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Supporters
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Guernsey Finance
The PEI
Fund Administration
and Technology
Compendium 2010
june 2010

B e l g i u m C y p r u s g u e r n s e y H o n g K o n g H u n g a r y J e r s e y l u x e m B o u r g m a u r i t i u s t H e n e t H e r l a n d s n e w y o r K s i n g a p o r e

Editor’s letter
Welcome to Private Equity International’s
Private Equity Fund Administration and
Technology Compendium 2010.
The landscape for fund administration
has changed since our last compendium.
The fallout from the global recession
continues to push fund managers towards
greater transparency and accountability,
and major financial regulatory overhauls
are also threatening to require a much
higher level of disclosure from GPs.
New custody regulations in the US
The PEI
Fund Administration
and Technology
Compendium 2010
will impose transparency and compliance
requirements on GPs that will make third
party administration more of a necessity
than a choice, as Jenna Gottlieb writes
on p.4.
Meanwhile, some of the proposals
in the European Union’s Directive on
Alternative Investment Fund Managers
would demand enhanced transparency
and thus reporting as well as additional
compliance and risk management
obligations from GPs. As Alain Kinsch
and Kai Braun of Ernst & Young write on
p.29, fund administrators can help GPs
who find themselves at their wits’ end
trying to comply with these rules.
Peter Niven of Guernsey Finance
notes that offshore jurisdictions with
excellent regulation and infrastructure
can gain ground with fund
administrators despite the challenges
presented by the AIFM directive and
uncertainty over European corporate
tax rates. The endorsement of Guernsey
by several prominent private equity
firms and the jurisdiction’s status on
the OECD “white list” mean that it will
be able to weather tougher regulations
coming out of the EU.
As Ogier writes on p.8, LP
demands for increased accountability
and transparency could exacerbate
the trends set in motion by these new
regulations. The Institutional Limited
Partners Association’s private equity
guidelines elevate good and timely
reporting to “must-have” status. Ignoring
those demands comes with a heavy
price, as David Haarmeyer writes on
p.26 – impairing your firm’s brand, and
potentially crippling your ability to raise
your next fund.
Kevin Ley set up a conference call
with three finance professionals at
US private equity firms to get a sense
of how GPs are handling heightened
transparency requirements. Some are
turning to more sophisticated technology
products to manage information flow
– but installing an off-the-shelf system
is often fraught with challenges, as Ley
writes on p.13.
All of these pieces make up a picture
that is decidedly positive for the fund
administration industry. As George
Sullivan and Iain Stokes of State Street
note on p.18, as recently as three years
ago, consultants were estimating that only
15 percent of private equity assets were
administered through third party entities.
Today, this proportion has doubled to the
realm of 30 percent of assets. It looks as
though that figure will continue to rise in
the years ahead.
Enjoy,
Jennifer Harris
Editor
A Private equity international publication 1

Contents
Senior Editor, Private Equity
Amanda Janis
Tel: +44 20 7566 4270
amanda.j@peimedia.com
Editor, Private Equity International
Toby Mitchenall
Tel: +44 20 7566 5438
toby.m@peimedia.com
Editor, PrivateEquityOnline
Christopher Witkowsky
Tel: +1 212 633 1072
christopher.w@peimedia.com
Supplement Editor
Jennifer Harris
jennifer.h@peimedia.com
Contributors
Kevin Ley
rkevley@gmail.com
David Haarmeyer
dhaarmeyer@gmail.com
Jenna Gottlieb
jenna.g@peimedia.com
Editor-in-chief
David Snow
Tel: +1 212 633 1455
david.s@peimedia.com
Editorial Director
Philip Borel
Tel: +44 20 7566 5434
philip.b@peimedia.com
Head of Marketing
Paul McLean
Tel: +44 20 7566 5456
Paul.m@peimedia.com
Design and Production Manager
Joshua Chong
Tel: +44 20 7566 5433
joshua.c@peimedia.com
Head of Design and Production
Tian Mullarkey
Tel: +44 20 7566 5436
tian.m@peimedia.com
Group Managing Director
Tim McLoughlin
Tel: +44 20 7566 4276
tim.m@peimedia.com
Co-founders
David Hawkins
Tel: +44 20 7566 5440
david.h@peimedia.com
Richard O’Donohoe
Tel: +44 20 7566 5430
richard.o@peimedia.com
Head of Advertising
Alistair Robinson
Tel: +44 20 7566 5454
alistair.r@peimedia.com
Head of Business Development
Jeff Gendel
Tel: +1 212 633 1452
jeff.g@peimedia.com
• Fund administration overview 4
Game changers in fund administration
These five forces are likely to permanently
alter the landscape of the fund
administration industry. Luckily, most will
likely encourage greater maturity in the
industry, as good fund administration is
becoming a requirement rather than just
“gravy”.
• Expert commentary 8
The new best practices
The ILPA principles and the IOSCO report
raise the bar for governance, transparency,
and reporting. Ogier discusses how fund
administrators can help.
• Roundtable discussion 13
Adopting new technology
Three finance professionals at US
private equity firms discuss how they
use technology to enhance reporting.
Upgrading from Excel to a more
sophisticated system can help – but it
can also mean more headaches and
diminishing returns.
• Expert commentary 18
What’s next for fund administration
George Sullivan and Iain Stokes of State
Street outline the top trends that will
drive GP adoption of third party fund
administration.
• Investor relations 23
‘Stale unfunded’ commitments
In a capital-starved market,
communicating the status of ‘stale
unfunded’ commitments to LPs is a
winning way to forge strong relationships
and free up new commitments.
• LP service 26
Building an IR brand
As the private equity industry matures, a
strong and distinctive investor relations
function is proving its worth, especially in
a down market.
• Expert commentary 29
How to succeed in Europe
Best-in-class European fund managers
will want to follow the current status and
future trends of the private equity fund
administration market. Alain Kinsch and
Kai Braun of Ernst and Young describe
what’s driving the market, and what
services GPs should be offering.
• Reporting 32
What LPs want
GPs will be need to go further to raise
funds today. PEI spoke with LPs about
what’s important to them in terms of
reporting and transparency.
• Expert commentary 34
What’s next for Guernsey
Peter Niven of Guernsey Finance talks
about the challenges ahead for the
offshore jurisdiction – and how Guernsey
can grow in this challenging environment.
2 THE PEI Fund administration and technology compendium | june 2010

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Feature: fund admin
Game changers in fund administration
In the past 12 months, these five forces have altered the landscape
of private equity fund administration. Jenna Gottleib reports
From new regulations to pressure from lower management
fees, new forces have buffeted the world of fund
administration in the. Here are five changes that have both
GPs and outsourced service providers rethinking their
approach.
1. Cost pressure
In tough economic times, more firms are looking to
outsource their fund operations as a way to reduce costs.
Newly empowered LPs, however, are willing to foot the
outsourcing bill. The result is GPs are increasingly having to
negotiate outsourcing expenses with LPs.
Fiduciary Compliance Associates principal Charles Lerner
told PEI this year that the first thing GPs need to do when
allocating expenses is look at the offering memorandum.
“That will spell out what expenses the advisor or the general
partner pays for and what expenses the fund pays for,” he
said. “But then you have to look and see, does this benefit
the fund or does this benefit the advisor? Because the advisor
is getting paid money to manage the fund, and his expenses
– office space, computer, things like that – are really their
expenses.”
One controller said that generally believing that fund
administration is something that can always be charged
back to the fund is not always the right way to look at it,
especially when “grey areas” come up. “A grey area would be
when your document doesn’t specifically say that you can
do that, that you can reimburse yourself,” he said. “If you
have a grey area it is very difficult unless it had been required
of your investors to make the case that it should be a fund
expense. You could have two or three [internal] people for
half the price of an administrator, so I think an administrator
is an expensive charge, which is why managers are so hesitant
to charge that back sometimes.”
Traditional back office operations such as bookkeeping
are areas that are clearly borne by the management company,
but not when a firm is required to get a CPA to do its
yearly audit of financial statements. “Those cost are without
question viewed by the industry as being borne by the
fund regardless of whether it is a CPA firm in the States or
elsewhere,” said Jerry Chacon, a fund formation lawyer at
Goodwin Procter.
2. Consolidation
Consolidation in the fund administration market has stepped
up considerably over the past several months. Administrators
that are looking to focus resources elsewhere or are wary to
commit to new technology are accounting for the current
wave of consolidation, according to a fund formation lawyer.
2010 has seen some notable deals. In April, JP Morgan
Worldwide Securities Services (WSS) bought the private
equity administration services business of Schroders for an
undisclosed sum. WSS has $15.3 trillion in assets under
custody and $6.5 trillion in funds under administration.
Schroders has $240 billion under management.
Schroders’ private equity administration business
was initially developed to support Schroder Ventures, an
in-house private equity business that is no longer part of
the Schroders Group, and later expanded into third-party
administration.
BNY Mellon and State Street also picked up new
administration business this year. In February, BNY Mellon
agreed to acquire PNC’s global investment servicing business
for $2.31 billion, including the purchase of $1.57 billion
of stock and repayment of intercompany debt from PNC.
PNC’s investment servicing business provides custody, fund
accounting, transfer agency and outsourcing solutions for
asset managers and financial advisors.
The acquisition added $855 billion in assets under
administration, including $460 billion in assets under
custody, to BNY’s platform. The deal doubled the number
of funds serviced for accounting and administration.
State Street announced in January that it acquired
Mourant International Finance Administration (MIFA),
a smaller European competitor based in Jersey. Bostonheadquartered
State Street, which provides fund accounting
and administration services, took over MIFA’s 650 employees
and $170 billion in assets under administration in Europe
and Asia.
“Our primary objective was to get into markets where
we didn’t have market share,” said Jack Klinck, global head
of State Street’s alternative investment solutions team. Up
until now the core of State Street’s administration activity
has centred on the US.
MIFA was owned by the partners of Jersey-based
4 THE PEI Fund administration and technology compendium | june 2010

