembourg In a note to its members, the British vantage, research shows. or Ireland, a manager new to Europe will Private Equity and Venture Capital As- “If we don’t like the fee, the next per- choose Luxembourg, as they’ve got the sociation said the plans would need to son in line will pay it,” one US pension established partnership vehicle available. be proportionate. fund official said. This [...] is the first step in making Ireland A study by financial services firm a natural home for private equity funds.” bfinance found fees have remained “in- transigent” due to a limited number of institutional-quality deals. Some GPs are flexible, reducing transaction and monitoring expenses in their fees – a nod to such inclusions no longer being standard practice, the report said. Nick van Winsen, head of fiduciary management at Dutch pension fund SPF Beheer said, “I would even say we’ve seen some deterioration in terms, such as Bailey: FCA chair lower hurdle rates or no hurdle rates.” Ireland: natural home for private equity?

Investment Management Association. available, the association told pfm. The It could be the first step in dismantling the The industry body said a service provid- ILPA said it was working on its imple- regulation. er should demonstrate it will collaborate mentation with GPs that have not yet ad- with the manager to ensure all legal agree- opted the template and will continue to Securities and Exchange Commissioner ments are terminated, and the relevant meet with those that “have an interest but Michael Piwowar has criticized the Fi- regulatory bodies are informed of the end are lacking resources to make a switch.” duciary Rule implemented by the De- of the agreement. partment of Labor, calling on it to “recon- The Office of the Comptroller of the Cur- sider this misguided rulemaking.” Uptake of the Institutional Limited rency, which oversees US national banks, Partners Association’s fee-reporting will consult banks affected by the Vol- Do you have a news tip? template among GPs will rise as more cker rule limiting a bank’s private equity Email [email protected] tech solutions to facilitate its use become investments to 3 percent of Tier 1 capital.

September 2017 • Issue 154 • privatefundsmanagement.net 5 NEWS • PEOPLE MOVES

ALTERNATIVE Partners, an investment firm, where equity energy investor clientele. He INVESTMENTS he was president and chief investment joins from BearingPoint, a business officer. He previously sat on the advi- consultancy firm. Investcorp, a global alternative invest- sory committee on small and emerg- ment firm, has appointed Mohamed ing companies at the Securities and LAW FIRMS El-Erian to its advisory board. The Exchange Commission. ex-PIMCO chief executive and co- US firm McGuire Woods appointed chief investment officer was chief eco- SERVICE PROVIDERS Jeremy Davis as a corporate partner. nomic advisor at Allianz and He specializes in cross border M&A chairman of its interna- The International Pri- and joins from the London office of tional advisory board. vate Equity and Ven- K&L Gates. The firm also brought ture Capital Valuation on Lorraine Vaz, a leveraged finance Palamon Capital Board has appointed lawyer, as partner in its London of- Partners, a Euro- six new members. fice. She advises private equity firms, pean private equity Paul Cunningham as well as debt funds and banks on firm, has made two of Helios Investment fund finance and restructurings. She appointments to its Partners becomes joins from King & Wood Mallesons, board of advisors: Oli- EMPEA representa- where she was a partner. ver Hemsley, the found- tive and chairman, while er and former chief executive Karla Bullard of Madison Winston & Strawn has added nine of Numis Securities, a Lon- Dearborn Partners is the new new partners in its New York office, don-listed small and mid- American Investment specializing in mergers and acquisi- cap capital markets spe- Council representative. tions, capital markets, financings, pri- cialist; and Josayne 3i’s Neil Harding will vate equity and fund formation, joint Gold, a former fund represent Invest Eu- ventures, corporate reorganizations, formations partner rope. Michael Weav- and international arbitration and lit- at law firm King & er, who works for igation. All the partners previously Wood Mallesons. Sunsuper, is the Aus- worked together as the Latin America tralian Private Equi- practice from Chadbourne & Parke Highlander Partners, a ty and Venture Capital in New York. The team is led by cor- US mid-market private eq- Association representative. porate lawyers Talbert Navia and Al- uity firm, has promoted Ben Daniel Gregor of Allianz Cap- len Miller. Slater to vice-president of its private ital Partners and Karin Lagerlund of equity team. Slater joined the firm as HarbourVest Partners are also joining. Alpa Patel, former chief investment and operations lead. He of the division is also responsible for the firm’s ex- Christian Mouillon has joined cor- of investment pansion into Europe. Before joining porate finance and valuations firm management Highlander, he was a senior analyst at Duff & Phelps as its global senior at the Secu- Tipp Hill Capital Management, a US advisor. He comes from professional rities and hedge fund. He also spent three years services firm EY, where he was global Exchange at Carlyle subsidiary AlpInvest as an vice-chairman. Commis- associate. sion, has Chuck Lowrey has re-joined Alva- been ap- Xavier Gutierrez has been appointed rez & Marsal as a managing direc- pointed part- as managing director for operations, tor of its private equity performance ner at Kirkland & client services and strategy by US pri- improvement practice, which he Ellis, a global law firm. vate equity firm Clearlake Capital. helped co-found in 2009. He will fo- She joins the investment funds prac- He joins from Meruelo Investment cus on expanding the firm’s private tice in the Washington DC office. n

6 private funds management • Issue 154 • September 2017 NEWS • INDUSTRY VIEW

IRR calculations remain under SEC spotlight Fund managers must be explicit in disclosing their calculation methodology to investors, or face the wrath of the regulator, writes Vivek Pingili, vice-president of compliance at Cordium

any private equity firms so. Regulators and certain investors have yet again started to re- are concerned that this could impede view their IRR calculations the ability of investors to meaningful- Mand disclosures since it emerged the ly compare the performance of fund Securities and Exchange Commission managers who use subscription lines had subpoenaed Apollo Global Man- with those who do not. The impact of agement for additional information on this practice on a private equity fund’s its calculation methodology in Decem- IRR calculations should be adequate- ber. ly disclosed to current and prospective While IRRs have long been used by investors. investors to measure a private equity The SEC has started scrutinizing firm’s performance and draw compar- these practices during its examination isons between firms, to date there has of private equity firms. To date, it has not been a standard industry-wide cal- focused on whether a firm has ade- culation and reporting methodology. Pingili: review and enhance disclosures quately disclosed the impact of sub- The inclusion or exclusion from fund scription credit lines on a fund’s report- IRR calculations of the following can ed IRR, the other risks and/or conflicts have a material impact: receive capital called from investors. of interest associated with such practic- 1. Reinvestment of capital (ie, recycling Such loans have traditionally been re- es, and the accompanying costs. of distributable proceeds) paid within a few weeks upon receipt As with any other practice that im- 2. Capital sourced from subscription of investor commitments. Several re- pacts a fund’s reported IRR, private lines of credit or other lending facili- ports indicate a recent uptick in the use equity firms should carefully review ties to make long-term of subscription lines for longer-term and, where necessary, enhance the dis- 3. The performance of capital accounts borrowing early in a fund’s lifecycle to closures they provide to current and/ of the fund sponsor and/or its affil- make acquisitions. or prospective investors relating to the iates. Longer-term borrowing creates po- use of subscription lines to ensure that Insufficient disclosure could impli- tential for a firm to boost its reported the impact of such subscription lines cate the broad anti-fraud provisions IRR early in a fund’s life and receive on fund performance reporting and re- of the Investment Advisers Act, under carried interest before the firm would lated risks and conflicts are adequately which investment advisors have a fidu- otherwise have been entitled to do disclosed. n ciary duty to avoid misleading their investors. Violations can trigger enforce- Checking the numbers ment action, as has been demonstrated by various SEC actions against private Investors on IRRs equity firms over recent years. Rarely or never trust 28% 60% performance Subscription credit lines Always Recalculate more numbers given often than not Historically, private equity firms have by managers recalculate IRRs used subscription lines of credit as bridge loans to quickly close time-sen- 21% 79% sitive deals without having to wait to Source: eVestment

September 2017 • Issue 154 • privatefundsmanagement.net 7 COMMENTARY • FUND TERMS

Both arrived from outside private eq- Clause for thought uity, having been part of Italmobiliare, Do key-person provisions achieve what they are supposed to? the investment holding company that bought Clessidra following the death of the firm’s founder Claudio Sposito. Both criticised key-man provisions. by TOBY MITCHENALL With Vista Equity Partners’ re- Sposito’s death had led to nine months cent $10.5 billion fund, for example, of uncertainty. “That would have al- rivate equity is a people business. an event is triggered if either of the most certainly destroyed most firms of As such, key-man clauses are co-founders, Robert Smith and Brian that size,” says Fera. among the most important sec- Sheth, “cease to devote substantially Pesenti argued a credible succession Ptions in a limited partnership agreement. all their time” to the business, or if a plan should make the provisions un- “For the LP clients that we represent, proportion of nine top execs were to do necessary. it is near the top of their diligence and the same, according to documents pre- Someone with direct experience of terms lists for funds that they are con- pared by StepStone for a client. the key-man clause is UK investor Jon sidering investing with,” says Heather Moulton, who trigged one when he left Stone, a funds lawyer at Locke Lord Protective embrace the firm he founded – Alchemy Part- in Boston. “It is the starting point for So it is a perfectly sensible investor pro- ners – in 2009. These provisions are the LP’s diligence on team, incentives, tection, right? Not everyone thinks so. “mostly stupid,” he says. track record and succession planning.” To an outsider, they can seem unneces- “If the key man takes to the bottle The clauses identify a person or sary or even counterproductive. or the secretaries, or gets a criminal in- group of people who, were a prescribed Sister publication Private Equity In- vestigation, or simply stops trying, the number of them to leave, trigger a sus- ternational recently interviewed chair- key-man clause becomes a major obsta- pension of the investment period and man Carlo Pesenti and chief executive cle to sorting things out.” allow the limited partners to decide Mario Fera from Italy’s largest domes- In the case of Clessidra, the story whether the fund should have a future. tic private equity firm Clessidra. had a happy ending: the firm is today investing its €607 million third fund. Must-haves Alchemy Partners is also still investing. So is are the provisions unnecessary? The clauses investors insist on in limited partnership agreements No, but they do need to be thought

Key-man clause 87 through before fundraising begins and “before third parties – ie, LPs – be- Level of the management fee 82 come involved in the conversation,” Structure of the carry distribution waterfall 80 says Stone.

Level of carried interest 79 Some clauses are better drafted than others. “There are as many key- Level of GP commitment 78 men clauses structured with nuanc-

Clawback and escrow terms 75 es as there are GPs with nuanced investment strategies,” says Klaus Bjorn Transaction fee levels 66 Ruhne, a partner at ATP Private Eq- No-fault divorce 60 uity Partners, which invests on behalf of a $113 billion Danish pension fund. Investment restrictions 58 The jury may be out on key-person Commitment to ESG 27 clauses – investors have differing and

Inclusion of co-investment opportunities 25 strong views – but they are here to stay. In the words of one LP, “It’s definitely a % case of better to have one and not need Source: Private Equity International it versus the other way around.”

