The heatwave and the storm: managing investor sentiment in the changing PE market


The heatwave that has gripped much of the Northern hemisphere over the summer months provides a neat metaphor for the current state of the global private equity and real estate industry. Just as Europe and North America have sweltered under record temperatures and aridity, ‘very hot and exceedingly dry’ more or less summarises the state of the alternative investment market.

Despite a slight ebb in Q2 of 2018, firms are raising money at a pace and level not seen since before the financial crash. According to Preqin, 2017 saw a massive 20 per cent increase in funds under management, the highest rate of annual growth ever recorded by the analyst, bringing the industry’s total AUM to over three trillion USD. The average fundraising period has now fallen to 12 months, half of what it was in 2010.

This is all quite understandable considering that the industry has frequently posted double-digit returns in a post-crash era marked by a paucity of yield. However it has led to a situation where the flow of money is fairly one-way. The amount of ‘dry powder’ has increased in lockstep with AUM growth, rising 24 per cent in 2017 to a record level of 1.1 trillion USD – with some estimates putting the figure as high as 1.5 trillion. The trend has become self-perpetuating: fund managers have more and more capital, with less and less attractive options for spending it, which only pushes deal values higher, continuing the cycle.

As such, and despite the overall buoyancy of the sector, firms may be about to enter into a tricky phase which will take skill to navigate. Paper gains are all very well and good, but ultimately don’t mean anything until they convert to actual gains via exits. The risk now is that the fierce competition for investment opportunities will inflate deal valuations to the point of seriously impacting returns. And while this might be a short term phase to allow for market rebalancing, investors who are used to outperformance from the sector – or have recently moved into the sector, drawn by the allure of double digit returns – may find such a dip difficult to stomach.

Good investor relations come easily when the returns are flowing, but should there be a period of tightening, trust and confidence will need to be sourced from elsewhere. Communication will be of critical importance. Constant talk of squeezed returns due to overpricing will make it more crucial than ever that managers are able to clearly, regularly and efficiently provide information on portfolios, explaining the situation and their strategy – ensuring that sentiment is managed and that key relationships don’t become a casualty of the changing environment.

In fact, boom times or not, investors have been agitating for greater transparency into their investments for a number of years. The industry has done some good collaborative work to respond to this. Notably, trade body ILPA’s common reporting template is beginning to catch on (a laudable case of being ahead of the regulator, which is consulting on a mandatory fee template of its own). However there is still a way to go, and while standardisation of this sort will certainly improve things, it doesn’t help provide the granular, customisable information of the sort LPs are increasingly hungry for.

And on a firm-by-firm basis, there is still a long way to go. Despite a recent wave of investment in technology, some parts of the industry remain relatively low-tech relative to their peers in finance, with much of this visible in the area of investor communications. Too many firms still rely on outmoded, simplistic updates delivered via PDF or email.

While this may have sufficed in the less heavily regulated, less formal PE industry of old, in the modern environment it means one of two things: damaging relationships, or creating obscene amounts of unnecessary cost and work in the process of responding to ever-more complex and idiosyncratic investor demands (or worse, both). A recent survey of Augentius’ clients across the globe revealed that only half of managers were providing their investors with enough information on a routine basis, without investors having to make additional requests. Concerningly, one in five investors reporting never receiving the additional information they requested – which hardly inspires confidence. And what’s somewhat damaging to relationships now could be fatal during a period of lower returns and investor anxiety.

The barriers to solving the problem are far more cultural than financial or technical. Well-tested and relatively low-cost platforms exist now that can automate much of the reporting process, allowing for far more in-depth, frequent and granular information to be sent to investors. This can be tailored to exactly what investors want and need – without any corresponding increase in cost and effort for fund managers (indeed there is often a net saving given the efficiency gains).

Nonetheless, the gradual pace of change on this front may not be quick enough. Should the long summer of private equity be able to give way to a storm, the need for gold standard investor relationships will become one of survival rather than advantage. Storms have a way of separating the wheat from the chaff.

First Published in Alt Assets, September 4th

FCA backs increased cost disclosure for Private Equity and Real Estate Managers


Last year, the FCA set up the Institutional Disclosure Working Group (“IDWG”), chaired by academic Dr. Chris Sier, to come up with ways to address a lack of uniformity in the disclosure of fund management charges. The group was formed in response to one of the main findings of the FCA’s asset management market study namely that institutional investors such as pension funds and insurers found it difficult to get the necessary cost information to make effective decisions.

The IDWG was established as a stakeholder working group comprising of a range of experts, including the BVCA, with an independent chair, Dr Chris Sier. Its objective to “gain agreement on (cost) disclosure templates for asset management services provided to institutional investors”. A range of experts were selected and invited to join the IDWG with support from several observers and a secretariat provided by the FCA. Approximately 40 per cent of the group comprised institutional investors and their advisers, 40 per cent asset managers and 20 per cent independent experts with a range of backgrounds.

Over the summer, IDWG published its initial recommendations, which included:

  • The use of five templates (including a private equity fund template) for collecting and disclosing data;
  • The arrangements that need to be in place to ensure the templates are maintained;
  • Proposals on how asset managers can be encouraged to offer information using the templates; and
  • Proposals on how more investors can be encouraged to request information in this format from their managers.

The FCA welcomed the IDWG recommendations “We believe that the group has made significant progress in tackling the issues we found in relation to institutional disclosure as part of the Asset Management Market Study”.