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Feature: fund admin
law firm Mourant du Feu & Jeune, who, following the
transaction continued on as a separate entity focused solely
on law.
3. European regulation
The EU’s proposed Alternative Investment Fund Managers’
directive could prove costly for GPs in terms of time and
money.
“If the directive passes, it would bring new annual
reporting requirements to investors and regulators,”
according to a fund formation lawyer.
The directive would bring additional offering
memorandum disclosure requirements and regulatory
reporting about assets in which funds are invested, he said.
Ongoing compliance costs will rise for funds directly or
through their service providers.
One-off compliance costs could rise by between €110
million and €2.2 billion in total for private equity, hedge
funds and venture capital, according to an impact assessment
commissioned by the European Parliament.
A previous impact study by the UK Financial Services
Authority said that EU regulations could impose one-off
compliance costs of up to €3.2 billion, while a report
released by London-based research organisation Open
Europe estimated that that additional compliance costs
could total as much as €1.9 billion in the first year of
implementation and €985 million annually after that.
EU fund managers would also have
to hire independent valuators and
depositories to hold assets in segregated
accounts.
If all or even some of the new
transparency measures above become
law, hiring an outsourced fund
administrator will start to look very
appealing.
commentators say.
The new rules, which the SEC were spurred by several
enforcement actions it has brought against “investment
advisors and broker-dealers alleging fraudulent conduct,
including misappropriation or other misuse of investor
assets”, create a stricter custody regime in order to better
protect clients’ assets from misuse, and to uncover fraud
earlier. The SEC estimates that, advisors incur additional
compliance fees of $8,100 annually.
One finance professional at a private equity firm said:
“Although we keep our LPs’ assets with a bank custodian,
the mere fact that we direct them to pay fund expenses
causes us to fall under the rule. This is especially difficult
when you have a fund with only one remaining but illiquid
asset.”
With the complications presented by the new rules,
private equity firms who were previously self-administered
are turning to third party administrators to make life easier.
5. New and better “seals of approval”
In the last twelve months several private equity funds
of funds, including Adveq, HarbourVest, and Capital
Dynamics, completed the thorough and expensive SAS
70 audit.
While SAS 70 has been around for decades, it has rarely
been undertaken by private equity managers. It is typically a
process that third party fund administrators who have custody
“Although we keep our LPs’ assets with a bank
custodian, the mere fact that we direct them to
pay fund expenses causes us to fall under the
rule. This is especially difficult when you have a
fund with only one remaining but illiquid asset.”
4. US custody rules
The US Securities and Exchange Commission last year
made a number of amendments to the Investment Advisors
Act of 1940 – specifically Rules 206(4) and 204-2, and
Forms ADV and ADV-E. The changes impose a number
of burdens on RIAs, more of whom would be subject to
annual surprise audits, disclosure requirements regarding
assets under management and some client information, and
more extensive record-keeping rules. The costs associated
with these changes could put small firms out of business,
of client assets would undergo. But Capital Dynamics and
HarbourVest both said they went through the third-party
review due to increasing requests from their investors.
There are two types of SAS 70 audits, one which
measures the rigour of a firm’s internal controls at a point in
time, and a lengthier type which measures the effectiveness
of those controls over a period of time.
The downside is the audit process can be time-consuming
and expensive. Both Type I and II can cost up to $100,000
each. But for firms that want to be seen as best in class by
LPs, they may find it is time and money well spent. •
6 THE PEI Fund administration and technology compendium | june 2010

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Expert commentary: Ogier
Stepping up your game
Best practices and corporate governance –
how your administrator can help
Jane Pearce
Tim Morgan
All those involved in the raising of private
equity funds, their investment, and their
administration, know that the private equity
landscape has dramatically changed over
the last two years. While the private equity
industry waits to learn the outcome of the
fierce debate over the EU AIFM directive,
there have been more recent changes to
recommended best practice to concern us.
The role of the independent administrator
is changing as the private equity industry
moves from a largely self-regulated
environment to one where a framework
of valuation principles, best practice,
transparency and corporate governance will
be required. These dynamics have now been
added to by the recent issue of two sets
of guidelines: the ILPA Principles and the
IOSCO Report (as defined below).
This article considers various patterns
that are emerging for private equity in the
context of the current economic climate and
the ILPA principles and the IOSCO Report.
New principles for private equity managers
In September 2009, the “Private Equity
Principles” were introduced by the
Institutional Limited Partners Association
(ILPA). ILPA represents more than 215
member organisations worldwide managing
approximately $1 trillion of private equity
assets with a view to increasing best practice
from a private-equity investor perspective.
The ILPA Principles were closely followed in
November 2009 by a consultation report on
“Private Equity Conflicts of Interest” by the
Technical Committee of the International
Organisation of Securities Commissions
(IOSCO Report). The ILPA Principles and
the IOSCO Report have been introduced
against the backdrop of the financial crisis
which itself has also been a catalyst for a
number of evolving trends in the private
equity funds market.
ILPA Principles
The ILPA Principles cover a number of areas
of private equity including best practices and
preferred terms.
The document is divided into three parts.
The first part summarises best practices in
private equity partnerships and focuses on
three themes:
(i) Alignment of interest between
manager and investors;
(ii) Corporate governance; and
8 THE PEI Fund administration and technology compendium | june 2010

Expert commentary: Ogier
(iii) Transparency.
The second and third parts of the
document set out specific fund terms in more
detail. The second part covers (in Appendix
A) the three themes summarised above
and establishes specifically recommended
“The role of the independent administrator is
changing as the private equity industry moves
from a largely self-regulated environment
to one where a framework of valuation
principles, best practice, transparency and
corporate governance will be required”
“Private Equity Preferred Terms”. The last
part (Appendix B) describes limited partner
advisory committee (LPAC) best practices
through formation, meeting protocol, LPAC
duties and LPAC member responsibilities.
We will focus here on Appendix A’s Private
Equity Preferred Terms (PE Preferred
Terms).
(i) Alignment of interest
This portion of the PE Preferred Terms,
dealing primarily with economics, focuses
firstly on carried interest and distribution
cascades. It recommends, as standard, a
model of all contributions plus preferred
return being paid back first as best practice.
This is a model which has traditionally been
treated as a “European” model. Where a
deal-by-deal model (the traditional North
American standard) is chosen, PE Preferred
Terms suggests features such as a return of
all fees and expenses (rather than just pro
rata for the realised investment); valuation
of all unrealised investments at lower of cost
or market; and carry escrow accounts with
standard reserves in order to cover clawback
liabilities.
The PE Preferred Terms then cover
management fees and expenses, suggesting
that a fee model based on reasonable
operating expenses and salaries be provided
at fund formation, with a significant stepdown
upon formation of a follow-on fund
and at the end of the investment period.
Placement agent fees and general partnership
insurance should be borne entirely by the
GP.
On the theme of alignment of interest,
the PE Preferred Terms then move to
non-economic considerations, such as
suggesting that fund term extensions be
permitted in one-year increments only, that
the GP have substantial cash invested and
that principals be restricted from transferring
their ownership of the GP.
The PE Preferred Terms also mandate
no subsequent fund closing until after the
investment period and predisclosed, pro rata,
co-investment arrangements.
(ii) Governance
The second theme following alignment of
interest is governance. The PE Preferred
Terms takes issue with provisions which
attempt to constrain GP fiduciary duties such
as allowing the GP to reduce all fiduciary
duties to the fullest extent allowed by law;
allowing the GP to use its sole discretion
in weighing its own self-interest against the
interests of the fund and obliging LPs to
acknowledge and waive broad categories of
conflicts or affiliated transactions (something
quite common in investment-bank-sponsored
funds). In addition to recommending
avoidance of these practices, the PE Preferred
Terms also suggest presenting all conflicts to
the LPAC for prior approval of any material
conflicts and all affiliate and non-arm’s length
transactions.
The PE Preferred Terms also tackle the
problem of “style drift” from investment
purpose, suggesting that any changes
to investment strategy be disclosed and
approved by an LP supermajority.
The PE Preferred Terms recommend no
fault rights: (i) upon LP majority-in-interest
approval for suspension of the investment/
commitment period and termination of
the commitment period, and (ii) upon LP
two-thirds-interest approval for GP removal
and fund dissolution. The PE Preferred
Terms also place reliance on checks and
balances such as an independent auditor,
A Private equity international publication
9

