Asset Management Benchmarking - Governance

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1 Benchmarking Insights s asset management perspectives and analysis Asset Management Benchmarking - Governance

2 Contents Section Page # 1 Introduction and Survey Demographics 3 2 Governance 7 2

3 Introduction and Survey Demographics 01 Section 3

4 Introduction Alternative asset managers continue to face a challenging environment amidst pressure from competitors, regulators, and investors. To help respond effectively to these demands, s Asset Management practice is delighted to publish results from our Alternative Asset Management Benchmarking Series designed to gather, analyze, and share information about key industry trends and metrics. In this report, we present the results from our Governance survey addressing selected practices for hedge funds and private equity funds around governance. Other topics covered in our Benchmarking Series include practices and selected metrics related to Valuation and Fund Administration. In total, 42 alternative firms participated in our benchmarking study. Because of the number of participants and the diverse nature of alternative asset managers, these results should not be considered representative of all alternative asset management firms. Where possible, managers were segmented into three different organization types based on their dominant strategy: Hedge Funds Organizations that have more than 50% of their AUM in hedge fund strategies such as long/short equity, multi-strategy, credit, etc. Private Equity Organizations that have more than 50% of their AUM in private equity strategies such as buy-out, venture capital, growth, distressed PE, etc. Other Organizations that have more than 50% of their AUM in fund-of-fund strategies, or indicate they are a business development company We hope that you find these results interesting. 4

5 Survey Demographics Number of Funds Managed Assets Under Management More than 30 funds 33% Fewer than 10 funds 29% Greater than $20 billion 24% Less than $5 billion 48% funds 38% $5-20 billion 28% Type of Organization Primary Domicile of Funds Other 12% Hedge Funds 55% Cayman 33% Private Equity 33% US 67% Other include BDCs and Fund of Funds 5

6 Advisor s Office Locations 14% Northern California 2% Denver 7% Chicago 62% New York 2% Delaware 19% Boston 7% Connecticut Texas 7% D.C. Metro 7% Southern California 5% Atlanta Florida NOTE: Advisors were given the option to select multiple locations, therefore percentages will not sum to 100% 6

7 Governance 02 Section 7

8 Committee Meeting Frequency Percent of Advisors with Committee Meetings Monthly Quarterly Semi-annually, annually, or ad-hoc 0% 25% 50% 75% 100% Valuation 33% 48% Investment 26% 2% 21% Observation: The vast majority of organizations represented in this study have a valuation committee (90%); of those firms, about 30% meet monthly. Regulatory and Compliance Risk Executive 14% 24% 21% 5% 12% 21% 14% A considerable number (over 20%) of organizations investment and risk committees are meeting on a monthly basis. Advisory 7% 31% Audit 5% 14% 8

9 Average Fund Board Composition Average Fund Board Composition (out of 100%) 38% 50% All Respondents Observation: In an effort to limit conflicts of interest, fund boards include a balance of individuals that are both affiliated with the advisor (advisor representatives), and independent to the fund (non-executive directors). 4% 8% Firms in this study cite having more non-executive directors (50%) vs. representatives from the advisor (38%) on their boards. Representatives from the advisor Non-Executive Directors Consultants/Legal Other 9

10 Fund Board Membership Additions All Respondents Hedge Funds Private Equity Does the board have formal procedures to appoint new board members? Yes 58% Yes 68% Yes 36% Observation: About 70% of hedge funds say they have a formal procedure to appoint new board members. Only 36% of private equity firms have these formal procedures. The reference to private equity boards includes Limited Partner Advisory Committees. 10

11 Governance for Domestic and Offshore Funds (Hedge Funds) Does the Advisor have a fund board or its equivalent over domestic and/or offshore funds? Domestic Funds Offshore Funds Yes No 23% 77% 77% 23% Observation: 77% of participating Hedge Funds cite having a fund board overseeing their offshore funds vs. only 23% with domestic (U.S.) fund boards. Bearing in mind, the majority of offshore funds are domiciled in the Cayman Islands, this variance is no surprise given Cayman law requires a board of directors to oversee the fund. 11