8 private funds management • Issue 154 • September 2017 COMMENTARY • REGULATION

and produces an investor report that Con-templating the future presents an extensive range of data in a The Financial Conduct Authority will insist UK private equity known format. firms use a standardized reporting template, but it’s crucial But ILPA’s template, issued in 2016, has gained limited traction. Just 12 per- they learn from their US counterparts cent of delegates polled at this year’s Private Equity International CFOs & CCOs forum said they had adopted it, by CLAIRE WILSON with more than one-third saying they have no plans to do so. Others are using rivate equity firms in the UK aspects of the template, but adapting it were dealt a blow when the to their own specifications. country’s regulator said they Uptake has been limited by a num- Pwould have to use a standardized tem- ber of factors. For smaller firms, im- plate to report their fees and charges plementing the template is just too big to investors like other asset managers. a task. Other fund managers say inves- That template, however, is not yet in tor demand for data is so individual it place; a working group appointed by is difficult to standardize. Some inves- the Financial Conduct Authority will tors even require more data than the be responsible for drafting it and in- template, and in their own formats. dustry bodies including the British As one lawyer pointed out, it’s im- Venture Capital Association are ex- portant to strike the right balance pected to be involved. between complexity and transparen- The reform is part of a transparency cy when it comes to reporting; a GP drive triggered by the FCA’s two-year shouldn’t have to spend time prepar- review of the asset management in- ing reams of data for an LP that nei- dustry. Alternative assets were initial- ther understands or requires it. ly excluded from its scope, but retail FCA: wants to make private equity But GPs do believe the template transparent managers complained the sector was has at least provided a benchmark for “particularly opaque.” transparency, and this is at the heart of what the FCA is trying to achieve with One size fits all? its new regulation. In essence, a version of the Institution- It’s important to UK firms should learn from the ex- al Limited Partner Association’s tem- perience of their US peers, and use this plate on fees and expenses will be made strike the right balance knowledge to their advantage. They compulsory. It makes sense on paper; a between complexity and may not be able to escape this regula- template allows general partners grap- transparency tory requirement, but they will have a pling with reporting requirements to chance to shape its outcome. That is not plug numbers into specified categories an opportunity they should pass up.

No traction Proportion of GPs who have adopted the ILPA template

12% 36% 30% 21%

Fully adopted Not adopted the template Adopted a modified version Adopted it for some LPs

September 2017 • Issue 154 • privatefundsmanagement.net 9 COMMENTARY • CYBERSECURITY

What to do when the worst Survey says happens: cyber-attack Sister title Private Equity International and eSentire Two recent security breaches mean it’s time to examine asked 100 private equity how private fund firms should act if they become victims firms about their readiness by CLAIRE WILSON section of its network temporarily, or 70% shut down the entire network. Believe wo private equity service pro- cybersecurity viders had to put their cyber- Conduct an is a high risk to crime response plans into prac- investigation their business Ttice in June when they were affected The firm should nomi- operations by a global malware attack. Systems at nate someone to head an fund administrator TMF and law firm investigation and ensure they have the DLA Piper were infected by a virus that right resources. All steps taken during 23% spread to 64 countries. the investigation must be documented Have a fully While prevention is of course better as they may be required by regulations, operational and than cure, no cybersecurity program law firm Herbert Smith Freehills says. compliance is 100 percent impenetrable. So what cybersecurity program should you do if the worst happens Manage public and your firm is the victim of a cyber- relations attack? pfm asked legal and technology Poor communication fol- sources to find out. lowing an attack can have 53% worse consequences than the attack it- Have been a self, according to Deloitte. Manage- victim of cyber- Mobilize the ment’s response can contain or escalate attack incident response an incident. plan The importance of keeping Address laws the incident response team and plan up and regulations to date is evident as soon as they are Compliance teams should 56% triggered. Private fund firms should en- be aware of their obliga- Do not have a security policy for sure the team includes a cross-section tions and the time frame in which they outside devices of employees so that breaches across the are required to report a breach. They may business can be responded to effective- also be required to notify individuals ly. It should also include staff from the whose data have been compromised. organization’s legal team and possibly Response plans should be constantly external counsel. evolving, but the more comprehensive 13% and tested a plan, the better the man- Have suffered a Secure systems and agement of an incident will be. While hacking breach ensure continuity the advice doesn’t need to be followed Securing systems will en- to a T, a firm should bear the response sure that the breach is guidance in mind if – or when – they contained. The organization may have fall victim to a cyber-attack. n to isolate or suspend a compromised Turn to p. 24 for more on cybersecurity Source: PEI/eSentire

10 private funds management • Issue 154 • September 2017 COMMENTARY • REGULATION

out new regulation. If regulation is required, as one lawyer said, it’s required. Timing should not be a factor in its implementation. The new rules are not so onerous that they will impact a firm’s decision to leave the UK, which will be squarely based on access to European investors. What the new rules do is illustrate the UK’s position as a leading alternative assets market, and show that once again the FCA is leading the charge on implementing measures that are likely, in time, to be applicable to firms across Europe. London’s heritage is as an international financial services hub, and years Standing out: the FCA may be the outlier on regulation, but others will catch up of regulation, tradition and business culture are ingrained in its DNA. For the FCA to embark on a regulatory rollback, or to stop moving forward, First among equals would be inappropriate, not least as it The pain UK-domiciled fund managers are feeling from the has promoted a ‘business as usual’ ap- Financial Conduct Authority will be worth it in the long run proach to implementing forthcoming EU regulation and encouraged regulated firms to do the same. by CLAIRE WILSON FCA’s point of view, there is no reason Firms aren’t in the UK because it’s to treat private fund firms differently cheap, or because of its light regulation, ny hope private fund man- from their retail counterparts, as they they are here because of the strong and agers may have harbored of a manage investors’ money. supportive infrastructure it offers in post-Brexit regulatory bonfire Concerns fund managers have that which to do business. The FCA’s recent hasA been extinguished by the Financial the FCA’s rules will create regulato- action will help to ensure it remains Conduct Authority, which has contin- ry arbitrage have also been quashed. that way. ued its crackdown on the alternative as- What is written into one directive of- sets industry. ten makes it into the next, and so the Unlike its European peers, the UK consensus among regulatory lawyers is regulator has extended some require- that the agency is pre-empting MiFID 37 ments of the second Markets in Finan- II principles being incorporated into Asset managers cial Instruments Directive to alterna- the next incarnation of the Alternative consulted for FCA tive investment funds. In June it also Investment Managers Directive. Any asset manager study unveiled new investor reporting obliga- perceived competitive disadvantage is tions applicable to all asset managers, therefore only likely to exist for a short including private fund houses, to im- period of time. prove transparency. As for the timing of the new regu- 0 There has been criticism from the in- latory requirements, which will come dustry that the extra requirements go into force as firms assess their future Private equity firms too far, according to regulatory law- in the UK ahead of Brexit, legal sourc- consulted yers. But they argue that from the es say there is no “good time” to roll

September 2017 • Issue 154 • privatefundsmanagement.net 11 FEATURES • REGULATION

Weathervane: fund managers are trying to anticipate Clayton's approach to reforms

Winds of change Private equity IPO value fell 45 percent year-on-year in 2016, according to The nomination of a Dodd-Frank critic as commissioner EY, and to its lowest level since 2012. and the private filing of IPOs are just two signs of a new But that looks to be rebounding as the direction at the SEC, Claire Wilson writes first quarter of 2017 saw a 300 percent year-on-year increase in the number of PE-backed IPOs. ay Clayton has given scant detail Act benefit to all companies we hope The SEC has expressed concern of his intentions for the Securities that the next American success story about the decline in IPOs, not just Jand Exchange Commission, but will look to our public markets when from the private equity sector. It ar- evidence is mounting that the US reg- they need access to affordable capital,” gued start-ups going public are more ulatory body is turning its attention to- Clayton said at the time. innovative than large companies and wards capital formation and away from “account for a substantial percentage enforcement. of the jobs created each year.” Here are four moves that suggest the Small but mighty regulator is taking a new tack: Private equity IPOs as a The mixed message in its proportion of the market annual budget Extension of the Jumpstart The agency is on track to deliver 12 2 Our Business Startups Act a 20 percent increase in the number of 2017 This was new chairman Jay Clay- examinations in 2017, Clayton told the 1 8 ton’s first big policy change. Senate during his presentation of the

A regulation allowing the private fil- 11 agency’s budget. But he has requested ing of initial public offering documents 2016 $1.6 billion for the forthcoming fiscal was extended to cover private equity 9 year, essentially the same as its 2017 to-

firms with the aim of encouraging more 0 2 4 6 8 10 12% tal.

IPOs. Value Volume “It’s going to make it extremely diffi- “By expanding a popular JOBS Source: EY cult to increase its current examination

12 private funds management • Issue 154 • September 2017 FEATURES • REGULATION

cycle for investment advisors,” says Duane Thompson, senior policy ana- Pieces of the puzzle lyst for a fiduciary training and accred- itation firm, adding that the SEC could Clayton gave a few more hints about the future direction of the SEC at a hit a ceiling on the number of exam- panel discussion with the US Chamber of Commerce Center for Capital inations it could perform given its bud- Markets Competitiveness at the end of July. Here are the points that will get request. affect private fund managers

Nomination of a Dodd-Frank Enforcement: the Commission has increased the use of data to target opponent as commissioner exams, using it to consider which firms to look at, how to conduct the 3President Donald Trump has exam and whether the Commission is being effective. nominated Hester Peirce, a staunch critic of the Dodd-Frank Act and the Proxy reports/disclosure effectiveness: more disclosure does not Volcker Rule to fill a vacancy on the mean better disclosure, Clayton said. It should be written to protect the SEC commissioner panel. investor rather than to hedge against legal action. Peirce’s name was thrown into the ring during the Obama administra- Reduction in number of public companies: the SEC will not do tion, but her nomination was reject- anything to inhibit private capital formation. Clayton said having both ed by Democrats who objected to her a healthy public and private equity market provides companies with views on regulation. financing options, facilitates capital formation and provides healthy and Peirce, a research fellow at a conser- necessary market competition. vative think tank and former SEC at- torney, said the Volcker Rule has taken Costs of compliance: Clayton acknowledged the need to be aware of up much regulatory and industry at- compliance costs when writing rules. tention and resources “that could have been spent on pressing issues like cy- Co-ordination among domestic regulators: there should not be gaps bersecurity.” or duplication between various regulations and regulators should not She has also written positively about ask for the same information in different ways. Clayton’s overall approach to reform, saying he is “searching for better ways Cybersecurity: watchdogs should develop standards to respond to ensure that our public securities effectively to incidents. Clayton added that if a company acts responsibly markets are an efficient and safe place in terms of protections and disclosures, regulators should not punish for investors and companies to meet them for being victims. their complementary goals.”