Expert commentary: Ogier
“Fund managers
need to be
aware of the
increased
scrutiny by
investors as a
result of the
emerging trends
in realignment
between buyside
and sellside
interests”
independent counsel and LPAC oversight.
Appendix B sets out LPAC best practices,
including formation, membership,
rights to call meetings, creating agendas,
quorum and voting protocols, minutes of
meetings, reimbursement of expenses and
indemnification, decision reporting to LPs
generally and general duties (including audit,
conflicts, GP operations and costs disclosure,
LPA compliance, personnel changes and
valuation policy and practices). Your
administrator will be able to offer support
and guidance on converting best practice into
operational reality.
(iii) Transparency
The third and final area covered by the PE
Preferred Terms is transparency, which
requires that fund marketing materials
should include values for unrealised
portfolio companies in prior funds including
explanations of values that deviate from
audited statements; performance information
using both IRR (gross and net as well as
derivation) calculations and multiple of
invested capital modelling; benchmarking;
descriptions of any pending or threatened
litigation and disclosure of agents and
sub-agents. Many of these requirements are
not expected to present significant challenges
in the context of current Channel Islands
regulatory requirements, particularly in
light of the extensive due diligence which is
increasingly common from sophisticated LPs.
The PE Preferred Terms also look for
greater transparency relating to the GP and
the management company. For example,
organisational structure and arrangements
of the fund, GP, affiliates and principals
should be specifically disclosed as part of due
diligence including capitalisation of the fund.
Again, many of these issues are already being
currently requested by LPs in due diligence
questionnaires.
Ongoing reporting transparency is
another PE Preferred Terms area of concern.
Detailed quarterly reports (within 45 days
of quarter-end) should cover such aspects as
P&L statements and year-to-date results; GP
expenses; management discussion of changes
over quarter; and explanation of valuation
changes. Detailed annual reports (within
75 days of year end) should cover audited
financial statements including a number of
items which are referred to in Appendix A.
Surprisingly, the PE Preferred Terms fail to
cover the issue of side letters in any detail.
IOSCO Report
This report set out to identify the risks
and prevent these where possible in the
structure of a typical private equity fund.
The IOSCO Report travels through the
typical life of a private equity fund and
sets out the inherent risks at each stage. It
suggests the disclosure of all remuneration
arrangements at the fund raising stage, clear
terms, increased negotiation and verification,
ongoing reporting and further independent
reporting. The IOSCO Report was open for
consultation until 1 February 2010 and the
report is due to be finalised once comments
have been considered. At the time of writing
(May 2010) it remains to be seen whether
any changes will be made due to comments
received during the consultation process.
Effect on fund structures going forward
Fund managers need to be aware of the
increased scrutiny by investors as a result
of the emerging trends in realignment
between buy-side and sell-side interests.
It is likely that the entrenchment of these
trends in fundraising by the issuing of the
ILPA Principles and the IOSCO Report will
lead to changing terms in private equity and
greater negotiations in relation to their terms.
Since the credit crisis, investors have had
much greater bargaining power and it is clear
that if the terms of offer are not adjusted
to recognise the new market paradigms,
investors will be unwilling to make an
investment commitment. The more dynamic
wealth managers have begun to use fund
structuring techniques as an opportunity to
access new capital and it is likely that those
who are attuned to meeting revised investor
expectations will be most successful in raising
new funds.•
10 THE PEI Fund administration and technology compendium | june 2010

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Whether you are a new fund manager or an established player, Ogier’s fund
administration service has the expertise to deliver a proactive and flexible
approach to even the largest and most demanding fund structures.
Contact us:
Jane Pearce - Group Director
Jersey/London
jane.pearce@ogier.com
+44 (0)1534 753806
Michael Lombardi - Partner Ogier Legal
Jersey
michael.lombardi@ogier.com
+44 (0)1534 504280
‘Offshore Law Firm of the Year, 2008 and 2009’
British Legal Awards
‘European Legal Services Provider, 2009’
ICFA
‘Top Offshore Law Firm, 2009’
Alpha Awards
‘IFC Legal Team of the Year, 2009’
STEP Private Client Awards
‘Overall Private Funds Law Firm of the Year, 2009’
ACQ Global Awards
‘International Law Firm of the Year, 2009’
Citywealth Magic Circle Awards
‘Best Offshore Law Firm, 2009’
HFMWeek European Service Provider Awards
‘Offshore Law Firm of the Year, 2008’ (Europe and USA)
Hedge Fund Journal
www.ogier.com
Bahrain • British Virgin Islands • Cayman Islands • Guernsey
Hong Kong • Ireland • Jersey • London • Tokyo

Company profile: Ogier
Ogier Alternative
Fund Administration Services
Ogier’s Investment Funds Team specialises in the provision
of offshore full administration and legal services for private
equity, real estate, mezzanine and listed funds. We are
strategically located in nine key jurisdictions: Bahrain, BVI,
Cayman, Dublin, Guernsey, Hong Kong, Jersey and London.
We distinguish ourselves by offering a commercially
minded, client-focused, responsive and flexible service,
through an experienced and established team. With more
than 100 administrators and 80 investment fund lawyers
we have the strength and depth to handle the largest,
most demanding and complex offshore investment fund
transactions.
Ogier Fund Services currently administers over 5,000
investment structures globally which in aggregate have
attributable funds under management exceeding $200
billion. In the last three years we have acted in relation to
over 1,500 offshore investment vehicles and have significant
experience with alternative investment funds.
Services include:
Fund launch / establishment
• Development of the fund structure and
establishment of the fund vehicles
• Liaison and coordination with legal counsel,
regulators and placement agents
• Obtaining regulatory approval
• Client due diligence checks
• Administration of closing
Corporate offshore administration
• Offshore company incorporations /
establishment of partnerships and trusts
• Offshore registered office, registered agent,
secretarial and registrar and transfer agent services
• Provision of offshore resident directors
and trustees
• Agent for service of process.
• Escrow / nominee services
Contact
Ogier Fund Administration Team
Administration and accounting
• Treasury services
• Calculation of performance and incentive fees
• Financial and management reporting
(IFRS, US GAPP, UK GAPP)
• Audit management
• Consultancy and support services
Listing Services
Ogier Corporate Finance Limited offers listing services
to the CISX through our Jersey and Guernsey offices
and acts as a sponsor in relation to the listings on the
Exchange of debt securities, investment funds, trading
companies and other securities
Ogier Fund Legal Advisers
Bob Banfield
Managing Director
Guernsey
Colin Mackay
Partner
BVI/ Cayman / Hong Kong
Jane Pearce
Partner
Jersey/ London
Michael Lombardi
Partner
Jersey
Caroline Chan
Partner
Guernsey
E: bob.banfield@ogier.com
T: +44 (0)1481 752327
E: colin.mackay@ogier.com
T: +1 345 815 1775
E: jane.pearce@ogier.com
T: +44 (0)1534 753806
E: michael.lombardi@ogier.com
T: +44 (0) 1534 504280
E: caroline.chan@ogier.com
T: +44 (0) 1481 752215
12 THE PEI Fund administration and technology compendium | june 2010

Reporting technology roundtable
No easy solution
PEI spoke to three private equity finance professionals about
how advances in fund administration technology are creating
just as many questions as answers. Kevin Ley reports
PEI: Have you upgraded your
technology solutions recently in
response to any administration
needs that have come up?
John Malfettone
Tim Smith
Technological advances have
traditionally been seen as positive
– every innovation making life a
bit easier. But for private equity
managers, the advancement in
technology solutions for fund
administration has in some ways
made their job harder. Many
are asking themselves whether
there really is a “perfect” solution
for their fund and how much
transparency they may be
sacrificing in the future. Private
Equity International set up a
conversation with John Malfettone,
chief operating officer and chief
compliance officer for Oak Hill
Capital, Tim Smith, chief financial
officer for Conversus, and the
senior finance leader (SFL) for a US
middle-market fund (who asked
to speak off the record) to get
their perspectives on how they are
dealing with the rise of technology
in fund administration.
JM: As I think about upgrading
our technology, I’ve been going
to conferences and talking to
other CFOs and COOs to inform
myself about what is new in the
market. My sense is that there
really is no panacea, no perfect
system out there. The technology
for our industry has developed
into a situation where there are a
number of different players with
different options, and whatever
you select requires significant
customisation to get it to work.
With many of these out-ofthe-box
accounting or operating
systems, there is still a lot of work
that you have to do. And then the
trap you fall into is that once you
start customizing the technology,
the next time there is a new
release it becomes highly possible
that your product won’t work
anymore with that new release. So
I think the lesson is to be wary of
out-of-the-box solutions because
it’s an oxymoron, they don’t exist.
SFL: We’ve had an Excel-based
solution for traditional private
equity. About five years ago we
started to invest an approximately
$2 billion fund and that was
A Private equity international publication
13

Reporting technology roundtable
the pivotal point of thinking about
whether we wanted to switch to a
different system, and I think our main
issue was that in 2005 there were not a
lot of players out there, the landscape
was much more limited. I think it was
much more of a time commitment
than we were focused on. We were
a pretty small group at that point,
and when you got to the level of
customisation needed for a waterfall
calculation, for example, we really
found there was limited utility for a
system.
JM: The two things that add the
most complexity to our business
are the number of LPs, meaning
the number of unique names and
addresses and contacts that you have
“There is a significant trade-off between
transparency and efficiency, and we are
all in an environment where time is
extremely valuable.”
to maintain and send information
to, and the number of legal entities.
About a year ago I actually did a
survey on this and when you look at
the cost of accounting and finance it
is highly correlated with those two
factors. Firms with a large number of
LPs and legal entities generally require
technology solutions to make their
processes faster and more reliable.
TS: I will echo what John said in
that the problem here is customisation.
Our investors are clamouring for more
and more information as expected, so
it is important to have a system that
can track everything that goes on in
our portfolio. We spend a lot of time
customising reports so we can get the
information in a certain way … but,
the outputs are only as good as the
inputs. As we all know in this industry
there is little standardisation – one GP
may report something one way and
another may report the same event in
a different way. So, we spend a lot of
time customising, and when you spend
that amount of time you are kind of
stuck with what you have and it is hard
to go back and unwind everything to
change systems on a routine basis.
PEI: For those of you who are
registered, are there products you are
looking at that would make an SEC
examination, for example, go more
smoothly in the future?
JM: I would start by assessing your
e-mail archiving system. It is important
to have the ability to perform efficient
key word searches, and to segregate
and log privileged communications.
There is software in the market that
provides that capability, and although
these products are somewhat nascent,
this type of software is becoming more
commonplace.
SFL: Part of our business is
registered, and we have found that
the e-mail vendors are extremely
difficult to deal with. We are on our
third vendor in only a year’s time,
and getting history in there and other
things seems a very difficult thing to
do, just time-consuming and pricey.
The problem with the first vendor
was we could not get any history at
all, there were too many e-mails. We
only had to do it from registration
onward, which was back in 2008, so
you wouldn’t think it would be that
much for a pretty small firm, but it
was too much for them to handle. For
the second vendor the issue was if I
typed the words “insider trading” in
an e-mail, and it got replied to eight
times, each of those e-mails would
get flagged. You would go in and have
14 THE PEI Fund administration and technology compendium | june 2010

