If you have investors redeeming, the fund will liquidate assets, and
the remaining investors may be left with a less liquid portfolio. That’s
when it can be a grey area, where you need to get guidance from the
investment managers and directors on how to proceed.
Blackmore: One of the things I look for when a fund structure is being
launched is if the redemption terms reasonably match the liquidity of
the investments, which is even more important in a traditional hedge
fund than a private equity fund where there is limited ability to redeem.
I’m seeing more special situations funds where it might make sense to
move an asset into its own SPV so you have that protection that the last
investor standing isn’t bearing all of the risk of an illiquid investment.
In terms of governance on private equity funds, it is a much slower
uptake and depends on the investor base and if those investors are
saying ‘we want some independence here’. But it is encouraging to
see an increase in independence on the boards of private equity funds
and hopefully this trend will continue.
Thomas: The investors that have the weight to move funds towards
appointing independent directors are the ones that are sitting on the
limited partner advisory committee (LPAC) anyway where they will
be reviewing and approving valuations. In a sense, when considering
independent governance, the valuation is irrelevant in the private
equity context where it’s all about realisations.
There would be other factors that might drive a manager towards
considering independent governance. The SEC has carried on
levying fines against private equity funds, where they have looked
into allocation of investments between fund vintages, managers
taking transaction fees, monitoring fees and so on. If you’ve run that
decision-making progress past an independent director it strikes me
that you’re in a much better position when the SEC comes knocking.
Have fees and their structures
changed in recent years?
Calleja: There is a lot more customisation. Investment firms are
struggling to figure out how they can still be efficient while addressing
the needs of individual investors. It’s more about selling the solution
that the investor wants. What’s their liquidity appetite? What’s their fee
appetite? We are seeing more use of SPC structures for that reason.
Windsor: Managers are under a lot of pressure and they are looking for
their own internal operational efficiencies. They’re looking to outsource as
much as they can to avoid having to employ a large number of employees.
Instead of having their own staff doing a lot of manual work or processing,
they are looking to outsource to a service provider. We’re doing much more
for the investment managers, whether it’s business process outsourcing,
or doing the heavy lifting of collecting and processing data.
A hot topic in the industry right now is artificial intelligence (AI), which
managers are interested in. As a fund services company, we want to make
ourselves more efficient so that we can still be profitable off the shrinking
fees. Maybe AI and robotics are going to revolutionise not only the way
investment managers work internally but also their service providers.
I’m not concerned that it’s going to decrease the jobs in Cayman
Islands because the jobs the robotics and AI would replace left the
jurisdiction years ago. You still need skilled professionals and talented
people with experience in the hedge fund industry to manage the
processes and face the clients, and Cayman is well placed as a
jurisdiction to attract and retain that kind of talent.
Pierce: We haven’t seen as much pressure on fees, perhaps they’ve
just come down to a comfortable level and people are not negotiating
quite as much.
Certainly we are seeing new products coming online. It’s horses for
courses. If you’re new and don’t have much of a track record, then you
probably have to shave a lot off your management fee. On the other
hand, the large managers who have a lot of capital can afford to lower
that fee or be more efficient. There’s been a bit of fluctuation here and
there but I don’t think it’s dramatic.
Thomas: In private equity there’s been the haves and have nots. In
2017 we had the largest fund ever raised and the largest aggregate
amount of funds raised in a year in history and we’ve now got close
to three trillion in assets under management which is the highest it’s
ever been. And there’s a record amount of dry powder sitting there
and waiting to be deployed.
Pierce: We have seen capacity rights being extended where a fund
says it will close at X and actually the investors just want to invest
more, so managers are having to extend the initial time period and/or
the actual capacity granted to investors.
Thomas: General partners have all of the power on economic terms
because the fundraising market has been so buoyant. But in a high
price environment coupled with undeployed capital, if you’ve got
managers doing deals just because they’ve got the dry powder (and
not because the price is right) and they get a lower return as a result, or
if managers are not doing deals and investors are paying management
fees on undrawn capital, it’s going to be interesting to see whether in a
year or two from now, that pendulum shifts in investors’ favour.
How might technology and
innovation change the industry?
Cook: The largest managers can afford investment towards new
technology, whereas the small ones for these cost efficiency
discussions we’ve already had aren’t able to respond.
Calleja: Managers are trying to figure out do we invest the money and
self-automate internally or do we outsource. Depending on where you
are on the spectrum, which is generally driven by size, that’s where
the investment is taking place or not.
“We need to figure out very
quickly how we develop
those informed messages.”
11 CAYMAN FUNDS | 2018