“The recent changes are
probably a clear indication
that the regulators are
serious.” Kendell Pierre
Investors want to make sure they’re getting good value for their
money and the industry’s getting very fee-sensitive.
Guilfoyle: For the PE funds specifically the AML compliance officer is
responsible for doing procedures on the underlying assets as well. That
becomes a lot more difficult with those PE investments as opposed to
hedge funds. The PE side is a completely different kettle of fish.
What are the challenges around
valuations as more PE firms
emerge and funds also implement
new structures?
Farrington-McSweeney: On the valuation side specifically in the
context of the PE funds, the AML clarification says you have to do due
diligence, on the service providers, the products and so forth. We’ve
seen a lot of issues around valuation in the PE space.
A lot of them are investing in real estate, for example. We are finding
a lot of unusual assets in PE funds that are hard to value.
Some PE funds hold one asset for 10 years, so it’s closed and then
once the asset matures it pays out. Clearly that’s less risky than a PE
fund that’s investing in alternative assets. The issues we are seeing
coming out of the PE industry are primarily valuation, existence and
custodianship, as well as the third party service providers.
We didn’t have that in hedge funds because everything was listed or
was done by a broker over the counter that we could see, but we’re
now getting into an industry that is not as transparent as previous
industries. We have increased valuation risk but also on the regulatory
side if those investment managers aren’t regulated.
Rossiter: Doesn’t it start with the structure? In terms of valuations
the only times you care, apart from fraud, is when you buy and when
you sell that fund, so as long as you set up the structure correctly that
should be your focus.
Cook: Investors typically want 100 percent transparency through the
portfolio of the PE fund, whereas in the hedge fund they wouldn’t.
Murray: I would say that the vast majority of PE clients are blue chip
who are not dealing in ‘art’; it is providing private placements in public
companies with household seminal tech names.
Pierce: I agree with the comments about transparency. But although
the trade in some respects has been unusual, unseen, unknown, in
fact it’s the opposite in many ways.
When you go into a PE fund, you know precisely what you’re
investing in. You know what the duration of the fund is, you know
how long the investment is going to be held for, that there could
be following on investments and so on. I don’t think from a legal
perspective it’s problematic.
The question is around the difficulties with valuing the assets when
do you need to value them, and whether you have the right people
who can do that exercise. So I don’t really see this as particularly
problematic.
What innovations are we seeing
in the funds market?
Guilfoyle: There has been the rise of artificial intelligence (AI) and
managers implementing that into their strategies but, I do ask how’s
that different from a box that you built to trade previously. There’s
been a lot of systematic trading strategies out there for a number of
years, now you are calling it AI, but it’s pretty much the same.
There are new asset classes but in terms of how managers do
what they do, I haven’t seen a lot of change. The infrastructure that
managers put in place and the quality of the service they put in place
definitely has increased. It is a minimum expectation from investors
looking to invest and then it all comes down to performance.
It’s difficult to start up, it’s far more costly than say going back 15,
20 years ago where you might have had two guys with a machine and
they suddenly have $100 million and everyone’s just pouring money at
them. Those days are gone, there has been a flight to quality and the
investment manager industry is definitely proof of that but as regards
to how people do what they do, I haven’t seen a lot of changes in that
for 10 years.
Murray: The biggest change is fee structures and how they’re
calculated. And you do need technology to calculate these rather
complex calculations that a human cannot.
Smith: We’ve seen a lot of the segregated portfolio companies
(SPCs) that offer bespoke investment opportunities for an individual
investor’s needs. If smaller managers are really struggling to break
into the space, are they then using SPC structures?
One of the things we’re looking at from a regulatory perspective
is this increase in SPCs where managers can implement a bespoke
strategy without having to then set up a standalone fund.
Guilfoyle: Well, it’s cost-effective. That’s the whole idea behind the
SPC initially. You can have multiple managers, and it can save fees.
It is one of the tools Cayman has for emerging managers who are
struggling to maybe put the full fund structure in place where they can
have itemised fees for itemised investors. It’s a very costly industry to
get into otherwise.
Leadbetter: Being on a platform with other emerging managers in
an SPC enables the investment managers in those individual cells to
build up their track record with lower overheads, do a good job raising
CAYMAN FUNDS | 2019