Reporting technology roundtable
thousands of e-mails flagged, and
only 150 to 200 of them might be
original e-mails, and it was incredibly
cumbersome. So we shopped around
and did a lot more research on the next
system, and found one that deals with
that, but it also still has issues with
getting all the history in there. So there
doesn’t seem to be a perfect solution.
PEI: What should firms that will be
registering in the future be doing now?
SFL: An e-mail system is required,
when the SEC wants a certain word
looked up. What we have tried to do is
create a better way to tag our research
and keep track of our research, so
we have put in this system known
as Tamale which helps codify our
research. All the research can be pulled
together in a much easier fashion and
put in a supporting deck and archived.
So now we have our rationale for, if
you get accused of insider trading, you
can refute it by showing there were no
communications with the person you
are alleging, and here is a 100-page
deck that outlines our investment
rationale.
JM: If you are registered, people
who have access to confidential,
non-public information must pre-clear
every time that person, their spouse
or anyone living in their home wants
to execute a trade. The volume of that
activity and the auditing required to
check compliance is pretty significant.
We put in a security trading system
to automate that process and the back
end controls that go along with it.
PEI: From your perspective is
there a point where it is not cost
beneficial for middle-market firms
to be implementing more expensive
technology solutions?
JM: It depends on how complex
you are—there is a point where
complexity can overwhelm your Excel
solutions. I think a lot of it is driven
by the information requirements of
your LPs: what information they want
and how quickly they want it. I find
that the part of TheNextRound that
“Our investors are clamouring for more
and more information as expected, so it is
important to have a system that can track
everything that goes on in our portfolio”
we liked, and I know InvesTran has
the same thing, is an extranet. It is
an information delivery mechanism
preferred by most of our LPs. In
addition, it is process and cost efficient
since we were able to eliminate
copying, collating and sending out
thousands of pages of information
every quarter.
SFL: We use IntraLinks. We had a
fund with approximately 100 LPs and
a bookkeeper that was literally sitting
and PDF-ing each one and posting
it to IntraLinks, which is hugely
inefficient. With the way IntraLinks
has upgraded its technology, it takes
“That depends on how complex you are;
there is a point where complexity can kind
of overwhelm your Excel solutions”
five to six minutes to post all the
capital statements for a much larger
fund, so the process has gotten 150
times better.
PEI: Is there a trade-off between
transparency and efficiency as these
A Private equity international publication
15

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June 22 - 23, 2010 | New York
At this conference, leading private fund managers who are responsible for compliance
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The forum will focus on how the Registered Investment Advisors Act and other
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For more information or to register go to:
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Reporting technology roundtable
solutions become more complex?
TS: There is a significant trade-off
between transparency and efficiency,
and we are all in an environment
where time is extremely valuable.
We need efficiency to save costs and
provide meaningful data, which is why
these systems have necessarily become
more cumbersome.
SFL: In Excel you have a bit more
of a transparent solution, which may
be a bit more cumbersome and not
as efficient. You can see your Excel
spreadsheet from column A to column
M, down to row 400, and if you have
the proper levels of review you should
be able to catch things in there. The
less transparent you get – because
“With many of these out-of-the-box
accounting or operating systems, there
is still a lot of work that you have to do.
And then the trap you fall into is once
you start customisation, the next time
there is a new release it is highly possible
that your product doesn’t work anymore
with that new release.”
or service perspective. For example,
with most service providers, you have
to give them notice of capital calls a
certain number of days in advance,
but we have the in-house capability to
turn around a capital call in a day. And
with respect to HR and IT, like many
PE firms, we strive to provide tailored
services on an immediate basis as needs
arise. We found that for this kind of
“high touch” service, it costs you more
to outsource HR and IT.
TS: We outsource our accounting
and administration work and there
is no doubt that it is more expensive
for us to do that as opposed to try
and bring it in-house. At some point
we will get large enough that it will
make sense for us to have our own
internal team to manage the processes
and to take over more control. It’s
part of the natural evolution. The
trade-off of outsourcing is in the
cost, accountability and efficiency.
However, whether you outsource
or in-source, you still have the
accountability. Overall, technology in
all parts of our businesses is changing
rapidly and you have to be thoughtful
about any changes you make.•
things are built into a system where
you kind of have to trust the data a
little bit – the more tendency people
have to become reliant on the system.
It is a dangerous place to go.
PEI: What is your position on keeping
things in-house vs. outsourcing and
have you changed your budgetary mix
recently?
JM: Last year we looked at every
area, including accounting, HR and IT.
We found that outsourcing services to
one of the large accounting companies
would not prove beneficial from a cost
Malfettone is partner, chief operating
officer and chief compliance officer
for Oak Hill Capital Management, a
middle-market private equity firm which
last year raised $3.8 billion for its third
fund.
Smith is chief financial officer for
Euronext-listed fund of funds Conversus,
which had $91 million of distributions in
the first quarter of this year.
A Private equity international publication
17

Expert commentary: State Street
What’s next for fund administration
George Sullivan
Iain Stokes
In the wake of the financial crisis, the private equity industry is
undergoing tentative recovery and the initial phases of structural
evolution. In this environment, limited partners are demanding
new transparency, robust systems and scalable global solutions.
Third-party administrators will play a critical role.
By George Sullivan and Iain Stokes of State Street
The private equity industry is
emerging from the downturn in dealmaking
that took place during the
global financial crisis. After sharply
rising from less than $100 billion
in 2003 to $500 billion in 2007,
US leveraged buyout deal values
collapsed to less than $20 billion in
2009. The surge in global liquidity
in the years before the crisis created
what many believe was a “golden
age” for the private equity trade. But
the decline of global real estate prices
and of markets for mortgage-backed
securities and collateralised debt
obligations abruptly shut off liquidity
taps, restricting credit to private
equity.
Despite the general decline in
risk appetite and valuations in public
markets over the course of the
financial crisis, investors kept their
faith with private equity. According
to a recent survey from Preqin,
fully 65 percent of respondents said
that they intend to maintain their
allocations during 2010, while a
further 22 percent actually expect
to increase their allocations this year.
Over the longer term, the majority
of investors intend to either maintain
or increase their allocations over the
next three to five years.
While deal markets in 2010 have
begun a tentative recovery, with new
launches and markedly improved
prospects over one year ago, the
outlook for private equity – an
industry largely defined by the credit
environment – is not easy to predict.
One thing seems certain; the private
equity market that existed amid the
great risk rally of the past decade
is unlikely to return any time soon.
We can already observe a shift in
the industry’s center of gravity,
with limited partners increasingly
in the driver’s seat, dictating deal
terms and defining many aspects
of general partner operations, fund
administration and day-to-day
business.
Structural impediments to growth
Even as economic recovery takes
hold and deal activity inches upward,
prospects for new fundraising are
being inhibited by structural factors
inside the industry. GPs today are
sitting on a mountain of capital that
was committed during the boom
years but remains uninvested. This
“dry powder”, which may total up
to $1 trillion, set aside for buyouts,
venture capital and real estate, may
take several years to deploy.
Another industry constraint is
the restrained appetite for new deals
on the part of limited partners such
as pension funds, endowments and
other institutional investors. While
investors in industry polls have
expressed continuing interest in
private equity investment and the
uncorrelated returns that it can offer,
for many LPs, their allocations to
PE remain at the upper-end of their
allocation limits.
18 THE PEI Fund administration and technology compendium | june 2010

Expert commentary: State Street
The culprit here is the “denominator effect”, by
which the proportion of total allocations dedicated to
private equity shot up as the value of LPs’ public equity
allocations plunged in the market crash of 2008 and
2009. This effect left many institutional investors overexposed
to private equity, short-circuiting their carefully
optimised portfolios. While this phenomenon abated
substantially with the recovery of equity markets in 2009
and 2010, many LPs are waiting until public markets
recover further before allocating fresh capital to private
equity.
It’s safe to say that the financial crisis has changed
the way that institutional investors interact with general
partners. In the years before the financial crisis, LPs were
content with GP reporting that gave a general overview
of investments and risk. Today, by contrast, LPs are
much more interested in the fine-print details. Within LP
organisations and boards, risk management has taken on a
new primacy. They want their private equity investments
to come bundled with high-value, timely and granular
information on investments, performance and risk
exposures.
And of course the nature of LPs continues to evolve.
Increasingly, these investors represent large pension and
endowment structures and so have an inherently greater
appetite for investment detail. Private equity, for these
institutional investors, is becoming a mainstream strategy,
offering long-term, uncorrelated returns, reduced
exposure to business cycle risk and a durable track record
across multiple investment cycles.
The move to third-party administration
In the wake of the financial crisis, general partners are
increasing the speed of their migration to third-party
administration. Post-crisis, the industry expects to see
fewer mega-buyout deals and an increasing proportion
of activity dedicated to more nuanced deal types in
selected industries and geographic regions. This means
that general partners will need to broaden their offerings
to accommodate a variety of private equity activity.
Third-party administrators, because they have experience
with many different kinds and sizes of deals in multiple
jurisdictions, can bring forward niche expertise and
knowledge of regional idiosyncrasy.
As recently as three years ago, consultants were
estimating that only 15 percent of private equity assets
were administered through third-party entities. Today,
this proportion has doubled to the realm of 30 percent
of assets. Generally speaking, this trend is more advanced
in Europe than it is in the United States. In Europe, GPs
make greater use of onshore/offshore structures and so
use third-party administrators to avoid having to selfadminister
in multiple jurisdictions.
The decision to employ third-party administration
is largely driven by the practical fact that private equity
chief financial officers find it difficult to keep up with the
accelerating demands of managing fund administration
in-house. Leading third-party administrators tailor
administration to the needs of individual funds. In some
cases, they provide support and targeted deliverables; in
others they assume all the duties of a fund chief financial
officer.
Third-party administration is also being driven by
limited partners and regulators that are increasingly
demanding that funds provide greater transparency,
information access, robust operational infrastructure and
reporting capabilities similar to those found in traditional
public equity
One thing seems
certain; the private
equity market that
existed amid the
great risk rally of
the past decade
is unlikely to return
any time soon.
investment
classes.
As private
equity enters
the mainstream,
general partners
encounter
mainstream
expectations for
service delivery
and clarity.
Investors in
mutual funds,
institutional asset management and hedge funds express
vast demands for information. Increasingly, limited
partners in private equity also want to “interrogate” their
information. They want to cut and dice, model and
interact with their data in multiple ways.
Industry-leading administration
The decision to outsource administration doesn’t
come easily. For good reason, general partners are
concerned about the security of their proprietary data,
accountability, cost efficiencies and stability. Historically,
the quality of third-party administration has been
variable. In consequence, a second wave of industry
migration is underway. The first decision to outsource
is largely a matter of industry momentum. Post-crisis,
investors want the surety and checks-and-balances that a
third-party administrator can provide.
But given the new diversity of deal structures and the
aggressive migration of deal activity around the world,
A Private equity international publication
19