Silence on enforcement division powers biggest and most sensitive cases. Pi- names will make him go easy on fi- 4Clayton is yet to say whether he wowar’s policy was expected to reduce nancial misconduct, but Republicans will allow enforcement division staff- the number of compliance examina- argue his past as a prosecutor means ers to issue subpoenas on their own tions. he is unlikely to turn into a light- authority, as they have in recent years. The appointment of Steve Peikin, a touch regulator. In February, acting chairman Michael colleague of the chairman at Sullivan The top man has remained tight- Piwowar began requiring division di- & Cromwell, and Stephanie Avakian lipped on the general policy direction rectors to approve these requests. as co-heads of the enforcement divi- of the Securities and Exchange Com- Officials in the enforcement division also cast doubt on the number of mission under his stewardship, but ev- sion usually issued subpoenas and examinations. idence is mounting that its focus will negotiate settlements without com- Democrats fear Peikin’s relation- move towards capital formation and missioner participation, except in the ship with some of Wall Street’s biggest away from enforcement. n

September 2017 • Issue 154 • privatefundsmanagement.net 13 FEATURES • FUND ADMINISTRATION

Clubbing together Consolidation may be beneficial for the fund administration businesses, but is it in the best interests of the end user? Rebecca Akrofie explores the recent surge in acquisition activity and gets a CFO view on its impact

onsolidation in the fund admin- businesses where their clients are. An ex- istration market has been rife ample of this is the UBS sale of its fund over the past 18 months. Neu- services business to Northern Trust. Cberger Berman kicked off the trend in Northern Trust had smaller operations February 2016, spinning out its admin- in Luxembourg and Switzerland – the istration arm to Japanese financial group acquisition gave them the geographical MUFG Investor Services. That deal was reach they were seeking.” followed by the first of Sanne Group’s It’s worth noting that, so far, this is five acquisitions, when it bought Char- largely a European phenomenon. In the tered Corporate Services in Ireland the US, where regulation has not had the same month. same influence on managers, cost-effi- Among the most recent larger deals ciency has kept administration in-house. were Northern Trust’s purchase of UBS’s Only one-third of US managers out- fund services unit in February. Estera source administration, says Tim An- Andrews: lack of scale is challenge was the latest firm to widen its net, ac- in the US drews, director of the iD register, an on- quiring Heritage, which has offices in line platform for centralized due diligence Guernsey, London, Belfast and Malta, and reporting, compared with two-thirds in June. Administration, a Luxembourg-based of European managers. But he believes There are three main drivers of confirm. this will change as more US emerging solidation, according to market sourc- “A large part of the fund administra- managers hit their growth spurts. es. The first two are the quest for scale tion industry is securing economies of “The challenge in the US is that the and a global footprint, says Thomas scale. It’s a volume business,” he adds. fund administration market doesn’t Seale, chief executive of European Fund “Administrators want to establish strong have scale. You can get away with

Shopping spree Consolidation of fund administrators has been gathering steam in recent months

Capital Analytics sold to IDS Fund Services MUFG Investor Services sold to Sanne

Chartered Corporate Elian sold to Intertrust Services sold to Sanne Nautilus Trust Company sold to First Names Allied Corporate Services sold to Zedra

January February March April May June July August September 2016 2016 2016 2016 2016 2016 2016 2016 2016

14 private funds management • Issue 154 • September 2017 FEATURES • FUND ADMINISTRATION

administrating small funds in-house, but not vehicles with thousands of LPs. That means larger GPs using a smaller number of fund administrators, but this has its limits,” said Andrews. The third factor driving consolidation is administrators’ desire to expand their offering. Among Sanne’s five acquisitions was a listed fund and corporate services firm, for example. On the sellside, fund administration businesses are being divested because their valuations are high, says Ethan Levner, group head of corporate develop- Levner: fund admins are ripe for Cherry-Seto: requiring firms to get on a ment at fund services firm Estera, which divestment platform is problematic span out of Appleby Law in January 2016. “Accountancy and law firms, such as Appleby, are focusing on their core ad- “Fund administrators are like the hold on clients is increasingly standard- visory services and have come to the platform. The asset manager is the de- ized and regulation is driving the need for realization that they are no longer the cision-maker. Innovation in the mar- a standardized system,” he says. right owners for the fund administra- ket, to me, looks like administrators “You’re never, as a fund administration and fiduciary businesses. They are expanding their services to reduce the tor, in complete control over the whole seeking reputable partners with the scale, workload for the manager. On service industry. It’s more interesting to have resources and expertise to develop the expansion, it’s offering mid-office -ser fund administrators talking to each business further,” says Levner. vices, distribution management, regu- other and making their processes more latory reporting services, risk consult- efficient as a whole. The fund admin- New frontiers ing,” says Seale. istration industry has developed out of In the future, market innovation and While automating processes is im- paper, PDFs and Excel sheets, to need- technology will continue to drive the portant, technology needs to go much ing one central information exchange future development of fund administra- further to retain clients. platform,” Andrews adds. tion, Seale says. “The information fund administrators Leading the pack in expanding client

Barclays UK Trust Wells Fargo Global Fund Morgan Sharpe New Amsterdam Cititrust sold to Zedra Services sold to SS&C sold to Estera Services sold to JTC Group

FLSV Fund Sorato Trust UBS Fund Equinoxe Investment Services Administration Services sold to Sanne Administration sold to Apex Fund Services sold to Sanne (Luxembourg and Switzerland) sold IFS Group to Northern Trust sold to Sanne Heritage CARTA Fund sold to Estera Services sold to Alter Domus

October November December January February March April May June 2016 2016 2016 2017 2017 2017 2017 2017 2017

September 2017 • Issue 154 • privatefundsmanagement.net 15 FEATURES • FUND ADMINISTRATION

technology are Heritage, Colmore and financial officer at Blue Wolf Capital, a Augentius, who have all released tools US private equity firm. Size matters this year. “As an emerging manager to a growing Colmore, which spun out of private group, there is a need to not just man- Large private equity firms are equity firm Capital Dynamics in Janu- age the books as they are, but to be a well-positioned to take ad- ary, launched an in-house fund reporting partner in building out and improving vantage of the economies of tool in April. The Fee Allocating Incen- processes. A mega [private equity] shop scale enjoyed by growing fund tive Reporting service aims to tap into may not have that higher-touch, relation- administrators, but for new limited partners’ desire for more trans- ship-management mindset. I do think funds, or small firms, there are parency on reporting data. some administrators are trying to figure advantages to outsourcing to Augentius’s product, meanwhile, is out how to onboard more small shops a fellow small operation, ac- predominantly aimed at GPs, assisting to secure relationships which grow into cording to industry sources. with data collection and workflow man- large shops, but not sure they are there “As a boutique fund admin- agement. just yet,” he adds. istrator we are able to give “Where the technology needs to get to On the technical side, administrators personalized guidance and is GPs providing LPs with a pool of data, requiring investment firms to use their support, and can act as an from which they can extract what’s per- proprietary systems is also a potential extension of the back office,” tinent to them,” a spokesman for Augen- downside for fund managers. James Orrick, managing di- tius says. “Requiring managers to get on a plat- rector at Private Equity Admin- form is problematic; it is overkill. We’re istrators, tells pfm. Client view operating well with the simple systems PEA adapts its own systems Expanding to full-service, full-capacity we have,” says Cherry-Seto. “Many large and processes to fit a new fund global firms may be the ideal for admin- shops require onboarding to their plat- manager’s needs and require- istrators, but what do their clients think? form as their compliance controls require ments and appoints a client One chief financial officer says that- ad ownership of the system and can’t be relationship manager to each ministrators which chase larger manag- more flexible. A concern is keeping confirm, who is responsible for all ers leave mid-market managers with few- trol of your operations as you are grow- administrative processes. er options. ing, and third-party platforms adds un- “It’s a relationship-driven “We do have a desire and need to be necessary complication.” business and we take on client working with an administrator who can “For managers running pure pri- risk, too; we don’t require up- send a mid-level person on site now and vate equity firms up to $1 billion-$2 front payment so there are no then,” says Joshua Cherry-Seto, chief billion in assets, niche strategic rela- immediate costs to the client. tionships with fund administrators are Upfront invoices can create more helpful. As a small firm grows, barriers to entry to new market All the eggs in a basket the limited transactions don’t warrant participants,” Orrick says. Fund administrators on whether the hiring internally, so it is the niche firm, And even the rapidly ex- space will expand or contract personal touch in developing systems panding fund administrators and scaling of resources that’s required, recognize there will always be Other rather than simply processing of trans- space for smaller firms. (specific to asset actions,” he adds. “If a Big Four emerges in the classes or fund administration business, firm size) 15.8% Fund administrators’ ambitions show 26.3% More firms no sign of abating. In an environment of we would want to be one of 10.5% weak growth, more acquisitions should them. But there will always be The same be expected. But in the race to expand a space for boutique firms,” the private equity director of Fewer their footprint and scale, fund admin- firms 47.4% istrators should remember to prioritize one large service provider expertise and the specialist services that tells pfm. Source: eVestment Fund Administrator survey make their targets so sought after. n

16 private funds management • Issue 154 • September 2017 FEATURES • CYBERSECURITY

Financial Conduct Authority documented how in 2014 it received just five reports of cyber-attacks from the 56,000 firms it regulates. This figure increased to 27 in 2015 and to 89 last year, indicating a rise in reporting and in attacks. Attacks have also become more large-scale and ambitious. If malicious hackers were to gain control of power stations, telecoms units and airports, lives could be put at risk as operators scramble to remedy the sit- uation. But what are the risks at fund level? A wealth of information can be accessed in the event of a cyber-attack, but what would be at stake for both managers and their investors?

Data not assets Weakest link: humans are the frailest part of the system While ‘assets’ and ‘funds under management’ are the terms most often used when measuring the size of a fund manager, perhaps a more accu- The enemy within rate description in this sense would Fund managers hold huge amounts of data and sensitive focus on ‘data under management.’ information, so tackling the sharp rise in cyber-crime is a Secure and sensitive information in priority. Zak Bentley finds out how to defend against an attack a personal and a commercial sense about LPs is often held by funds, while performance information, spe- he WannaCry cyber-attack overly complacent about cybersecuri- cific asset data and either ongoing or that struck Britain’s Nation- ty warnings, despite many listing the planned company moves will also be al Health Service, Telefóni- threat as one of their main concerns at risk in the event of a cyber-attack. Tca and Renault, among others, was in recent years. “[At stake is] the loss of commer- billed by many around the world as a The threat, or at least awareness cially sensitive information. For in- ‘wake-up call.’ For too long, com- of the threat and its consequences, stance, M&A activity, information mentators said, the business com- has certainly been growing in recent around portfolio companies or their munity and investors had been years. In the UK alone, the country’s strategy,” says Peter Johnson, senior

$120bn €20m $10m Potential cost of serious Top end of penalties Damages sought cyber-attack on the EC regulations will by commodities global economy according seek to impose for a fund Tillage after to Lloyd’s of London data breach SS&C’s data breach

