Benchmarking Insights PwC’s asset management ...PwC Governance for Domestic and Offshore Funds (Hedge Funds) PwC Observation: 77% of participating Hedge Funds cite having a fund

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

2

July 2015Asset Management Benchmarking | Alternatives

Section

PwC

Introduction and Survey Demographics

013


PwC

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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PwC

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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PwC

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

027


PwC

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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PwC

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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PwC

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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PwC

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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PwC

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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PwC

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?


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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PwC

Compliance Function

90%100%

79%


% 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

PwC Contacts

Leadership

Mike Greenstein - [email protected]

Benchmarking Insights

Kristin Francisco - [email protected]

Liz Pelan - [email protected]

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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Documents

Benchmarking Insights PwC’s asset management ...PwC Governance for Domestic and Offshore Funds (Hedge Funds) PwC Observation: 77% of participating Hedge Funds cite having a fund