12 Valuation Committee Composition Which of the following groups are represented on the valuation committee? (Select all applicable) Chief Financial Officer Portfolio Managers/Analysts Chief Compliance Officer 62% 69% 77% Observation: It is common for alternative asset managers to rely on executives such as the CFO and CCO to monitor the valuation process undertaken by operations and trading personnel this is demonstrated by 77% and 62% of firms, respectively. Legal Operations 46% 44% Valuation/Product Control Chief Risk Officer Other Traders Fund Administrator Independent Members 28% 23% 13% 3% 12

13 Valuation Practices & Analysis What analysis is provided to/reviewed by the valuation committee? (Select all applicable) Does the valuation committee review and approve the valuation practices? Fair Value Models/Analysis Third Party Valuation Reports Illiquid Securities 59% 54% 85% Yes 90% Listing of Fair Valued Investments 51% ASC 820 Leveling 33% Pricing Error/Tolerance Reports 33% Stale Price Reports Management Overrides Crossing Transactions Pricing Vendor Review Documentation 13% 13% 31% 28% Answers for Other described: Detailed comprehensive write-up Changes to valuation methodologies Other Look-Back Testing The Valuation Committee is provided a valuation package for each investments that includes the history of the investment and the current valuation calculation Disclosures (e.g. sensitivity analysis) Stress Testing 3% 13

14 Risk Function % of Respondents with a Dedicated Risk Function 75% If none, where does the risk function reside? All Respondents Hedge Funds Private Equity 50% 23% 3% 29% 15% 38% 5% 23% 11% 5% 8% 5% All Respondents Hedge Funds Private Equity NOTE: This question does not distinguish between enterprise-wide risk vs. investment risk Internal Audit Front Office Middle Office Back Office NOTE: Multiple selections were allowed, therefore percentages will not sum to 100% Observation: In order to comply with enhanced governance and regulation, alternative firms are focusing on risk more than ever before. 50% of participating firms say they have a dedicated risk management function, driven largely by hedge funds (75%). The other half of the participant pool, indicate that the greater part of their risk personnel sit in the front office. This demonstrates how integrated risk management is with the investment process. 14

15 Compliance Function % of Respondents with a Dedicated Compliance Function 100% 90% 79% All Respondents Hedge Funds Private Equity Observation: All hedge funds and nearly 80% of private equity firms cite having a dedicated compliance function. A dedicated compliance function may include a compliance framework designed to establish ethical and regulatory guidelines for the organization, and a designated Chief Compliance Officer to manage a compliance program. Furthermore, the Dodd-Frank Compliance Program Rule requires an investment advisor to adopt and implement formal written compliance and supervisory policies and procedures.¹ The few private equity firms that cite not having a dedicated compliance function are most likely venture capital firms that qualify for the exemption from registration as an investment advisor provided by the Dodd-Frank Consumer Protection Act. As a result, they are also exempt from the need to establish a dedicated compliance function in their organization.¹ ¹: A Closer Look, The Dodd-Frank Wall Street Reform and Consumer Protection Act 15

16 Contacts Leadership Mike Greenstein - Alternatives michael.s.greenstein@us.pwc.com Benchmarking Insights Kristin Francisco - Alternatives kristin.francisco@us.pwc.com Liz Pelan - Alternatives elizabeth.r.pelan@us.pwc.com This report is for general purposes only, and is not a substitute for consultation with professional advisors. It is intended for internal use only by the recipient and should not be provided in writing or otherwise to any other third party. PricewaterhouseCoopers has not independently verified the accuracy or completeness of the information presented herein, gives no express or implied warranties, including but not limited to any warranties of merchantability or fitness for a particular purpose or use, and shall not be liable to any entity or person using this document, or have any liability with respect to this document. 16

Investment Adviser Registration Overview 2012

Investment Adviser Registration Overview 2012 Bart Mallon January 2012 San Francisco 150 Spear Street, Suite 825 San Francisco, CA 94105 Telephone (415) 352 23002300 Fax (646) 619 4800 New York 8 West