September 2017 • Issue 154 • privatefundsmanagement.net 17 FEATURES • CYBERSECURITY

vice-president and UK cyber-adviso- PHISHING ATTACK ry lead at insurance and risk manage- Impersonation of a business 30% ment firm Marsh. “If that was to get to trick you into giving out Phishing emails are out, it could not only have a finan- personal information opened cial impact on the value of the assets themselves, but also have reputation- al damage for the fund itself.” SPEAR-PHISHING The risks and the outcomes will Sending email from a 97% largely depend on the motives of the known user to induce Attacks initiated by a attacker, which range from those targets to reveal information spear fishing email looking to extort, those seeking information for personal gain and disgrun- BRUTE FORCE CRACKING tled employees or former employees. Trial and error method of 65% Recent examples seen elsewhere of LinkedIn passwords can state-sponsored attacks also cannot be decoding encrypted data such as passwords easily be cracked by brute discounted at fund level. force software “An attack effectively enables somebody to have an insider trading DRIVE-BY DOWNLOAD position,” Johnson continues. “There A program automatically are many different permutations.” 50% downloaded without Sites serving drive-bys are The loss, or just the unauthorized consent or knowledge more than five years old access of such data, is high among the worries of global institutional investors. In a survey last year, conducted RANSOMWARE by the US-based investment associa- Malicious software designed to block access to a computer $679 tion CFA Institute, 45 percent of the Average ransom demand 502 institutional investors surveyed until money is paid highlighted a data or confidentiality breach as among the top five reasons Source: cybertraining365 they would withdraw from an investment firm. This ranked only below concerns over underperformance and of its commodities fund client Till- Rule, information security officer at an increase in fees but above issues age Fund to what appeared to be rep- fund administration firm Maitland. such as a lack of communication and resentatives of Tillage, but were ac- “If they receive a request for payment regulatory sanctions. In other words, tually hackers from China, the fund and perform the call-back, make sure investors will not tolerate those that was understandably furious and had the request is a valid one and confirm are – or even perceived as – lax with to suspend its business. It launched the entire transaction before making their cybersecurity efforts. For fund legal action seeking $10 million in the payment.” She adds that she sees managers, the threat is real. damages and accused the fund ad- a lot more attacks from email than ministrator of failing “to exercise anywhere else, with cyber-attackers Face the consequences even a modicum of care and respon- aware “the weakest part [of the sys- While issues surrounding data loss- sibility in connection with known tem] is the human part.” es and confidentiality should not be and obvious cybersecurity threats,” While cases such as Tillage do not treated lightly, the name of the game an allegation SS&C denied. always result in expensive court cas- remains a financial one. So, when “One thing we have definitely seen es, financial authorities are begin- US-listed fund administration com- and would encourage other fund ad- ning to add an extra layer of risk to pany SS&C Technologies last year re- ministrators to do is to enforce call- ineffective cybersecurity measures leased $6 million from the accounts back procedures,” says Samantha with hefty punishments. While the

18 private funds management • Issue 154 • September 2017 FEATURES • CYBERSECURITY

US Securities Exchange Commis- His colleague Martin Bennett, the Rule explains. “There are new threats sion’s first cybersecurity ruling in managing director of the Marsh in- arising every day. We don’t rely on 2015 only resulted in a $75,000 fine, frastructure team, continues, “There one layer of defence to protect client it hit Morgan Stanley with a $1 mil- are some who are very receptive to information.” lion sanction following a data breach understanding their risk and others French fund manager Antin Infra- last year. still at quite a preliminary stage in structure Partners created an IT di- This pales in comparison with mea- their journey in terms of recognising rectors’ club across its portfolio com- sures set to reach Europe in 2018 af- there is an issue but not necessarily panies that meets every quarter to ter they were approved by the Euro- having tackled it to the full level of share best practice. Similarly, French pean Commission. The General Data depth.” counterpart Ardian organizes regu- Protection Regulation will seek to lar meetings with its company chief impose penalties of up to €20 million Building the wall executives to share opportunities and for a data breach or up to 4 percent However, it appears this hasn’t quite risks. of turnover of the preceding financial hit home for some firms just yet. In “You need to have an incident re- year, whichever is higher. Those with the wake of the WannaCry attack, sponse team, so that people are their eyes off the ball when it comes the SEC released some damning fig- trained and prepared and know what to cybersecurity are now playing a ures – 26 percent of 75 investment plan to follow when responding to high-risk game. management firms surveyed did not incidents as and when they occur,” “If we have a look at how compa- conduct periodic risk assessments of Rule advises. “Back-ups, too, are im- nies are generally looking at cyber- cybersecurity threats, while 57 per- portant, but education means hav- security, we’re seeing their thoughts cent did not conduct penetration ing knowledgeable first responders mature from ‘it’s not a problem I tests on critical systems. who know what steps to follow, rath- need to deal with’ to ‘I need to spend “We do a lot of user awareness er than allowing ransomware to run more money on cybersecurity’ and training, making sure users are able riot across a network.” now they think they need to buy in- to identify what a phishing attack Unpreparedness is no longer an op- surance,” says Johnson. looks like, for example,” Maitland’s tion. n

Keeping investors happy CFOs on cyber LP demand for cybersecurity risk How important is your assessment readiness to existing LPs?

60% 27% 50 45% High

40 Investors polled by CFA Institute that 30 would withdraw 53% 20 from an investment Medium following a data 10 breach

0 Source: GP management GP portfolio 20% company company pfm Now 3-5 years Low Source: Coller Capital

September 2017 • Issue 154 • privatefundsmanagement.net 19 Toeing the line Guidance unveiled by the investors’ trade body on subscription lines comes as the industry is getting to grips with best practice on this now-controversial issue, Thomas Duffell writes

brouhaha has broken out over fund managers’ use of subscription credit lines in recent months.A The Institutional Limited Partners Association has waded into the debate by issuing guidance to help ensure they are used appropriately. The private equity investor trade body urged members to take responsibility for checking they are informed about a manager’s use of these lines, specifically any impact they may have on performance. The association asked investors to dig deeper into how they affect firms’ track records, and to compare levered and unlevered IRRs. Some investors are already taking a firmer role in negotiating subscription finance provisions in their limited partnership agreements. At the Fund Finance Association conference in Hong Kong in June, fund managers and fund formation lawyers discussed how investors are increasingly Debt discussion: participants at the dictating the time frames in which a Fund Finance Association conference subscription line should be repaid. In listen to views on subscription lines a hypothetical example explored at the event, should a repayment not happen within a predetermined time frame, an investor will be deemed to have funded its capital contribution for the purpose of calculating the IRR. 6-12 The lobby group also called for 15-25% fund managers to agree to “reasonable Average duration, Average share of uncalled thresholds” for the use of credit lines, in months, of a capital a line represents such as establishing the longest period subscription line for which they can be used and a maximum percentage of the uncalled capital

20 private funds management • Issue 154 • September 2017 that can be borrowed against. Event participants said the length of subscrip- What LPs will ask tion lines were already trending downward, with more flexible arrangements ILPA has provided a specific list of questions for investors to ask GPs now having a six- to 12-month time- frame. Best practice today is for lines to • What is the stated purpose and intention of using the line? reflect between 15 and 25 percent of a fund’s uncalled capital, they noted. • When is use of the line expected to end? When is it contractually ILPA also reflected on the use of these required to end? facilities when exiting investments, which effectively involves managers • What are the terms for the line? drawing capital from these lines once an exit is determined and then repaying • What was the initial size of the line and by how much could it be the lines once it completes. This short- increased? ens a fund’s hold period and further boosts its IRR, something ILPA points • How many current LPs cover the line? out should not be permitted. Some of • What is the cost to initiate the line, and how are those expenses sister publication PERE’s sources have reported to the LPs? What is the cost to renew the line at the end already distanced themselves from the of the term? practice, with one arguing investors would question lines used this way. • Does the line cross-default in the event one of the LPs defaults?

Tracking changes • Will performance (IRRs) be calculated with and without use of the The noise around fund managers’ use of line? these lines has sharpened the industry’s focus on how they are used. Provisions • Will leverage be disclosed with and without use of the line? are even being made for the worried. One source said investors that commu- • If an LP whose commitment was used to secure the line needed nicate their concern can be given paral- to sell their commitment on the secondaries market, how would lel levered and unlevered fund reports, that impact the line, the ability of the LP to sell and the overall meaning they can use whichever num- partnership? bers best suits their purpose. It’s also a reminder that an astute in- • Under what circumstances, eg, regulatory changes, could the vestor’s due diligence process is always facility be pulled by the bank? being fine-tuned. One real estate head at a US public pension plan said that • Is limited partnership advisory committee approval required his chief investment officer circulated to open or extend the line? Does initiating or extending the line the ILPA report as a reminder that it require any amendments to the LPA? should be asking all GPs about the use • In an event of default, what recourse does the lender have to the of subscription lines. The pension plan uncalled commitments or assets of included investors? has also started periodic lunchtime briefing sessions to review best practic- • What process was followed by the GP in the selection of a lender? es. Having the industry body give official guidance can only help. n

September 2017 • Issue 154 • privatefundsmanagement.net 21 FEATURES • INVESTOR RELATIONS

Bringing the back office to the front Technology upgrades, operational due diligence and marketing compliance pitfalls were hot topics at sister title Private Equity International’s Investor Relations & Communications Forum. Claire Wilson reports on the key takeaways

Timing is crucial for tech upgrades

A positive culture, timing and employ- He added that the most successful He added that if a firm does not have ing easy-to-use systems are the keys to technology transitions are made against a dedicated technology team, it is wise the successful deployment of technolo- a backdrop of firm-wide support. to employ someone – internally or exter- gy at private equity firms, according to a “It’s important that you choose the nally – before undertaking a technology panel of tech experts. right time and the right project to im- upgrade. They agreed that while upgrading sys- plement the change,” the chief tech- “You might have an IT helpdesk, some- tems may seem like a huge task, the ben- nology officer of a large private equity one who helps with your computer issues, efits of doing so do make it worthwhile. firm agreed. “And if the senior manage- but that person is not trained in securi- Established firms may be daunted by the ment are not on board, it’s unlikely to ty, they can’t implement a cybersecurity prospect of overhauling their systems, get far.” policy for example, they’re not trained to but there are products available that can When choosing a solution, the speak- take on a system upgrade,” he said. make the transition smooth and effi- ers said firms should consider ease of use, An office expansion, or establishing cient, a technology firm’s founder said. including making sure staff can access a second or third operation, may also “About three years ago we decided to the system from any device, anywhere. prompt a firm to hire a dedicated tech- review our approach and began working “Simple things, such as making sure nology specialist. on a solution that brings together data email is optimized for the iPad or a “If you’ve one office and a small staff that may be sitting on different systems mobile phone, that it has functionality you probably don’t need a dedicated and within different programs. Bringing away from the office and that its oper- CTO, but as soon as you start to grow, technology up to date doesn’t have to be ation is logical are all very important,” or expand into other geographies, things a five-year task,” the speaker said. the CTO said. become more complicated,” he added. n

Where to share Short of a green light Delegates prefer 1% fee, 10% carry for commingled vehicles Where attendees rate their ESG programs against LP expectations

0% fee 47 0% carry 22 24% Sitting pretty, 0% fee 14 ahead of the game 41% 20% carry 7 Behind the 1% fee 27 curve 10% carry 58