The full report and templates are due to be published in the autumn. As part of its proposals, the IDWG has encouraged the formation of a new body or group to maintain and update the framework to be formed over the summer also with a launch planned for autumn, when the full report will be released. The publication of the new templates was delayed in order to allow the new monitoring group to be established in order to act as a Helpdesk and Information Hub for Firms seeking information on how to incorporate the templates into their processes. Unlike the IDWG, the new group will not be overseen and facilitated by the FCA. The IDWG was chaired by Sier, but it is not yet clear whether he will be invited to sit on or chair the new body, although it is understood there is strong support for him holding a role within it.

The IDWG also recommended ways to encourage adoption of the templates voluntarily including urging investors to pressure managers to use them. “Typically, this would be by non-compliance resulting in de-selection from requests for proposal and the non-renewal of contracts,” the group said, adding that investment consultants and platforms should also take this approach. Members of the UK’s Local Government Pension Scheme (LGPS) already apply this approach, the group said. The schemes existing transparency code has succeeded in encouraging most of the biggest providers to public sector pension funds to report all costs, and the IDWG’s work built on the disclosure templates drawn up by the LGPS. “Industry representative organisations and trade bodies should be prepared to adopt the templates as their disclosure codes and to support the use of the templates by their members,” the group said.

Private equity managers that complete the Institutional Limited Partners Association (“ILPA”) fee template do not need to also complete the IDWG fee template following BVCA representations that its members should not have to complete multiple templates. The ILPA is a voluntary association funded by its members and published its fee template on 29 January 2016. The ILPA has grown its membership to more than 4,500 professionals today across 50+ countries, managing 50% of the global institutional private equity AUM. Members represent all investor categories of small and large institutions including public pensions, corporate pensions, endowments, foundations, family offices, insurance and investment companies, development financial institutions and sovereign wealth funds.

Although the working group stopped short of calling for regulation, it said the FCA should enforce regulations if managers fail to report voluntarily. The FCA responded by stating “We will reconsider the issue of disclosure to institutional investors in the future if we have any reason to be concerned about the effectiveness of how the IDWG recommendations have played out in the market.” The ILPA template published in early 2016 has been adopted partially by a significant number of UK private equity managers but full adoption of the template in its entirety is far from widespread. Therefore, many managers will face a difficult decision in the autumn whether to fully adopt the ILPA template or the new IDWG template in the knowledge that if a significant number of managers choose neither then the FCA could bring in mandatory disclosure requirements in the near future.

If you would like to discuss the practical implications of the IDWG recommendations or to arrange a free Regulatory Outlook consultation, please contact the Augentius Compliance Team here.

Cayman Islands – Anti Money Laundering Regulations – Deadline 30 September


Cayman AML – Augentius’ Solution for Unregulated Funds

30 September 2018 is the last day for existing Cayman funds to comply with the requirements of the Cayman’s Anti-Money Laundering Regulations 2017 (Amended 2018) which extended the coverage of the previous regulations on the subject to also capture unregulated funds.

This impacts Boards of fund managers operating unregulated Cayman funds.

The New Regime

The practical impact for the Board of fund managers of unregulated funds is that they have new sets of obligations and procedures around Anti-Money Laundering/Combatting the Financing of Terrorism, (“AML/CFT”) which extends beyond just undertaking CDD/KYC on their investors.

These include:

  • Implementing a corporate governance framework that addresses AML/CFT requirements and demonstrates that the Board have control and oversight of their business.
  • The appointment of a competent Money Laundering Reporting Officer (“MLRO”) and Deputy Money-Laundering Reporting Officer (“DMLRO”) as a part of a formal AML/CFT reporting process to competent authorities integrated into the fund manager’s activities.
  • The appointment of an Anti-Money Laundering Compliance Officer (“AMLCO”) to maintain AML/CFT policies and procedures and undertake ongoing review of their effectiveness to assist the Board who remains ultimately responsible.
  • Adoption of a risk-based approach in managing AML/CFT Risk requiring identification, assessment and mitigation of AML/CFT risk associated with business relationships, including formalisation of an AML/CFT risk appetite.
  • Ongoing monitoring of Investors, including screening and periodic risk assessment.
  • Maintenance of AML/CFT and Compliance records on Investors and associated business counterparts.
  • Director / Employee AML/CFT training (as necessary).
  • Director / Employee risk screening.

It should be recognised that the Board cannot avoid their obligations and remain responsible irrespective of delegation, outsourcing and contracting arrangements.

The Augentius Solution

Augentius, as a fund administrator operating in a number of regulated jurisdictions, is experienced in delivering AML/CFT regulatory solutions and managing the ever-changing regulatory environment.

Having undertaken an evaluation of the market and our clients’ needs, Augentius has developed a group-wide solution for its clients with its preferred service provider.

As part of an AML/CFT administration package, Augentius and its preferred service provider are able to provide individuals to hold the MLRO, DMLRO and AMLCO positions and the necessary AML/CFT framework described above (“the Cayman AML Framework”) along with Investor Due Diligence services.

Where Augentius provides Investor Due Diligence services on Cayman structures a standard information pack can be provided setting out how Augentius and its preferred service provider will assist the client with their new obligations to provide a complete solution.

A standard introduction pack to the preferred service provider and details on their service and delivery can be made available on request along with contact details of the relevant personnel at the provider who will be happy to explain the offering.

The use of Augentius’ preferred service provider resolves the complexity of identifying a suitable third party, the basis of engagement between the parties and its implementation. Our solution is competitively priced and straightforward to arrange.

Augentius’ preferred service provider arrangement is subject to Augentius being engaged to undertake the administration of the fund and is not separately available.

Effective dates

For Funds existing before 1 June 2018, the deadline for compliance to the new requirements is 30 September 2018.

Where Funds have been registered on or after 1 June 2018 the requirements are effective immediately.

Next Steps

If you want to know more about Augentius’ solutions, please reach out to your usual contact at Augentius.