Expert commentary: State Street
LPs are undertaking a flight to quality among third-party
administrators. General partner engagement of thirdparty
administration is a substantial commitment. The
relationship can be “sticky” and GPs want to know that
their administrators will offer industry-leading service,
will evolve this service over time
and, most importantly, will be in
business several years down the road.
In this regard, the balance sheet
of the third-party administrator’s
parent corporation has become a
major component in the decision.
As with the custody and
administration of public market
investments decades ago, private equity administration
today is undergoing a winnowing, with powerful
forces driving consolidation. As demand for detail and
timeliness in third-party administration has accelerated,
administrators are climbing a steep growth curve and
encountering expensive industry and regulatory demands
for operational infrastructure and technology. Today,
limited partners’ request-for-proposal processes include
detailed questionnaires focusing on infrastructure, failsafes,
backups, audits, and an increased emphasis on
diverse client references.
This proliferating complexity has triggered
administrators to merge in an effort to leverage global
scale. What has emerged is a new animal – a massive,
multi-market, multi-strategy private equity administrator
that can deliver state-of-the-art infrastructure and highvalue
services all over the world.
In a difficult fundraising environment, GPs want
to be able to tell clients and prospects that their
administrator has infrastructure, jurisdictional reach,
embedded knowledge and a strategic oversight of private
equity that is truly global. And as private equity has
become increasingly intertwined with other strategies
(for example with hedge funds participating as limited
partners), GPs can benefit from employing administrators
that deliver services from within a multi-solution
alternative investment administration framework.
The recovery in private equity will be nuanced, with
activities in particular industry sectors, deal sizes, formats
and regions growing at different rates. Global scale
administrators with experience in different investment
styles and regions, and with personnel experienced
in various types of activities, can add value by crossfertilising
ideas and best practices.
Large administrators, built from merged legacy
institutions, bring a diversity of professional perspectives
and cumulative years of experience. They appear well
placed to offer global scale, a breadth of service offerings,
cumulative years of experience and deep knowledge
of industry-leading services and infrastructure. These
administrators understand that private equity is being
used in concert
Post-crisis, investors want the
surety and checks-and-balances
that a third-party administrator
can provide.
with other
alternative
and traditional
investment
strategies, and
that many best
practices in the
administration
of those investments can be brought to bear in the
administration of private equity.•
This communication is directed at professional clients
(this includes eligible counterparties as defined by the
UK’s Financial Services Authority) who are deemed
both “knowledgeable and experienced” in matters relating
to investments. The products and services to which this
communication relates are only available to such persons,
and persons of any other description (including retail clients)
should not rely on this communication.
The Global Private Equity Administrator
• Multi-jurisdictional expertise
• Knowledge of evolving regulations, worldwide
• Experienced with multiple private equity strategies
• Comprehensive knowledge of diverse alternative
investment administration: hedge funds, real estate etc.,
as well as private equity
• Standing on the foundation of a substantial balance
sheet
• A proven track record; business continuity into the
future
• Experienced personnel that evolve their careers with the
administrator
• Robust operations including world-class IT infrastructure
• Transparency, detail, timeliness, precise reporting
George Sullivan is executive vice president and global head of State
Street’s Alternative Investment Solutions Group.
Iain Stokes is a senior managing director in State Street’s
Alternative Investment Solutions Group.
20 THE PEI Fund administration and technology compendium | june 2010

We’ve joined forces
to serve you better
What do you get when you combine the strength of two leaders in private equity
administration? A full range of comprehensive solutions to meet your growing needs
— wherever you do business.
With the acquisition of Mourant International Finance Administration (MIFA),
State Street offers the depth and breadth you’re looking for in a service provider. Benefit
from the industry-leading specialists you’ve come to know at MIFA, along with the global
presence and expertise of State Street, including the complete suite of services from
our Alternative Investment Solutions group — fund administration, corporate administration,
risk and credit services to institutional investors and hedge fund, private
equity fund and real estate fund managers.
For more information, please visit www.statestreetglobalservices.com or contact
Scott FitzGerald at +1 617 664 8207 or srfitzgerald@statestreet.com, or Iain Stokes
at +44 1481 747 840 or iain.stokes@mourant.com.
State Street Global Services is the investment servicing business of
State Street Corporation (NYSE: STT), one of the world’s leading providers
of financial services to institutional investors.
©2010 STATE STREET CORPORATION 10-INS0279-A0510

Profile
State Street is a leading financial services provider serving some of the
world’s most sophisticated institutions. We offer a flexible suite of services
that spans the investment spectrum, including investment management,
research and trading, and investment servicing.
Investment Management
A Trusted Partner
To succeed in today’s complex, dynamic marketplace, institutional investors need
more than a service provider. They need a strategic collaborator. Our expertise —
along with our unique combination of consistency and innovation — help clients
manage uncertainty, act on growth opportunities, enhance client service and
optimize cost structures. Confidently.
Investment Research
and Trading
No. 1 Servicer of Private Equities
State Street’s Alternative Investment Solutions (AIS) group services more than
$600 billion in alternative assets and provides a complete suite of services to
over 900 clients, including institutional investors, hedge fund managers, private
equity fund managers and real estate fund managers. State Street’s Private Equity
Fund Services is one of our core offerings. State Street ranks No. 1 in private
equity servicing globally, with more than $250 billion in private equity capital
commitments as of April 1, 2010. 1
Investment Servicing
Outsourcing your private equity fund administration to an experienced provider
like State Street lets you focus on managing investment returns and generating
value for investors. Whether your fund or family of funds is starting up, active and
expanding, or winding down and liquidating, our team can solve the challenges
of each specific situation.
A STRONG GLOBAL PROVIDER
US$19.0 trillion
€14.1 trillion
Assets under custody and administration 2
US$1.9 trillion
€1.4 trillion
Assets under management 2
1
No.1 in alternative fund servicing: Aggregating State Street and MIFA data from the HFN.net Q4 2009 Hedge Fund Administrator Survey and ICFA Alternative Fund Administration Survey
May 2010; No. 1 in private equity servicing: ICFA Alternative Fund Administration Survey May 2010.
2
As of March 31, 2010
©2010 STATE STREET CORPORATION 10-INS02790510

Feature
Freshening ‘stale’ commitments
In a capital-starved market, communicating the status of ‘stale
unfunded’ commitments to LPs is a winning way to forge strong
relationships and free up new commitments. by Jenna Gottlieb
Private equity general partners have spent
the last two years slogging through a deal
wasteland. It should come as no surprise
that some of the money they had originally
hoped to invest was never called down from
investors.
Now the deal market appears to be coming
back to life, but some GPs face a problem –
the investment period of their fund is over or
“Think of CIOs and investment committees.
When the head of private equity shows up
and says, ‘I’m ready to start committing to
new funds, but tell me about this unfunded’.
And the private equity executive says, ‘Oh, it’s
stale and it’s never going to be called’. You
could imagine that’s a difficult conversation.”
reaching the end, and they haven’t deployed
all the capital committed to their funds.
This article will explore the phenomenon
of the “stale unfunded” commitment, and
what GPs can do to change this from a
challenge into an opportunity.
It should be noted that the issue of
unused capital commitments is not confined
to recent times. Limited partnerships have
always allowed for the reservation of undrawn
commitments to pay fees and support
portfolio companies beyond the initial
investment period.
However, in today’s market, funds are
more likely than ever to have capital reserves
far in excess of what is needed to support the
portfolio going forward. In more liquid times,
LPs were unconcerned about stale unfunded
commitments. But in today’s market, some
investors are concerned that precious capital
is tied up in funds that have no need for the
money, but are failing to communicate this to
LPs.
Responsive and reactive
Today stale unfunded commitments are often
found in private equity funds that are well
beyond their investment periods. A significant
portion of these commitments are
unlikely ever to be called. Canceling or
cutting such undrawn commitments
should be a relatively easy give for GPs
since they usually will have switched to
charging fees on invested equity at this
point.
Bob Long, president and CEO
of Conversus Asset Management,
the investment management arm of
Conversus Capital, has been tracking
the stale unfunded commitments in his
large, mature portfolio of LP interest.
In an interview with Private Equity Manager,
he said, “A responsive or reactive GP would
do LPs a favour and would say ‘Go ahead and
release yourself of half of it.’”
Long noted that GPs would score major
points with LPs in the process. The reverse is
also true – failure to address an outsized stale
unfunded number may not play well with the
investor base. “Think of CIOs and investment
committees,” said Long. “When the head of
private equity shows up and says, ‘I’m ready
to start committing to new funds, but tell me
about this unfunded’. And the private equity
executive says, ‘Oh, it’s stale and it’s never
going to be called’. You could imagine that’s a
difficult conversation.”
Conversus is one of a few firms that track
stale unfunded, said Long. At the end of the
first quarter, Conversus had $685 million
in unfunded commitments, $187 million of
A Private equity international publication
23