Origination fee 8 35% no carry 3 Enough to get by, but needs Origination fee 4 improvement some carry 10

0 10 20 30 40 50 60 %

No commingled commitment Commingled commitment

Source: PEI Investor Relations Forum poll

22 private funds management • Issue 154 • September 2017 FEATURES • INVESTOR RELATIONS

LPs quiz CFOs during manager due diligence

Investors are doing more due diligence of health from the on back-office teams as a result of the SEC, but inves- regulatory crackdown on private fund tors want to be firms, according to market sources. sure that the firm A panel of investors and fund manag- has the right poli- ers said operational due diligence has be- cies and procedures come almost as important as investment in place, and that checks when a limited partner is consid- if the SEC does ering a manager. come in to examine “We had a number of investors send- them, there won’t ing in separate teams to speak with our be any big surpris- CFO, CCO and general counsel during es,” he said. our last fundraise, more than ever be- The panelists fore,” the head of investor relations at a said investors asked global private equity firm said. to meet the accoun- Operational due diligence teams tants and exam- Studying hard: LPs are examining back-office teams wanted to be sure the general partner ined their valuation had everything in place for a Securities methodology. “We’ve been doing operational due and Exchange Commission examina- As an investor, operational due dili- diligence for a while. It means we know tion, and to understand what steps the gence can put your mind at ease on reg- exactly who we need to ask if we have firm was taking to ensure regulatory ulatory issues, and helps you to build a specific back-office questions, and it compliance, the IR head added. better relationship with your GP part- makes us feel like we are getting fantas- “No firm is going to get a clean bill ners, one LP said. tic client service,” he added. n

Communication key to avoiding compliance pitfalls

Customized marketing materials and a In instances where it’s necessary to rush to get information out are the key get information out fast, attention to causes of compliance issues in investor detail and accuracy can suffer, raising relations teams, according to a panel compliance issues, the panel also said. discussion on IR and regulation. “To avoid this, our firm allows time Slides or PDFs sent to one inves- for an extra level of review in the case tor do not count as marketing under of ad hoc reports,” a second CCO the regulations, but in many circum- said. stances it is difficult to ensure that the During the review process the team content is going to a single person, the applies a high level of scrutiny to en- panel said. sure the appropriate disclosures are “You’ve got to be sure a piece is real- made, he added. ly only going to be seen by one person. Ensuring there is an ongoing dia- It’s not inconceivable for a slide to be- logue between the IR and compliance come popular and end up in a market- team can help a firm to avoid some Don’t phone it in: think hard about ing deck, suddenly exposed to market- of the marketing compliance pitfalls, marketing regulations ing rules,” one compliance officer said. the panel said. n

September 2017 • Issue 154 • privatefundsmanagement.net 23 SPECIAL REPORT • ACCOUNTING

Wave upon wave: new audit rules allow partnerships to push out tax Ending in tiers IRS rules for partnership audits are poised to take effect in 2018, but GPs still have serious questions about the new regime, Rob Kotecki finds

hen the Balanced Budget collecting from the partners as they do that were not present during the au- Act of 2015 was passed, now. But the service collects that tax dited year. This makes general part- the private equity industry on the year they complete the audit, ners responsible for maintaining the knewW that it would change the way the which could levy charges on partners tax attributes of limited partners, as- Internal Revenue Service audits partner- signing deductions and liabilities to ships, though they were uncertain how the appropriate investor. The IRS does those changes would be implemented. The IRS has allow GPs to use the attributes of un- The proposed regulations were in- been reluctant to derlying LPs to reduce the charge, but troduced on January 18, only to be the process to do so is unclear. halted under President Trump’s ex- approve pushing out The law allows a GP to push out the ecutive order freezing any new regu- beyond one tier… tax to the partners, but right now, that lations. In June, however, they were [but it] is open to can only be done at one tier, prevent- reintroduced with minimal changes. a roadmap for how ing any underlying partnerships from The new regime is still expected to ap- pushing it out again to their partners. ply to fiscal year 2018, despite the in- multi-tier push-outs So GPs and LPs are busy reviewing dustry having major questions. would work fund documents to find the right bal- Under the BBA, the IRS collects any Todd McArthur ance of flexibility and protections for adjustments that arrive from an audit a regime that leaves a lot of room for at the partnership level, rather than interpretation.

24 private funds management • Issue 154 • September 2017 SPECIAL REPORT • ACCOUNTING

I wouldn’t hold out on any technical corrections this year. It’s time for people to dust off their partnership agreements and think about what to do here Adrienne Baker Baker: clarifications may not arrive in time Milkes: certain investors may not wish to amend prior filings

Even with those questions, market the BBA shifts that burden to the While GPs may be focused on be- participants expect regulations are partnership instead. ing able to get taxes from the appro- imminent. “It seems inevitable at this Now, the IRS collects the tax from priate partner, LPs are focused on point that the rules will take effect in the partnership once the audit is maintaining their tax status under 2018,” says Mike Hauswirth, a tax di- complete, which is called the “adjust- the new regime. “Many tax-exempt rector at PwC. “A delay of the effec- ment” year. However, that could be and foreign investors want to ensure tive date probably would require an years from the “review” year which is that GPs work with the IRS to import act of Congress, which seems unlike- the fiscal year under audit. But what their tax attributes to reduce liabili- ly, due in part to the potential reve- if there are partner transfers between ties, and that the benefit of reduced nue cost.” the review year and the adjustment taxes goes directly to them,” says year? Ready or not... “It’s not crystal clear who would The release of regulations in June was bear the burden of that, so the default followed by a comment period that rule is that whoever is the partner at ended on August 14, and a hearing on the time would suffer the burden of 45 the proposed regulations is slated for that adjustment,” says Gerald Whel- Days after final September. But there are questions as an, a tax partner with EY. “So, we’re audit in which GPs to how much the proposed regulations working with our clients and their can push out tax to will change in the coming months. fund counsel to make sure LPAs and partners What will not change are the broad other fund documents do this in an parameters of the new regime, which equitable fashion.” allows the IRS to collect any adjust- This implies the need for some ments at the partnership level. “The mechanism to allow any such lia- current system forces the IRS to col- bility to be collected from a partner 2% lect underpayments that arise from a even after they leave the partnership. Increase in rate partnership audit from each individ- “Agreements will need a clawback or applicable if tax ual partner, which can be an admin- indemnification agreement from the is pushed out to istrative burden,” says Kevin Valek, partners, so the partnership can fairly partners a private equity funds leader with spread the tax obligation,” says Adri- KPMG. But the new regime under enne Baker, a partner at Dechert.

September 2017 • Issue 154 • privatefundsmanagement.net 25 SPECIAL REPORT • ACCOUNTING

Rafael Kariyev, a partner at Debev- relieve the burden of collections,” says oise & Plimpton. Kariyev. Market participants stressed Such promises can be met, but it that while the IRS may be willing to gets complicated when LPs have dif- It seems consider a “roadmap,” it doesn’t mean ferent priorities. “In the case of cer- one will be in place by 2018. tain investors such as a fund of funds, inevitable at this Yet, the regulations will be. “I they may ask to be exempt from point that the rules wouldn’t hold out on any technical amending prior filings,” says Jay Mil- will take effect in corrections this year,” says Baker. “It’s kes, a partner at Ropes & Gray. The 2018 time for people to dust off their part- work for such complex partnerships nership agreements and think about to amend filings may not be worth Mike Hauswirth what to do here.” the eventual savings. What makes that effort a priority is Most LPs will want the benefit of the new regulations indicate the IRS their tax status, but the current regu- will be taking a much closer look at lations are not clear on how exactly to work.” Allowing unlimited push-outs partnerships in the future. “There’s do so. “The statute permits a partner- may leave the IRS pursuing individu- an understanding that there will be ship to reduce an imputed underpay- al partners in the wake of underpay- an increase in partnership audits,” ment by taking into account certain ments, making the new regime irrel- says McArthur. “The reason the stat- tax attributes of its partners, includ- evant. ute was enacted was because the IRS ing tax-exempt status, but there are “Essentially, the IRS wants the part- was having a hard time auditing part- questions regarding how to document nership to notify it which partners nerships and Congress wanted to give and report those tax attributes to the owe tax at those other tiers to help them a tool to do so.” n IRS,” says Todd McArthur, a princi- pal with PwC. Pushing past the problem The rise of the ‘rep’ This new regime does give GPs an option to sidestep all these issues, by The BBA’s new audit partnership regime also requires the appointment granting them the right to push out of a ‘partnership representative’ to deal with the IRS, replacing the the tax to the partners of the year un- current regime’s tax matters partner. “The idea is that the IRS only der audit, as long as they do it with- wants to speak with one person,” says Kariyev. The representative in 45 days of getting the final ad- doesn’t need to be a partner, but they have far more authority in justment. Those partners would then dealing with the IRS than a tax matters partner ever did. include any adjustments to their cur- “The tax matters partner was more of a co-ordinator, whereas the rent year’s filing, though they would partnership representative has the power to bind the partnership pay a higher interest rate of two per- to any settlements that are reached,” says Whelan. “So there are centage points. However, current reg- protocols being set up to better define the rep’s responsibilities since ulations stipulate is that if the tax is the IRS gives them fairly unfettered authority.” pushed out to a partnership – say, a The other quirk that may cause some headaches is that the fund of funds – that underlying part- partnership rep needs a substantial presence in the US. “What are nership cannot push out the tax again foreign partnerships expected to do?” asks Baker. “They may have to its own partners. no service provider or investments in the US, but merely a single “The IRS has been reluctant to ap- US partner. How do they find a partnership rep?” Several service prove pushing out beyond one tier,” providers suggested that a cottage industry of local partnership says McArthur. “Yet, in the proposed representatives may rise to meet that need. Like so many other regulations in June it seemed aware of regulations, the new audit regime might provide a windfall to service the issue, and are open to a roadmap providers willing to take on the extra burden. for how multi-tier push-outs would

26 private funds management • Issue 154 • September 2017 VISTRA003_PFM AD_OL.pdf 1 17年8月4日下午12:26

CMY

K KEYNOTE INTERVIEW • INSTITUTIONAL INVESTORS

The institutionalization of private equity With the growth of private equity and the wall of money flowing in, managers are struggling with the ‘institutionalization’ of the asset class. Malcolm Pobjoy, Vistra’s group commercial director for North America, sets out what GPs need to do to deal with new investor demands

