“You still need skilled
professionals and talented
people with experience in
the hedge fund industry
to manage the processes.”
Monette Windsor
How have valuations changed in
recent years?
Calleja: We had seen some traditional hedge funds dabbling in the
private equity space. We also expect to see more use of third party
service providers in assisting managers with valuations. With the rise
in private equity, with the traditional hedge fund managers dabbling
into the space, we see as service providers more traditional managers
needing to enhance their in-house infrastructure to be able to deal
with valuing a private investment.
There’s been a lot of talk around advisory committees on private
equity funds and there’s a well understood process of frequency
of board meetings for hedge funds, which is the less complex, the
more liquid asset class versus private equity where you have assets
which are based on largely investment manager’s assumptions. Fund
governance and valuation controls aren’t always present especially
with emerging private equity players. This is an opportunity for the
jurisdiction to service those private equity funds.
Bodden: As managers, who historically offered hedge products,
continue to seek additional sources of alpha we have seen an
increased willingness to invest in private or thinly traded securities.
This has only served to increase the complexity around the valuation
process and as mentioned previously, sometimes requires third party
expertise to augment the manager’s existing processes.
I would also agree there has been increased discussion around advisory
committees, however in our view the concept has not been widely
adopted in the private equity space. In those instances where it has
been implemented, it is either investor driven or where a manager who
traditionally offered hedge products is now launching a PE type fund.
10 CAYMAN FUNDS | 2018
These managers benefit from replicating the efficient hedge fund-like
governance structure which provides added comfort to investors in
the form of independent oversight of the service providers in general.
They also benefit from the independence that can be demonstrated
around conflict resolution, review of fund documents or other areas
where the investors feel independence is required.
Cook: Independent directors or an independent board can help resolve
many issues in a variety of situations. I’ve heard of instances where private
equity funds have not had any independent governance mechanism in
place, but there’s been a limited partner’s advisory committee that has
been constituted with representatives of some but not all limited partners.
There have been situations where an issue has arisen and certain
individual members have not been able to give an opinion on committee
matters because they’ve got their own vested interests to consider. This
can cause the committee’s usefulness to be severely restricted.
This is a gap that could be quite easily be filled by independent people
but the message I’ve received is that until everyone recognises that
there’s a need to do something differently they’re sticking with the
status quo.
Pierce: We have seen an increase in valuation activity, on the private
side, but typically where there is a contentious issue requiring the
valuation of a particular security or a basket of securities. We’ve seen
a lot more uptake in the merger space, with dissenting shareholders
and section 238 applications.
Windsor: Not only do we see the continuing trend of private equity
launches, but we’re seeing a trend in hybrid funds—funds that were
typically hedge funds or fund of funds, are now allocating a part of
their portfolio to private equity investments. Traditional private equity
structures are closed-ended, so although there are regular valuations,
investors won’t receive the money until the sale or end of each
investment. But if you’re an open-ended hedge fund with some
private equity investments, your portfolio is a mixture of liquid and
not-so-liquid investments.
“Given the number of existing
managers, new entrants
struggle to attract capital.”
Chris Bodden