Feature
which is stale unfunded, or 27 percent. Long estimates that a
significant percentage of the stale portion will never be called,
although he would certainly like to have better guidance on
this from his GPs.
The overhang grows old
The private equity industry has roughly $445 billion in
uninvested capital poised for deals, with about half of the
untapped money in the hands of large firms with $5 billion or
more in commitments.
According to research from Cambridge Associates, much
of the overhang, or about 75 percent, is housed within funds
raised in the period from 2007 to 2009. On average, funds
raised in 2007 are about 25 percent called, those raised in 2008
are about 15 percent called and funds raised in 2009 are less
than 5 percent called, Cambridge said.
Regarding stale funds, they typically become fully stale
three years past the end of the investment period, said Long.
“The stale [portion] that’s a year old could be called. After
three or four years, there’s less of a chance,” he said.
If GPs communicated the amount of stale unfunded,
private equity fund managers may well have an easier time
in the next round of fundraising. “LPs are starting to wake up
to [the magnitude of] old capital that has not been invested,”
said Long. “When the fundraising wave starts again, it will be
interesting to see if LPs push back.”
How and when to communicate stale funds continues to be
a grey area. It is notable that issues pertaining to stale unfunded
were not included in the Institutional Limited Partners
Association (ILPA) principles.
Framing the stale unfunded issue is the broader issue of
GPs trying to figure out how best to support their portfolio
companies with whatever capital resources are available.
“Private equity firms have really been in the middle of this
[downturn], working with portfolio companies, trying to
determine the best use of capital,” said Andrea Auerbach,
a managing director with Cambridge. “Their investors have
really had a chance to see what their managers are like under
significant pressure.”
The extend is your friend
As the end of investment periods for 2005 to 2007 vintage
funds nears, many GPs have decided to go back to LPs and ask
to extend the investment period in order to take advantage
of what many believe to be a more promising and liquid
investment environment.
Extensions must be approved by the LPs. Private equity
firms typically raise fund with the obligation to invest it over
a certain number of years. Securing permission to extend this
period can be tricky.
However, in the current market, some funds still have
significant amounts of capital, and many are loath to return this
to investors, given the challenge of raising fresh commitments
in the current market.
When approached by general partners about investment
period extensions, LPs need to consider the impact of an
extension on their timing expectations and management fee
step-down.
Without LP permission, there is little wiggle room for
extensions, according to a New York-based fund formation
lawyer. “The terms do not generally permit the extension of
the investment period unless an amendment to the agreement
is sought, which normally requires approval by a certain
percentage in interest of LPs,” the lawyer said.
Extensions of the investment period may be difficult to
come by as many LPs currently find themselves over-allocated
to private equity. In fact, some firms with new fund offerings
have tried to sweeten terms by offering shorter, not longer,
investment periods.
One firm that was successful in convincing LP to extend
the fund was BC Partners, which this month won an extension
to the investment period in its €6 billion eighth fund, stretching
the investment window to June 2011 from November 2010.
BC Partners was also granted a two-year extension of the hold
period in its €4.3 billion seventh fund
GPs like BC will welcome an extension because it eases the
pressure to complete deals and gives the GP more time to raise
its next fund.
To get the extension, BC Partners needed more
than two-thirds of its investors to approve the change in
its investment period. It was ultimately supported by 90
percent of investors, according to a source with knowledge
of the situation.
BC’s Fund VIII has about $1 billion left to invest, according
to the source. The investment period extension was not
necessary, the source said, but takes some of the pressure off
the firm to get the capital invested right away.
LPs that invested in BC Partners’ European Capital VII
fund include the California State Teachers’ Retirement
System, the Ford Foundation, Maryland State Retirement
and Pension System, and the Pennsylvania State Employees’
Retirement System.
There are various reasons why GPs have been slow to
commit capital.
In BC Partners’ case, the firm held back on investing the
fund during the credit bubble from 2006 to 2008, the source
said. The firm then deployed 30 percent of the capital in the
fund after Lehman Brothers collapsed in 2008. •
24 THE PEI Fund administration and technology compendium | june 2010

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Feature: LP service
What’s your ‘IR brand’?
As the private equity industry matures, a strong and distinctive
investor relations function is proving its worth, especially in a
down market. By David Haarmeyer
A good private equity firm brand is
recognised as invaluable to attract investors
and debt financing, to execute transactions
with prospective companies, and to gain
talent.
The underlying value of a brand is what
it communicates about a firm’s reputation
for being trustworthy. “What do people say
about you when you leave the room?” is
how Amazon’s Jeff Bezo defined reputation.
A good brand that promotes market
awareness and understanding of a company
takes time to build given that by definition
good reputations and brands are scarce
commodities that must be earned.
Relative to public companies, private
equity groups have three distinctive
advantages when it comes to building brands:
• They are constantly in the
equity and debt markets where their
performance and reputation is measured.
This intense capital market activity provides
an opportunity and incentive to build a
reputation for honesty.
• By putting significant personal
capital at risk along side of investors and
sharing in profits, GP’s interests are aligned
with LP’s, thus making them accountable and
trustworthy – which goes straight to building
a more powerful brand.
• Long-term funds create very
different investor relationships, sets of
expectations, and operating environments
than with liquid investment vehicles. Locking
in investor capital over seven to 10 years
provides GPs with more flexibility to create
value and stronger partnerships with their
LPs over the long term.
Thus, the long-term partnership that is
at the centre of private equity provides the
asset class with certain investor relations
advantages. That said, building a truly
outstanding IR brand requires hard work,
involving frequent communication with
existing and prospective investors to build
credibility, reduce investor uncertainty, and
provide a coherent view of a firm’s prospects.
As GPs have discovered over the past few
traumatic years, illiquidity for investors also
comes with a cost: LPs are likely to become
more demanding and scrutinising. This is
where a private equity firm’s IR brand is
tested – can the trust and communications
infrastructure the firm has developed over
time successfully sustain confidence? This is
a powerful proposition as it suggests a key
differentiator in an increasingly crowded
market.
Down market, high-touch IR
The fundraising picture over the past year has
not been pretty. GPs out on the road have
found it takes twice as long to close funds.
LPs are pinched for capital and thus writing
smaller checks and allocating them to fewer
funds. This has made for an ultra-competitive
and time-intensive fundraising environment.
It is during these tough times that IR
brands will be stress-tested. LPs of existing
funds, for example, have been persistent in
pushing GPs for more details on the health
of their investments. “Investors are hungry
for information; they very much want
transparency and want to know what they
own today given recent volatility,” explains
one US fund of funds manager.
LPs of prospective funds have had the
luxury of time and great bargaining power
to do more rigorous due diligence. A poll
conducted recently by Coller Capital found
that nearly half of LPs surveyed had increased
their due diligence since summer 2007 before
committing to a fund. A US buyout GP who
26 THE PEI Fund administration and technology compendium | june 2010

Feature: LP service
managed to close his fund last year says
the process was especially challenging
in developing new relationships: “We
had several visits by prospective LPs
and consultants; provided significant
details of our investments, strategy, and
management of the back office; and
gave detailed references.”
In the opinion of more than a few
GPs, the financial crisis did have a silver
lining by putting a spotlight on investor
relations. One US mid-market buyout
GP explains, “The downturn has made
us more proactive from the perspective
of our IR platform.” While a manager
of a European buyout fund, which had
a successful close during 2009, notes
that its “client-serving model should
position it to capture both market and
mindshare from its competitors”.
Annette Wilson, managing director
and head of investor relations and
marketing at Palamon Capital Partners
in London, thinks that there has been a
sea change in LP expectations over the
last year. “In the past LPs were more
forgiving of good performing funds that
did not provide appropriate reports
on a timely basis, but given that some
of these same funds have turned in
weak results, the expectations around
reporting and administration quality
have risen.”
Ben Cahyono with Delaware
Investments, a major backer of private
equity funds, echoes this sentiment in
noting that in today’s environment, “a
private equity firm’s IR brand can be
a real competitive advantage.” When
the economy rebounds, he says, “those
GPs that went the extra mile will be
rewarded by LPs”.
Despite many setbacks and
challenges it presented, the economic
downturn also had a silver lining for
investors. This came not only in the
form of access to potentially better
vintage years and top-flight funds, but
in securing important investor relations
benefits. “The downturn is giving
us many opportunities to improve
alignment, transparency, reporting with
fund managers,” says a manager of a
large North American pension fund.
IR brand ingredients
LPs and GPs have a wide opinion on
what makes for a good IR brand. But
generally, as one US fund of funds
manager says, “It’s all-around reporting,
transparency, and communications”.
Wilson at Palamon says for her, the
most important attribute of a strong
IR brand is “transparency coupled
with thorough yet concisely presented
information issued on timely basis”.
A firm that invests in better investor
relations should indeed expect a return
on investment. One imperfect measure
of investor relations ROI is how often
investors reinvest with their existing
private equity firms when a new fund
is brought to the market. According to
Coller Capital’s Global Private Equity
Barometer, in the past year only 16
percent of LPs reinvested with their
current private equity firms compared
to 55 percent in 2005. As indicated
in the chart below, poor reporting
and transparency are among the top
four factors deterring investors from
re-upping and are the factors showing
the greatest increase over the winter
2008 to 2009 period.
Cahyono at Delaware Investments
boils down the attributes of a good IR
brand to “PITA” – he is looking for GPs
with fund administration capabilities
that are proactive, innovative,
Reasons to say ‘no’
LPs recently surveyed are more concerned than ever about poor transparency
Source: Coller Capital
transparent, and accessible. These
attributes indicate that investor relations
functions are both customer relations
management (CRM)-specific and are
dynamic – there is a constant search
for better ways of communicating,
interacting, and sharing information.
Investor appetite for information
may move the bar again as to what
constitutes quality investor relations.
A Private equity international publication
27