When you talk about the ‘insti- and these investors are supporting the Qtutionalization’ of private equi- growth in the outsourcing of adminis- ty, what do you mean? tration. We see private equity is a cou- MP: With so much money being allo- ple of years behind hedge funds in this cated to private equity, managers have regard, where virtually every hedge to deal with transformation in gover- manager now has outsourced admin- nance and oversight being driven by in- istration. vestor demand. Vistra is helping private equity firms come to terms with this What about LP demands new institutionalized environment. We Qaround costs and fees, dili- work with clients by helping them build gence and globalization? the infrastructure and back-office -ca MP: The growth of co-investments is pabilities they need to meet demands, partially driven by LP demand for low- while always taking into consideration er-cost options that allow them to gain the changing regulatory backdrop. Pobjoy : LPs are getting more access to deals. Investors are also fo- The institutional investors coming sophisticated cused on what is being charged to the into private equity are really a major funds, and again, that drives them to driving force for change. They remain favor the GPs that use administrators focused on the ability of a GP to find rather than investing heavily in grow- opportunities to execute deals and de- ing their own back-office function. liver consistent returns – that has not There is When it comes to diligence, LPs are changed – but our research tells us LPs growing demand looking to delve down into the robust- are now looking for a lot more informa- for transparency ness of the operations of both the man- tion around fund governance and over- around decision- ager and the portfolio companies. Cy- sight. In particular, they are focused on bersecurity is a big concern here, and transparency, independence, costs and making, and for the investors are looking at scalability and fees, diligence and globalization. more widespread the depth of expertise that manag- use of LP advisory ers have to make sure funds are being What do investors expect of committees properly looked after, that regulations Qmanagers in terms of transpar- are being complied with across the en- ency and independence? tirety of their businesses, and that all MP: We see investors demanding a lot There is also growing demand for their providers have the requisite ex- more information and data about their transparency around decision-making, pertise. investments and fund performance, and for the more widespread use of LP That leads to concerns around glo- and the level of financial analysis ex- Advisory Committees, which enable balization: investors are backing pri- pected has grown significantly. There is investors to engage and get closer to vate equity managers investing globally a lot of interest in new platforms that that process. because they want diversification. That facilitate the ease of communication As for independence, investors are often means doing deals in multiple lo- and information-sharing among GPs, looking to allocate to GPs that have in- cations, but LPs are seeking reassurance LPs and administrators. dependent advisors and administrators, that there is sufficient on-the-ground

28 private funds management • Issue 154 • September 2017 KEYNOTE INTERVIEW • INSTITUTIONAL INVESTORS

expertise to deal with all the necessary on that and demanding vendor over- administration compliance and struc- sight and consolidation programmes, When it comes turing. Furthermore, they want GPs to asking managers to demonstrate how be structuring their funds in the right they are able to effectively monitor to diligence, LPs are domiciles, where there is a lot of interest multiple vendors for compliance, for looking for managers in new jurisdictions like Luxembourg good HR practices, and for more gen- to delve down into and Cayman, as well as cost-efficient eral corporate behavior. the robustness of the solutions involving Guernsey and Jer- As a result, GPs are reducing the operations of their sey, for example. number of providers that they work with, and showing a preference for portfolio companies How important is the back of- those that can deliver multiple service when they are Qfice in LP and GP relation- offerings in multiple jurisdictions. In allocating money ships? doing so, GPs are able to work with MP: Private equity allocations are still fewer partners, perform vendor over- heavily weighted towards the top-ti- sight more efficiently and drive down er players, and we continue to see the the costs of that control. private equity industry growing, de- This is very much a feature of tradi- Alternative Investment Fund Manag- spite the large amount of un-deployed tional asset management, and is anoth- ers Directive is now well-established in capital. And yet we do see competition er example of the institutionalization Europe, while in the US, even if reg- to win mandates from institutional in- of private equity. ulation is rolled back, it is the volume vestors becoming more aggressive, and of regulatory change that presents the to win that competition, GPs need the How can managers achieve op- challenge. right combination of performance, in- Qerational efficiencies? At Vistra, we believe there will con- frastructure and partners, so as to give MP: As private equity firms grow, it tinue to be a strong current of regulato- those investors the right level of com- makes sense to constantly review and ry change impacting the private equity fort that their investment is being well upgrade their operating models. Many industry globally. We know our clients looked after. have small in-house accounting teams and prospects view making sure they We are helping GPs develop that in- that have grown up with the business, are up to date and their systems are ful- frastructure, transparency and high but as the scale of operations expand, ly compliant as a real challenge that is level of customer service that will drive firms can be exposed to single-person driving them to outsource these func- better LP relationships. New inves- risk and an operating model that is not tions to a variable cost model. tors continue to come into the market, easily scalable. In the case of accounting, we see an whether they are endowments, state For firms to pursue the larger in- increasing collaboration across the pri- funds or others, and they are more stitutional investors, it is necessary to vate equity industry to agree on best cautious. There is more capital to be have more robust operating models, practice, in terms of issues like what chased, but there are more people chas- and having single-person dependency gets charged to the fund versus the ing it, and the people allocating it are becomes an issue – investors are look- manager, how performance returns are getting far more sophisticated. ing for confidence that the operating calculated and more. As the industry model is strong enough to cope with matures and institutional investors de- What should GPs be doing growth. mand more comparative techniques, Qaround vendor management the market will collaborate and drive and oversight? What do you consider to be towards best practice, rather than con- MP: Historically, when private equity Qregulatory and accounting best tinuing to remain fragmented. n managers were operating on a global practice? basis, they might have multiple ven- MP: All of these investor demands dors in different countries, and dif- are increasing at a time when regula- SPONSORED BY ferent vendors working with different tory and accounting compliance chal- VISTRA funds. Now investors are pushing back lenges are a constant backdrop. The

September 2017 • Issue 154 • privatefundsmanagement.net 29 SPECIAL REPORT • ACCOUNTING

Hunting the unicorn The regulator is watching start-ups ‘worth’ more than $1bn, so private fund managers must ensure their valuation policies are compliant. Claire Wilson reports

he Securities and Exchange concerning auditor independence,” law Commission has nudged uni- firm Proskauer Rose writes in a client corn valuations slightly higher note. 200 Ton its watch list after concerns there was Headwinds increase the risk of issues. no consistency in methodologies used by Discussion of a unicorn bubble will like- Unicorns private fund firms. The regulator wants ly fuel SEC scrutiny of valuation prac- worldwide to see more uniformity among managers tices, according to legal sources. Burst when it comes to assigning a price to a bubbles tend to turn the spotlight on start-up, but has not taken action – yet. securities laws and regulators, which are A study by the University of Brit- then criticized for being too passive and $600bn ish Columbia and Stanford University reactive. To counteract this, the SEC found about half of private companies will train the searchlight firmly on a Aggregate value with valuations exceeding $1 billion – manager’s valuations policy if there is a Source: University of British unicorns – would not have earned the unicorn failure. Columbia and Stanford University title without the use of complex stock mechanics. Playing it safe The study looked at 116 unicorns Private fund firms should, first of all, founded after 1994 with average valua- review their general valuations policies Being able to demonstrate you stuck tions of $2.7 billion. Researchers found and procedures and ensure their unicorn to the methodology is vital if the uni- that 11 percent of companies used pref- valuation methodology is in line. corn is devalued. erential stock to boost their valuations “It’s about doing things consistent- “Any significant devaluation of uni- to more than twice what they would be ly, with the consistent application of corns is likely to amplify the scrutiny worth using fair value estimates. the valuation technique. It’s never bad of valuation practices, particularly of “Regulators will examine whether ac- to revisit your policies and procedures. funds with significant exposure to uni- tual valuation practices were consistent Just make sure you feel comfortable corns. Fund investors will almost cer- with disclosures to investors, review gaps there’s sufficient detail to support your tainly focus on sponsors’ adherence to between stated valuation policies and rationale and the conclusions you have their own valuation policies, as well practices, and scrutinize inconsisten- reached,” says Rajan Chari, a partner as discrepancies in valuations between cies in applying those policies. The SEC at Deloitte and co-author of the annual private funds and mutual funds,” is already focused on potential issues Deloitte Fair Value Pricing Survey. Proskauer says. One of the main differences between valuing unicorns and other companies Top three unicorns with private equity investment is that the fund has few parameters and Ride-share behemoth Uber flagged down the top spot must determine for itself what a mar- Company Sector Valued at As of Investors ket participant would think, who those

Tata Capital, market participants are, and what the Uber Ride-hailing $62.5bn April 2017 Letterone ultimate exit for the investment may end Holdings up being. Palantir Kortschak Big data $20.3bn November 2016 Technology Investments To avoid the wrath of the regulator, a fund manager must ensure they are be- Shared WeWork $20bn July 2017 SoftBank workspaces ing realistic about their unicorn valua- Source: CrunchBase tions. n

30 private funds management • Issue 154 • September 2017 SPECIAL REPORT • ACCOUNTING

In the frame The Mandatory Performance Framework could be coming to private funds accounting, but will the accompanying qualification catch on? Claire Wilson finds out

framework outlining how to provide supportable and auditable fair value measurements is beingA touted as a possible turning point Larsen: Funds are focusing on processes Hill: CEIV may be a ‘nice to have’ for private fund valuations. The global Mandatory Performance “Private funds, especially those who Whether private fund valuations pro- Framework is designed to enhance con- report using US GAAP, will likely be fessionals will become CEIV-certified is sistency and transparency in fair value required to adopt the MPF,” Larsen subject to debate; some industry sources measurement methodology; it details says. “Increasingly funds of all sizes are say the process may be too admin-heavy how much valuation work should be focusing more efforts on improved valu- for them to adopt it. In addition to ini- done and how to document the calcu- ations processes. In future it may be dif- tial training and assessment, those cer- lations behind a fair value estimation. ficult for LPs to justify investing with tified are subject to continued education “Over time, the application of the GPs that do not have a valuation pro- requirements and must be engaged in MPF should enhance a fund’s valua- cess compliant with the MPF.” fair value assessments for at least 1,500 tion process and improve consistency New auditing standards, which hours over a three-year cycle. They are and transparency,” says David Larsen, a would include fair value estimates, also subject to a quality control and in- managing director at independent advi- currently being discussed by the US’s spection program and potential disci- sory firm Duff & Phelps. Public Company Accounting Over- plinary action. The framework is part of the Certi- sight Board may also encourage those “Possibly [people involved in private fied in Entity and Intangible Valuations involved in private fund valuations to fund valuations will become certified] certification, which is now open to val- adopt the MPF. as many of the funds are registered in- uations professionals in public and pri- “One way to demonstrate to audi- vestment advisors and are subject to vate markets. The optional qualifica- tors that a fund provides information SEC oversight,” Lindsay Hill, director tion was established by accountancy that is auditable under the new PCAOB at audit, tax and consulting firm RSA, firms and industry bodies including the proposals would be to comply with the says. “But unless there is a wide adop- American Institute of Public Accoun- CEIV and MPF,” Larsen says. tion it will probably be a ‘nice to have’ tants and the Royal Institution of Char- with an added administrative compo- tered Surveyors as a response to the Se- nent that may make adoption too bur- curities and Exchange Commission’s densome.” concerns over the lack of consistency in 1,500 Valuation boutiques, large and small valuation methodologies. Hours CEIV holders players are leading the charge to support Valuations experts choosing to be- the credential, Hill adds, while the Big come CEIV-certified have to comply must spend on Four accounting firms and other large with the MPF, but the framework will valuations within national and international organiza- likely be extended to those who are not three years to keep the tions are more hesitant and performing certified to create a “gold standard” in certificate deeper due diligence before establishing valuations. plans of action. n

