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ment for private equity & real assets fund
services at State Street AIS.
“Private equity firms are evolving
from being a single product offering
into becoming multi-product, and more
institutional in nature. This is forcing the
asset class to evolve,” said Estrada. These
new strategy sets introduce complexities
and business challenges which often go
beyond the aptitudes of existing middle
and back office staff and Excel software
long-accustomed to servicing the tradi-
tional buyout model.
Outsourcing also facilitates better
business continuity and reduces key
person risk, added Bailey. “Private equity
accounting teams – even within a big
company – will never comprise more than
three to six people. Guaranteeing talent
retention is not easy at private equity
managers, and certainly not in operations.
If a key person leaves, it jeopardises the
manager’s entire operations. This is not a
risk at administrators,” he said.
Corporate governance: Starting from
scratch
Corporate governance in the hedge fund
industry came under intense criticism
during the crisis, as investors admonished
directors for nonchalantly signing off on
manager decisions to implement gates
and redemption suspensions depriving
clients of much needed liquidity. Inves-
tors in hedge funds at the time described
their concerns being routinely ignored by
directors, with most of the opprobrium
being reserved for offshore providers.
Investors highlighted a number of
offshore directors sat on a large number
of boards, leading to concerns about
whether they had the bandwidth or re-
sources to effectively do their job. While
the rent-a-director model has in no way
disappeared, hedge funds – at the behest
of institutions – are appointing more
independent board members and fewer
jumbo directors, although many investors
acknowledge greater progress is required.
Private equity corporate governance
– according to one institutional investor –
has historically been borderline non-ex-
istent, although this is partly because of
how the funds are structured rather than
anything untoward. Experts point out
that the illiquid nature of private equi-
ty means that investors are often given
better protections than what they would
receive elsewhere in other asset classes.
It is not uncommon, for example, for private equity manag-
ers to have investor advisory committees signing off on certain
transactions where there may be a potential conflict of interest
risk, or reviewing portfolio company valuations where appro-
priate. With such high levels of investor oversight, the need
for independent board directors becomes less apparent. This
position, however, is now being revisited amid revelations about
poor fee controls and expense misallocations at some private
equity managers.
“The amount of regulatory work which has now been loaded
onto private equity businesses is too much for a single CFO
to handle.”
DAVID BAILEY, CO-FOUNDER, AUGENTIUS
Some say the recent scandals and SEC fines cement the need
for independent board oversight at private equity. The migra-
tion of hedge fund investors who take governance seriously
into private equity is prompting calls for reform too. “Corporate
governance within private equity firms has improved ever since
the Walker Guidelines were released, but it has also been driven
by industry efforts fronted by the BVCA and the Private Equity
Reporting Group,” commented Steve Langton, managing direc-
tor, alternatives sector, at State Street.
To date, private equity has, however, been less accommodative
than hedge funds around implementing independent board
oversight, mainly because exits have been strong and most man-
agers are oversubscribed. This may yet change in time if returns
fall in the saturated deal-making marketplace, just as it did with
hedge funds.
Private Equity Issue 2018
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