Feature: LP service
Earlier this year at the SuperReturn conference in Berlin, Erol
Uzumeri, head of private equity at the Ontario Teachers’
Pension Plan, said that investors wanted more openness not
only on portfolio company performance but on potential
deals. His sentiments were echoed by David Turner at The
Guardian Life Insurance Company who was of the opinion
that private equity executives are not good at telling him on a
regular basis “what they’re buying when they ask for a capital
call”.
The economics of IR
As the recognised value of a private equity group’s IR brand
increases, it raises key strategic and organisational questions
within the firm. For example, the increased professionalism,
best-of-class CRM, and heavy fund administration
infrastructure that are expected to contribute to IR brand
excellence represent meaningful investments. These are
driven both by intense competition for investor funds and the
increasing sophistication of investors who are becoming more
“hands on” in building their portfolios and demand customised
offerings that are tailored to their risk/return needs.
These drivers are increasing the complexity and cost of
investor relations. Private equity funds are expanding their
investor relations staffs and as applied to their portfolio
“Whatever the mix of resources used, LPs
say they are looking for insights into their
investments and tools that help them plan
and report, not just more paperwork.”
companies, beginning to hire “operational talent”. In London,
for example, BC Partners recently hired veteran Goldman
Sachs banker Charlie Bott to co-head its investor relations
group. Bott chaired Goldman’s European financial sponsors
group and is expected to focus on helping BC Partners make
a big push to diversify its investor base as firm raises its ninth
buyout fund. In announcing the recent hiring of two new
executives to its investor relations team, 3i emphasised in its
press release that the action demonstrated “its commitment to
client services”.
Consequently, private equity firms have to think hard
about the structure and size of their organisations and options
for containing costs, such as outsourcing services. Thus far,
most firms are of the opinion that unlike auditing and public
relations, investor relations is strategic to the business and
should remain in-house. However, many tools and functions
that support good investor relations can and indeed should be
outsourced, depending on the budget of the firm.
Whatever the mix of resources used, LPs say they are
looking for insights into their investments and tools that help
them plan and report, not just more paperwork. Cahyono at
Delaware Investments may speak for many LPs in observing
that “what is really important for me at the end of the day is
quality of information provided not the quantity”. Thus, while
a $5 billion fund may have more wherewithal than a $500
million fund to churn out voluminous, beautiful reports and
hire a chief technology officer, the investor relations function
will be judged on how well the information it provides gives
investors a credible and coherent view of a fund’s prospects.
Maturity and the IR brand
The increasing attention paid by private equity firms to
investor relations is a testament to the growth and maturation
of the asset class. Building a strong IR brand for credible
communications and near seamless contact with investors
has become a key differentiating attribute and powerful
competitive advantage. The fortitude of private equity firms
to communicate through market cycles helps to build this
brand.
Looking ahead, private equity groups face new investor
relations challenges, particularly
those that choose to go public and
that diversify into multi-line asset
management firms. The promise is
the ability to provide a broader set of
financial investment products to its
institutional client base, and do so from
a broader and more permanent capital
base. The potential downside is losing
both alignment and focus given widely different groups of
investors with different priorities and expectations.
Ultimately, the investor relations challenge for private
equity firms is to adhere to a quote from the late Walter
Wriston, former chief executive officer of Citicorp, that
“money goes where it is welcome and stays where it is well
treated”. A big part of doing so requires building a credible
investor relations platform that communicates organisational
and GP commitment to long-term investors. •
David Haarmeyer is a Boston-based economic consultant
and writer whose focus is communications and marketing
issues around private equity. He can be reached at
dhaarmeyer@gmail.com.
28 THE PEI Fund administration and technology compendium | june 2010

Expert commentary: Ernst & Young
Keeping up with the market
Best-in-class European fund managers will want to follow
the current status and future trends of the private equity fund
administration market. By Alain Kinsch and Kai Braun of
Ernst & Young
Administrators of private
equity funds have developed
rapidly during their average
eight years of history, according
to the first European private
equity fund administration
survey by Ernst & Young Alain Kinsch
covering 30 leading service
providers. While the starting point was clearly on the
Channel Islands, other hubs such as London and Luxembourg
followed some years later. Today, all major European hubs
are facing strong competition in a highly fragmented market.
Administrators are therefore reassessing their operating model
in order to gain market share and drive future growth. Main
questions currently being asked are: “What drives the market?”,
“What services should be offered and how should they be
priced?”, “In which jurisdictions should administrators position
themselves based on which organisational structure?”. In the
following paragraphs we aim to provide answers to these
questions as well as insights into latest trends and issues within
the private equity fund administration market.
What drives the market?
Two factors will significantly impact the future of private equity
fund administration, the first being the proposed EU Directive
on Alternative Investment Fund Managers (AIFMD) and the
second being the increased influence and therefore requirements
of investors. Both factors lead to enhanced transparency and thus
reporting as well as additional compliance and risk management
obligations. Investors place strong emphasis on the existence of
stable governance and controls at fund level, which is more and
more thoroughly checked in the form of due diligence before
investing with a private equity fund manager. In addition, they
are putting service quality and the related cost under scrutiny. It
is therefore not surprising that the formalisation of processes and
a robust controls environment (e.g. through SAS 70 or similar
reports), as well as the enhancement of efficiency through
scalable IT infrastructure,
are currently on top of the
list of strategic issues for
many private equity fund
administrators. Another
reason why the latter point
Kai Braun
is important is that the use
of specialised IT systems is
no longer a differentiator, but has become a “must have” over
the past few years. The market has clearly turned its back on
spreadsheet-based support, with expectations of a continued
move towards dedicated private equity systems. Over threequarters
of administrators have implemented specialised software
(or are currently in implementation) to support their private
equity administration business based on the Ernst & Young
European PE fund administration survey. The next steps to be
undertaken should now be the discontinuation of legacy systems,
as they result in duplication of data and thus greater effort and
costs, as well as the provision of online access to all stakeholders
in a more sophisticated way.
No matter which IT systems are implemented by the
different administrators, having skilled staff remains key in
order to comply with business-as-usual and legal requirements.
Most of the professionals currently employed by leading
administrators have more than three years of experience in
private equity and only a minority is new to the industry, with
less than one year of experience. The skill set of professionals
also includes financial reporting: 70 percent of administrators
said that their accounting staff is able to keep up-to-date
with developments on the financial reporting landscape. The
remaining 30 percent are smaller administrators purely focusing
on local GAAP.
What services should be offered and how should they
be priced?
Today, the service offering of administrators can be described
as close to fully fledged and covers a wide range including
A Private equity international publication
29

Expert commentary: Ernst & Young
Local ‘Organisation’
Global ‘Organisation’
accounting, company secretarial services, investor registration
and standard reporting. It is interesting to see that tax
services such as preparation of reports and tax specific data
are not yet on the list of many administrators, but it is an
area of future development for many. Tax structuring is not
being considered by administrators going forward, as this
clearly falls in the expertise of tax lawyers and accounting
firms. Also, value-added services in the early stage of the
private equity fund cycle, such as assistance in the fund
set-up, are not often provided. On the other hand side,
provision of directors – a service offered by the majority
of administrators today – is clearly on the decline due to
increased risk. As this service allowed administrators in the
past to receive first-hand information and to be directly
linked with fund managers, new ways of communication
need to be established in order to ensure stable information
flow in the future.
When analysing the pricing of services, a high degree of
flexibility is currently applied. 60 percent of administrators
operate more than one fee model as part of tailoring their
service offering. Fee models range from charging basis points
on committed or invested capital up to hourly charge rates
for time spent effectively on a certain task. Over the shortterm,
administrators should invest time and effort into
answering the question as to how the current flexibility
in the fee structure can be coupled with transparency,
simplicity and predictability for their client
In which jurisdictions should administrators position
themselves based on which organisational structure?
Private equity fund managers are likely to consider a shift
of their funds away from off-shore jurisdictions and toward
on-shore locations in the context of the current changes
in governance and the draft AIFMD. This potential move
is already anticipated by administrators, who are opening
new offices in many European jurisdictions. The expansion
of geographic presence is on the map of two-thirds of
the administrators. The main target destinations are
Luxembourg, which was by far the most named jurisdiction
as per the above mentioned survey, the Channel Islands, the
UK and Ireland. The most chosen international destinations
are Hong Kong and Singapore.
When taking a closer look at administrators’ operating
models, the majority is structured as local organisations,
offering a full range of services in each local jurisdiction
(see “Local organisation” on graph above). This is most
likely based on the nature of the private equity model
which requires higher manual input than traditional mutual
funds. Administrators with expansion plans based on the
30 THE PEI Fund administration and technology compendium | june 2010