September 2017 • Issue 154 • privatefundsmanagement.net 31 KEYNOTE INTERVIEW • ACCOUNTING

Booking the value As private funds accounting becomes ever more important, Peter Cogan, partner and co-leader of EisnerAmper’s financial services audit and assurance services practice, tells pfm about the rising complexity – and the costs

Senior staff at private equity their foreign investments. Such regula- Qfirms seem much more focused tions increase reporting requirements. on their accounts these days. Why? They have also made the structuring of PC: A major cause is the requirement private equity funds more complicated, for many advisors to private funds to as fund managers respond and adapt. become registered as investment advi- These days you do not just invest di- sors with the Securities and Exchange rectly in a portfolio company’s com- Commission. This change, introduced mon stock. There might be two, three in 2012, has put private equity funds’ or four tiers of vehicles, including off- accounting practices under the reg- shore holding entities. When you have ulatory microscope – and it’s not just four tiers of tax compliance the costs the fund. When the SEC visits our cli- will clearly be higher. ents, one of its first questions is, “Who To illustrate the increasing com- is your audit firm and audit partner?” plexity, one of our tax partners likes to The SEC will then come and talk to us. Cogan: audit costs are stabilising point out that the typical tax return for a private equity fund used to be about What kind of things is the SEC three inches thick. The same return Qconcerned about? could be 20 inches thick today. PC: The SEC is looking for high-qual- Tax costs can ity outputs from fund managers – not skew the performance What are the implications of only more information, but also in- between the different Qthese rising tax compliance costs? formation delivered in a more time- PC: As long as the funds are able to ly manner. The areas of focus remain funds in the group generate high returns, after allowing valuations, custody of assets, fees and quite substantially for all these costs, I do not think there compliance programs. Its staff com- is a problem. But if the costs get ex- monly ask us about our audit proce- ponentially higher this could be wor- dures, our oversight of valuation, cus- good at putting together high-quality rying for investors and general partners tody and fees, and our ability to get accounts. But overall accounting costs – particularly if the EBITDA multiples information independently of the cli- are on the up because we have seen a for private equity purchases continent. Amid the expected questions, they ramping up of tax compliance costs. ue to rise. Private equity funds would will tend to throw in a few surprises. Rises in tax compliance costs have far then face severe downward pressure outpaced rises in audit compliance from two separate sources; this could If accounting has redoubled costs in recent years. be a killer combination. Qin importance, what does this As accountants, we have seen some mean for costs? Why are tax compliance costs private equity fund structures where PC: Audit costs are in fact stabilizing. Qon the rise? the portfolio return for the fund de- This is largely because private equity PC: This is largely because of increased signed for US investors is higher than fund managers have been doing a bet- regulation, with rules such as the For- for the fund set up for foreign inves- ter job of preparing the books for au- eign Account Tax Compliance Act, tors, because of the higher tax compli- dit – the industry is more consistently which requires US citizens to report on ance costs of the latter. In other words,

32 private funds management • Issue 154 • September 2017 KEYNOTE INTERVIEW • ACCOUNTING

tax costs can skew the performance be- stock and debt market crashes. Funds’ On the other hand, it is possible for tween the different funds in the group accountants even did this for compa- talented junior staff within private eq- quite substantially. nies with minimal exposure to debt uity firms to work their way up to the markets. Some people said, “The debt rewarding position of CFO, even if the Private equity funds’ accoun- market is down 30 percent and the most common route is to work up to a Qtants face another challenge: stock market is down 30 percent, so senior role at an accounting firm before valuing the illiquid assets that make the valuation should be down 30 per- transferring to a senior finance role at a up the portfolios. What are your cent.” But I do not think the answer private equity firm. thoughts on this contentious issue? is as black and white as that. You have PC: The further you get away from any to look at the specific circumstances of If the accounting issues facing market information that is relevant, each company. If the company does Qprivate equity firms are com- the harder you have to work to come not need to access the debt market or plex, what kind of external accoun- up with reasonable valuations. Let me seek a listing in the near future, you tants do they need? illustrate with two examples. do not need to slash its value in line PC: They need specialists. There are is- The first is a company in the auto with these markets. Perhaps you only sues that a non-specialist will struggle sector. There is a lot of auto debt and need to cut it by 20 percent. Follow- with, such as the valuation methodol- there are a lot of listed auto companies, ing the same logic, you cannot neces- ogy, incentive allocations, offsets and so there is a large body of information sarily increase the value of the portfolio special deals. There are a lot of con- for comparable businesses that allows company in line with the rise of public cepts that are unique to private equity, you to compute valuations. markets. so someone not familiar with the nu- The second example is a tech com- Incidentally, I have noticed a defi- ances in this area is liable to slip up. n pany offering something relatively new nite downside bias among accoun- and unique. There are ways of valuing tants grounded in our historical train- early-stage tech companies, and there ing in ‘conservatism,’ which I think Peter Cogan is an audit partner are large tech companies for which is ill-founded in reporting consistent with more than 25 years of audit, there is already a lot of useful informa- with fair value standards: they tend to tax and advisory experience. He is tion. For example, if a big ride-hailing cut portfolio company values sharply co-leader of the firm’s audit and tech company is already earning a lot when public markets are down, but to assurance services practice as well as of income from millions of custom- be more conservative when the market the co-chair of the firm’s financial ers, and is already showing strong pos- goes up. We as auditors have to fight services group, leading the private itive EBITDA, it is easier to value. But that same bias when evaluating valua- equity group within that practice. what about the company in the middle tions reported by fund managers. In addition, Peter has been director stage rather than the early or late stage? of the Cayman Islands office since it It has invested a lot in developing the What does the increased scru- was established in 2001. technology, but most of its earnings are Qtiny of private equity firms’ ac- Prior to his current role leading in the future. It is harder to value that counting practices mean for finance the financial services practice, he kind of company. professionals at private equity firms? served as audit partner for several of PC: If I were a CFO at a private equi- the firm’s largest hedge and private So is it straightforward to val- ty shop, playing a key part in the op- equity fund clients. He has also Que a company owned by private eration of funds because of these new represented clients as an outsourced equity which is in the same business complexities, I would find it very chal- private equity fund CFO through as companies that are listed or have lenging and rewarding. I think it is the firm’s fund administration issued debt traded on the secondary harder for junior staff: they bear the practice. market? brunt of the cost pressures on private PC: In some ways it is, but accountants equity fund managers’ finance func- can rely too much on this. In 2008, tions because of the need to spend SPONSORED BY the notional values of some portfolio more on outside consultants who can EisnerAmper companies were slashed because of the help deal with these complexities.

September 2017 • Issue 154 • privatefundsmanagement.net 33 SPECIAL REPORT • ACCOUNTING

Five minutes to comply

Internal rate of return calculations are facing renewed scrutiny by the Securities and Exchange Commission following the regulator’s subpoena of Apollo Global Management over its disclosure of IRR calculations in May. What are the key features of compliant IRR reporting?

What are your peers doing?

CONSULTING TARGETED HIRES REVIEWING COMMUNICATING STANDARDIZING Seeking advice Employing more Studying Briefing relevant staff on Use a fund’s interim on the SEC external valuations internal clear and meaningful IRR valuations in investor requirements for professionals calculation reporting marketing material IRR calculations methods

Action items The Global Investment Performance Standards established by the CFA Ace your compliance Institute emphasize the main elements of compliant IRR reporting

Value private equity portfolios monthly and when there are Have you done the following: large cashflows Ensured correct IRR calculation methods 1 and related disclosures in place Calculate a since-inception internal rate of return. Do fair value assessments at least annually; quarterly is Been able to explain why your firm uses 2recommended its calculation methodology Calculate since-inception IRR using daily cashflows, based Ensured the actual valuation process 3on the date of the capital call or distribution matches the one promoted to investors Included clear and detailed disclosure Returns should be calculated after the deduction of about IRR calculations in advertising 4transaction expenses incurred during the return period materials Reported the impact of debt financing Net-of-fees returns should be net of investment management on IRR 5fees, including carried interest

34 private funds management • Issue 154 • September 2017 in association with

ALFI GLOBAL DISTRIBUTION CONFERENCE Where the fund distribution community gathers 19 & 20 September 2017, Luxembourg

With 40+ inspirational speakers and 40+ distributors already registered to attend, the ALFI Global Distribution Conference is on track to bring together once again the most experi- enced professionals, innovative forerunners and creative minds to gather their views and hold a genuine debate on topics of concern to the international asset management and global fund distribution community. We are expecting to welcome 500+ participants from Europe, the Americas, Asia Pacific, Africa and the Middle East. 40+ Senior speakers confirmed

Stewart Aldcroft Joanna Cound Jim Fitzpatrick Richard Lepere Yoshio Okubo Sally Wong Chairman BlackRock Head President Managing Director Vice Chairman CEO Cititrust Limited of EMEA, Global NICSA Fund Channel Japan Hong Kong Public Policy S.A. Investment Trust Investment Funds Group Association Association Agenda topics: • Overview of the global fund distribution landscape, distinguishing between distribution channels and distributor profiles by continent, region and country • The case for global cross-border distribution: local investment needs and international diversification • Fintech for Distribution - exploring a changing landscape for funds and how it impacts today’s distribution model • MIFID II target markets, costs & charges, oversight of financial intermediaries, etc…what will regulation make of distributors in the not so distant future? • Open debate between global giants of the fund manufacturing industry and boutiques on the challenges they face in Europe’s changing distribution landscape: Does scale matter? • Updates on key market and regulatory developments in Australia, South Africa, Brazil and the US

Latest programme & registration: events.alfi.lu/global17 EXPERT COMMENTARY • REGULATION

SEC’s reporting modernization rules mark new era New Securities and Exchange Commission reporting requirements will be burdensome for fund managers, but provide the agency with the power to aggregate and analyze information like never before, writes WithumSmith&Brown’s Tom Angell

or registered investment compa- a pipeline for enhanced complexity in nies, the Securities and Exchange fund filings. Commission’s investment com- In the words of former SEC chair Fpany reporting modernization ‘final Mary Jo White, the final rule was de- rule’ is so much more than a sign of signed as a “sweeping change for the the times. It signals the Commission’s industry by requiring strong trans- next move, as it becomes even more en- parency provisions and enhanced in- trenched in the private equity industry vestor protections… collectively, these and marks a new era for the fund in- amendments will improve the infor- dustry as a whole. mation the Commission receives from By moving beyond its focus on reinvestment companies.” The statement quiring advisors at a certain reg- also exalted how the new rules will istered-assets-under-management protect investors; maintain fair, order- threshold to register with the SEC and Angell: final rule is having a ripple effect ly and efficient markets; and facilitate implementing presence exams to assess through the industry capital formation. issues and risks, the Commission is now focused on modernizing fund re- New rule means new burdens porting information and overall trans- and processes parency. On the surface, improving Under the newly adopted investment the quality and type of information company reporting modernization ‘fi- provided to the SEC seems logical and nal rule,’ funds must adhere to the fol- innovative. lowing: Historically, the SEC has been reli- Once the final ant on fund reporting and related fil- rule’s structured data Form N-PORT, which nullifies Form ing information to monitor funds and really starts to roll N-Q detect risks, fulfill its role as an advisor in, the SEC will be As the modernization initiative’s cen- to policy- and rulemaking bodies and terpiece, this form requires certain facilitate its examination and enforce- in possession of a RICs and funds to report information ment activities – the latter have been potentially powerful about monthly portfolio holdings to ramping up since 2010. In issuing its new tool – the likes the SEC in a structured data format. final rule in late 2016, the SEC noted of which it has never By requiring portfolio-wide or posi- it has been challenged by the fund in- tion-level information using this for- dustry’s evolution, most notably new seen before mat, the SEC is counting on greater ef- fund products and investment tech- ficiency and, in turn, a rapid response niques. This is especially applicable to to market changes as well as fund-spe- exchange traded funds, targeted date cific events. funds and non-traditional bond funds. • Portfolio-wide and position-level As a result, increased volume has been holdings data must be filed with the

