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Benchmarking Insights
July 2015
www.pwc.com/ambenchmarking
PwC’s asset management perspectives and analysis
Asset Management Benchmarking - Governance
PwC
Contents
Section Page #
1 Introduction and Survey Demographics 3
2 Governance 7
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July 2015Asset Management Benchmarking | Alternatives
Section
PwC
Introduction and Survey Demographics
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Introduction
Alternative asset managers continue to face a challenging environment amidst pressure from competitors, regulators, and investors. To help respond effectively to these demands, PwC’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.
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Survey Demographics
Fewer than 10 funds29%
10-30 funds38%
More than 30 funds33%
Number of Funds Managed
Less than $5 billion48%
$5-20 billion28%
Greater than $20 billion
24%
Assets Under Management
Hedge Funds55%
Private Equity33%
Other12%
Type of Organization
US67%
Cayman33%
Primary Domicile of Funds
Other include BDCs and
Fund of Funds
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Advisor’s Office Locations
62%New York
19%Boston
7%Connecticut
14%Northern California
7%Chicago
10%Florida
10%Texas
7%SouthernCalifornia 5%
Atlanta
7%D.C. Metro
2%Delaware
2%Denver
NOTE: Advisors were given the option to select multiple locations, therefore percentages will not sum to 100%
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Section
PwC
Governance
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Committee Meeting Frequency
PwC Observation:
The vast majority of organizations represented in this study have a valuation committee (90%); of those firms, about 30% meet monthly.
A considerable number (over 20%) of organizations’ investment and risk committees are meeting on a monthly basis.
33%
26%
14%
24%
10%
5%
48%
2%
21%
5%
10%
7%
10%
10%
21%
14%
12%
21%
31%
14%
0% 25% 50% 75% 100%
Valuation
Investment
Regulatory and Compliance
Risk
Executive
Advisory
Audit
Percent of Advisors with Committee Meetings
Monthly Quarterly Semi-annually, annually, or ad-hoc
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Average Fund Board Composition
38%
50%
4%8%
Representatives fromthe advisor
Non-ExecutiveDirectors
Consultants/Legal Other
Average Fund Board Composition (out of 100%)All Respondents
PwC 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).
Firms in this study cite having more non-executive directors (50%) vs. representatives from the advisor (38%) on their boards.
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Does the board have formal procedures to appoint new
board members?
Fund Board Membership Additions
58%
All Respondents
PwC 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.
Yes
68%
Hedge Funds
36%
Private Equity
Yes Yes
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PwC
Governance for Domestic and Offshore Funds (Hedge Funds)
PwC 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.
23% 77%Domestic Funds
Does the Advisor have a fund board or its equivalent over domestic and/or offshore funds?
Yes No
77% 23%Offshore Funds
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Valuation Committee Composition
77%
69%
62%
46%
44%
28%
23%
13%
10%
10%
3%
Chief Financial Officer
Portfolio Managers/Analysts
Chief Compliance Officer
Legal
Operations
Valuation/Product Control
Chief Risk Officer
Other
Traders
Fund Administrator
Independent Members
Which of the following groups are represented on the valuation committee? (Select all applicable)
PwC 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.
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Valuation Practices & Analysis
85%
59%
54%
51%
33%
33%
31%
28%
13%
13%
10%
10%
10%
3%
Fair Value Models/Analysis
Third Party Valuation Reports
Illiquid Securities
Listing of Fair Valued Investments
ASC 820 Leveling
Pricing Error/Tolerance Reports
Stale Price Reports
Management Overrides
Crossing Transactions
Pricing Vendor Review Documentation
Other
Look-Back Testing
Disclosures (e.g. sensitivity analysis)
Stress Testing
What analysis is provided to/reviewed by the valuation committee? (Select all applicable)
90%
Does the valuation committee review and approve the valuation practices?
Yes
Answers for “Other” described:
• Detailed comprehensive write-up
• Changes to valuation methodologies
• The Valuation Committee is provided a valuation package for each investments that includes the history of the investment and the current valuation calculation
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Risk Function
50%
75%
23%
All Respondents Hedge Funds Private Equity
% of Respondents with a Dedicated Risk Function
PwC 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.
3%
29%
5%11%
15%
5% 5%
38%
8%
23%
Internal Audit Front Office Middle Office Back Office
If none, where does the risk function reside?
All Respondents Hedge Funds Private Equity
NOTE: This question does not distinguish between enterprise-wide risk
vs. investment risk
NOTE: Multiple selections were allowed, therefore percentages will not sum to 100%
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Compliance Function
90%100%
79%
All Respondents Hedge Funds Private Equity
% of Respondents with a Dedicated Compliance Function
PwC 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
¹PwC: A Closer Look, The Dodd-Frank Wall Street Reform and Consumer Protection Act
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PwC Contacts
Leadership
Mike Greenstein - Alternativesmichael.s.greenstein@us.pwc.com
Benchmarking Insights
Kristin Francisco - Alternativeskristin.francisco@us.pwc.com
Liz Pelan - Alternativeselizabeth.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.
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