36 private funds management • Issue 154 • September 2017 EXPERT COMMENTARY • REGULATION

SEC on a monthly basis, no more well as the amended forms, industry fund’s website. This only pertains to re- than 30 days after the close of each and infrastructure challenges abound. ports and certain other materials. With month Speaking broadly, the industry has the proposed rule still under evaluation, • Compliance date: June 1, 2018 (over had – and continues to have – sweep- all eyes are on the SEC. Of course, given $1 billion); June 1, 2019 (less than ing questions related to data sourcing the Commission’s other priorities, the $1 billion) and aggregation, implementation of a proposed rule has an uncertain future, filing timeline that also is compressed at least over the near term. Form N-CEN, which nullifies Form and complex calculations. Further- Registered investment companies N-SAR more, there are also infrastructure-re- find themselves in a race to meet the This requires registered investment lated challenges posed when it comes new deadlines – and the challenges companies – other than face-amount to strategy, operations and – perhaps they inherently create – set forth un- certificate companies – to report cer- the greatest of these – technology. der the new reporting modernization tain census-type information to the To achieve even greater transparen- rules. This, it seems, is a sign of not SEC in a structured data format annu- cy, the SEC requires all information in only the times, but a sign of the SEC’s ally. a structured data format. What is this future governance. n • Updates required disclosure items exactly? It is an extensible markup lan- for all funds and includes new ques- guage file, commonly referred to as an Tom Angell, CPA, is a practice tions tailored to specific fund types XML format. This format enables the leader in Withum’s Financial and • Compliance date: June 1, 2018 (all SEC to leverage today’s technology to Investment Services Group and head funds) collect, aggregate and analyze informa- of the private equity and venture tion like never before. All of this is now capital practice. In this role, he serves Regulation S-X, amendment being accomplished with modern-day a diverse roster of private equity and This requires standardized enhanced speed and effectiveness. venture capital clients, including disclosure about derivatives in the Once the final rule’s structured data domestic funds, offshore funds and RIC’s financial statement. really starts to roll in, the SEC will fund of funds. From start-ups to long- • Amended disclosure requirements be in possession of a potentially pow- established organizations, Angell are intended to provide investors erful new tool – the likes of which it spearheads a team of auditors, tax with access to similar information in has never seen before. At the Com- professionals and internal quality- a reader-friendly format and to pro- mission’s fingertips will be a database control specialists who advance each mote comparability in derivatives. chock-full of information to assess risk entity’s strategies and objectives By standardizing the disclosures at a fund-specific level, spanning dif- while ensuring reporting standards across fund, it will help investors to ferent types of funds, across entire in- and tax compliance. He also is one better assess funds’ use of derivatives. dustries. This information can be used of the firm’s authors of theEmerging • Compliance date: August 1, 2017 in limitless ways to access fund regis- Manager Desk Reference Manual. tration compliance, identify funds for This details the various operational Forms N-1A, N-3, N-CSR, amend- examination, monitor risk and inform areas in which the fund manager ments rulemaking bodies. needs to focus, such as building This requires certain disclosures of the There is no telling where this new out the back office, outsourcing RIC’s securities lending activities. centralized database and enhanced and service provider selection and • Compliance date: August 1, 2017 knowledge will ultimately lead the organizational structure. His SEC. However, one thing is certain: expertise also extends to raising financing and deal origination as There is no doubt the final rule is the Commission is continuing its re- well as organizational structure and having a ripple effect throughout the view and consideration of Rule 30e-3, operational issues. fund industry. From the increased re- which was omitted from the final rule porting burden – in terms of frequen- when it was adopted in October 2016. cy and granularity – to implementing Under the proposed Rule 30e-3, a fund SPONSORED BY new processes to prepare filings utiliz- would be able to satisfy current share- WITHUMSMITH+BROWN, PC ing Forms N-PORT and N-CEN, as holder report-delivery obligations via a

September 2017 • Issue 154 • privatefundsmanagement.net 37 END MATTER • INDEX

Firms in this issue SS&C Technologies 15, 18 Mouillon, Christian 6 Sullivan & Cromwell 13 Navia, Talbert 6 Alavarez & Marsal 6 The International Private Equity and Orrick, James 16 Alter Domus 15 Venture Capital Valuation Board 6 Patel, Alpa 6 Apex Fund Services 15 TMF 10 Peikin, Steve 13 ATP Private Equity Partners 8 UBS 14 Pesenti, Carlo 8 Blue Wolf Capital 16 Vistra 28 Pierce, Hester 12 Clearlake Capital 6 Winston & Strawn 6 Piwowar, Michael 5, 13 Clessidra 8 WithumSmith+Brown 36 Pobjoy, Malcolm 28 Cordium 7 Zedra 14 Rhune Bjorn, Klaus 8 Debevoise & Plimpton 26 Rule, Samantha 18 Dechert 25 Seale, Thomas 14 Deloitte 30 People in this issue Slater, Ben 6 DLA Piper 10 Sposito, Claudio 8 Andrews, Tim 14 Duff & Phelps 6, 31 Thompson, Duane 12 Angell, Tom 36 EisnerAmper 32 Trump, Donald 12 Avakian, Stephanie 13 Estera 14 Valek, Kevin 25 Baker, Adrienne 25 European Fund Administration 14 Van Winsen, Nick 5 Bennet, Martin 19 EY 25 Vaz, Lorraine 6 Bullard, Karla 6 First Names 14 Weaver, Michael 6 Chari, Rajan 30 Herbert Smith Freehills 10 Whelan, Gerald 25 Cherry-Seto, Joshua 16 Heritage 14 Clayton, Jay 12 Highlander Partners 6 Cogan, Peter 33 iD Register 14 Cunningham, Paul 6 IDS Fund Services 14 Davis, Jeremy 6 Investcorp 6 El-Erian, Mohamed 6 JTC Group 15 Fera, Mario 8 Kirkland & Ellis 6 Gold, Josayne 6 KPMG 25 Gregor, Daniel 6 Maitland 18 Gutierrez, Xavier 6 Marsh 17 Harding, Neil 6 McGuire Woods 6 Hauswirth, Mike 25 MJ Hudson 3 Hemsley, Oliver 6 MUFG Investor Services 14 Hill, Lindsay 31 Neuberger Berman 14 Johnson, Peter 17 Northern Trust 14 Kariyev, Rafael 26 Palamon Capital Partners 6 Lagerlund, Karin 6 Paramount Group 4 Larsen, David 31 Private Equity Administrators 16 Levner, Ethan 15 Proskauer Rose 30 Lowrey, Chuck 6 PwC 25 McArthur, Todd 26 Ropes & Gray 26 Miller, Allen 6 RSA 31 Miller, Jay 26 Sanne 14

38 private funds management • Issue 154 • September 2017 October 4-5 Hilton Financial District Hear directly from the SEC at the San Francisco premier event delving into the complexities of private fund finance and compliance.

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‘I love the creativity and satisfaction’ Alexandra Poe, a private funds partner in the corporate practice of Hughes, Hubbard & Reed in New York, tells pfm about how she ended up in private equity law and the best week of her life

What’s your role at Hughes I finished the program and thought, QHubbard & Reed? “This may have been the best week of AP: I joined Hughes Hubbard & Reed my entire life.” in June as a private funds specialist. I I soon started representing my friend represent investment advisors in private Henri Bungener’s fine organic wines fund formation, regulatory compliance from Clos de Caveau, as a sort of brand and managed accounts. I also advise in- ambassador at international wine fairs stitutional investors in investment and and other tastings. fiduciary matters; some have been seed- In 2014, I enrolled at the Internation- ers in amounts up to $750 million. al Culinary Center in New York for the I often deliver onsite compliance train- 17-week intensive sommelier training, ing, tailoring my advice to a client’s op- involving over 200 hours of study after erations. For clients targeted in regulato- work and weekends. I passed the Intro- ry enforcement, I assist with meeting the ductory and Certified exams given by Securities and Exchange Commission’s Poe: versed in fund and wine vintages the Court of Master Sommeliers in 2015. settlement requirements, which often include passing muster with an indepen- Have you found there are links dent compliance consultant. Qbetween law and wine? It’s hard to say which aspect of the 200 AP: Many clients are interested in wine work I enjoy the most. Governance and Hours Poe spent and they’re happy to have a glass with fiduciary advice feel like my highest val- me; they trust I’ll add something extra ue as a seasoned counselor, yet I love the becoming a sommelier to the experience of drinking nice wine. creativity and satisfaction of helping cli- Also, when you’re learning to blind ents with new fund launches as well. taste, it’s necessary to engage all your After Schroders, I went to US Trust, senses, instincts and knowledge to iden- How did you become involved a private bank, which got me involved tify the wine. Similarly, it’s good to lis- Qin private funds law? in private equity and other alternative ten to clients and colleagues holistically, AP: During law school, socially respon- asset classes. as well. sible mutual funds emerged and I wrote I’ve formed funds in private equi- Vintners’ journeys require patience, about them for the school magazine. I ty, as well as funds focused on natural resilience and vision. Asset managers then volunteered for the funds practice resources, energy, shipping and receiv- must also be nimble, attentive to har- at my first Wall Street firm. I think they ables. monize constantly changing factors. were quite surprised that I even knew One can think of each reporting period what a mutual fund was back then. You are a certified sommelier. as a new vintage, wherein making the In the 1990s I became US general QWhat sparked your interest? right choices today can deliver lasting counsel at Schroders, who were very well AP: I first studied wine professional- rewards in the fullness of time. n known as a manager of overseas pension ly in 2004, at the Culinary Institute assets, and I helped launch the hedge of America in Napa, California. The fund business. I loved working with students were wine professionals, one Do you have an interesting sideline or story to tell? Spill the beans: these flexible product structures and wine collector – and then there was me! Email [email protected] managers who think outside the box. I suppose I did it to test my curiosity.

40 private funds management • Issue 154 • September 2017 UNPARALLELED EXPERIENCE SCHULTE ROTH & ZABEL PROVIDES COUNSEL TO MANY OF THE MOST ACTIVE AND INFLUENTIAL PRIVATE EQUITY FIRMS.

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