As the world gets smaller,
we’re thinking bigger
Private Equity is an Ernst & Young Priority
Contacts
Alain Kinsch
EMEIA Private Equity Funds Leader
alain.kinsch@lu.ey.com
+352 42 124 8355
Dr. Carmen Von Nell Breuning
Private Equity Business Development
carmen.von-nell-breuning@lu.ey.com
+352 42 124 8733
Kai Braun
Private Equity Advisory Leader
kai.braun@lu.ey.com
+352 42 124 8390
Ernst & Young provides audit, tax, transaction and other Private Equity related advisory services
to over 50% of the World’s largest private equity funds and their investee companies. We have
been recognised as the leading Big Four adviser in Europe to Private Equity firms by Thomson
Financial. Ernst & Young has the largest alternative investment practice of the Big Four servicing
more than 12,000 pooled investments globally.
Private Equity is also one of the core industries we serve at Ernst & Young Luxembourg through
a dedicated team of over 100 professionals of audit, advisory, transaction and tax professionals
specialized in this industry. Our Luxembourg practice is the local market leader in Private Equity
for audit, advisory and tax services.
ey.com/luxembourg
!@#
local organisational model need to ensure that the existing
operating model is fully applied in the new location and
that people are sufficiently trained in order to fully service
their clients locally. Some institutions lead the way in the
centralisation of key services such as accounting or reporting
in one central location such as Poland, Scotland or even
Mauritius (see “Global organisation” on graph above). The
decision in favor of a certain location is often based on a
multitude of factors such as availability of skilled resources,
level of wages or language skills. The main advantage of this
approach is clearly scalability. Nevertheless, administrators
need to ensure smooth information flow between local
business units and a centralised processing-hub, since local
specificities – mainly in the area of accounting – need to be
clearly understood.
No matter which organisational model is chosen by
administrators, they both need to be based on a client-centric
approach. Being able to provide the same service quality in
a multitude of locations to a multi-jurisdictional client is
becoming essential.
Conclusion
The private equity industry is currently shifting towards
increased regulation and investor scrutiny. Fund managers
will therefore increase their diligence when selecting thirdparty
administrators to ensure that all legal and investor
requirements can be handled from a middle- and back-office
perspective. In order to gain market share, administrators
need to focus on their governance and risk management
framework while at the same time providing full support
to the fund managers based on transparent pricing. This
includes support during the set-up of funds for first-time
general partners by sharing local expertise, as well as
assistance in the fundraising for experienced general partners
by producing suitable reporting. Finally, having a global
footprint becomes more important for servicing entire fund
structures from the target, through the SPVs, and up to the
fund.•
Alain Kinsch is country managing partner of Ernst & Young,
Luxembourg and EMEIA private equity fund leader.
Kai Braun is manager and private equity advisory leader at
Ernst & Young, Luxembourg
A Private equity international publication
31

Feature: LP expectations
Planes, trains and due diligence
GPs will need to go further to raise funds,
and in an environment characterised by lower fees
A recent survey of general partners around the world revealed
that many are anticipating more strenuous fundraising efforts
going forward.* This trend will be manageable for firms that
develop efficient fund administration systems, but it will be
a shock to GPs who have grown overly used to businesses
unrestrained by reasonable budgets.
Indeed, the current fundraising market makes the
fundraising markets of yesteryear appear almost easy by
comparison.
One fundraiser says that “fundraising going forward will
be slower. If [your returns] are average, your success rates
will be lower than before, because in 2007 or early 2008 just
being in the asset class you could potentially raise your fund.
Even if you weren’t a star you had a pretty good chance.
Today that chance is pretty low.”
One GP with a substantial track record, who closed
a fund recently, reports that LPs took much longer than
previous fundraisings to get approval from their internal
investment committees. GPs interviewed that are currently in
the market said enhanced due diligence by LPs was extending
the normal fundraising process by at least six months.
“LPs in the fourth quarter of 2008 and the first quarter
of 2009 went through a near death experience,” says a GP.
“Going forward, instead of 10 pages, we’ll probably get due
diligence memos with 30 pages.”
The quantity as well as quality of due diligence is
changing. Most fund managers expect to hear more questions
on how they operate their own business, on top of questions
verifying their investing track records. LPs are starting to
interview rank-and-file investment professionals employed by
GPs as well as internal compliance and finance teams. GPs
should also expect their service providers – administrators,
attorneys, consultants, custodians, and operating partners
– to receive phone calls or a visit during the due diligence
process.
In response to greater LP demand for third-party
verification of valuations and desire to save on costs, some
GPs interviewed began outsourcing this function instead o
f doing it in-house. In these cases, the outsource providers
will become critical sources of information to interested
potential LPs.
Flying farther
Many GPs have found to their dismay that once-solid LP
relationships are having trouble committing meaningfully
to follow-on funds due to over-allocation issues, liquidity
constraints and an appetite for smaller commitments.
In response, GPs that have just raised a fund or are
planning new fundraising campaigns are increasingly looking
well beyond their existing investor bases for capital. This
means going overseas and to geographies not historically
frequented by private equity fundraisers. Asia was frequently
cited as a popular new fundraising destination. GPs cited
Asian LPs and Middle Eastern LPs has having a strong
appetite for the asset class, many of them having relatively
young programmes with significant target allocations to put
to work.
Fully 28 percent of GPs specifically said that their future
fundraising efforts would likely take them for the first time to
Asia-Pacific and the Middle East. These are the most notable
GPs comment on ‘enhanced’ diligence:
“Due diligence has always been rigorous, now they [LPs]
just have more time.” – US GP
“No one is rushing to get anything done.” – Asian GP
“Due diligence this time around was above and beyond
anything we have seen before and this is despite our longstanding
track record.” – European GP
new fundraising regions for GPs, ahead of Europe, a region in
which eight percent of respondents said they will fundraise
for the first time.
In addition, some GPs have sought out new types of LPs
who may never have been involved in private equity before,
such as sovereign wealth funds. One venture capital fund we
spoke to noted that some large corporations had an increased
appetite for venture in order to access to new technologies – an
expansion on the traditional research and development strategy.
32 THE PEI Fund administration and technology compendium | june 2010

Feature: LP expectations
Pressure on fees
When asked which partnership terms
and conditions they expected to most
closely negotiate with LPs during their
next fundraisings, the most frequent
and highest priority response was fees,
particularly the management fee and
transaction fee.
Several GPs said they had received
operating budget information requests
from LPs to ensure that management
fees are being efficiently spent. One GP
now raising a first-time fund said such
requests may presage LP demands for
management fees that closely match
operating budgets. “We are comfortable
taking a smaller management fee just
to cover costs, not necessarily a fixed
1 or 2 percent”, he said, referring to a
perception among many LPs that a fixedpercentage
management fee may be
arbitrary and not necessarily reflect the
costs of running the firm.
Other GPs were confident that their
own fixed-percentage management
fee schemes did indeed match their
expenses. Said one: “There will be
pressure on the management fee, but
that is fund-size dependent. A 2 percent
management fee for a target fund of our
size is reasonable.”
In fact, many LPs noted that megafunds
in particular were most likely
to charge management fees that far
exceeded their operating budget needs.
Not every GP is “building wealth”
by collecting management fees greatly
in excess of operating budget. In fact,
many are keenly aware that a smaller
follow-on fund might bring the flow
of management fees very close to, or
beneath, current operating expenses.
With a smaller fund size from which
to draw management fees, GPs might
not be able to attract and retain the
personnel it needs to run successfully
with a reduced operating budget.
A senior partner at a large private
equity firm said he was “positive” about
his firm’s outlook and the outlook for
the industry, but admitted that smaller
fees and funds might cause his and other
firms to “end up having. . . a slightly
smaller business. We have a fantastic
platform and model, but it was scaled
for a [larger] fund.” He added that if the
next fund “is meaningfully smaller than
that, we can continue along the same
[investment] themes, but on a current
income basis we are receiving much less.”
Other fee pressures cited by
respondents include the elimination of
transaction fees, and monitoring fees,
through the 100 percent use of such fees
to offset the management fees charged
to LPs. Several GPs predicted that the
offset term would indeed go as far as
100 percent toward the LP in future
partnership documents. Such a trend
would dry up what for many GPs has
been an important source of income
(and, as many LPs were quick to point
out, an important profit centre).
Despite all the talk of management
fees, the traditional 20 percent carried
interest term appears to be sacrosanct.
However, some US GPs are anticipating
encountering debate on the issue of
whether they should adopt a more
“European style” waterfall distribution
formula, by which the LPs get back all of
their invested capital in aggregate, across
all portfolio investments, plus a preferred
return, before the GP begins to collect
carry. For many US private equity fund
managers, such a term concession would
mark a big shift away from so-called
“deal-by-deal” carry, which allows for
GPs to begin collecting carry earlier
in the life of the fund. More broadly,
some GPs noted that the discussion
of “waterfall distribution formula”
calculation came in the broader context
of an attempt to avoid clawbacks, a
highly unwanted event that can occur at
the end of a fund’s life if it is determined
that the GPs have paid themselves too
much carry.
It should be noted that aside from
fees, GP respondents confidently
gave the next highest priority to “no
major changes” as an expectation for
their next fundraising partnership
negotiations. One such GP said: “Terms
and conditions in our new fund are like
our last fund. Our terms have always
been investor friendly and thus it’s
less of a shift back to normal for us.
Underlying our terms and conditions is
good performance, which our investors
are after.”
Some GPs noted that LPs seem
eager to win term concessions, whether
major or non-major. One GP said: “We
have 80 percent offset that will go to
100 percent. We expect to lower overall
fees – from 2 percent to 1.75 percent
for our next fund. We heard that a big
investor said that their management was
expecting them to come back with a
great victory on terms after negotiating
with us.”
While some GPs with loyal investor
bases and outstanding track records may
succeed in dictating the same terms
and conditions, and raise similarly sized
funds, from prior fundraising cycles,
many other GPs will need to adjust to
market realities.
Luckily, as professional builders of
businesses, most GPs have intensive
experience creating efficiencies in
portfolio companies and positioning
them to thrive in changing markets.
These skills will now increasingly
brought to bear upon private equity
franchises by their managers, many of
whom expect fundraising and budget
challenges, but who told us they are
confident in their abilities to meet these
challenges and help their firms thrive in a
new era of growth. •
*A version of this article appears in
the recently released “Private Equity Faces
The Future: Candid Views From The
Market”, a white paper jointly produced
by PEI Media and BNY Mellon.
A Private equity international publication
33

Expert commentary: Guernsey Finance
Peter Niven
Guernsey – the European
home of private equity
By Peter Niven,
chief executive of Guernsey Finance
During this last year the world has been picking itself up off
the floor of the global financial downturn. We have seen the
start of renewed confidence in the markets, but really this is
just the start of a trip down what will be a very long road to
recovery and at the moment I would gauge that the general
economic conditions remain fragile and will remain so for
some months to come.
Guernsey cannot be completely immune from these
worldwide issues, although the island has to a large extent
remained resilient in the face of the pressures. Perhaps the most
significant fallout for us has been the increased international
focus on so-called “tax havens” or “offshore” centres. But I am
very pleased to say that the island is consistently recognised as
being within the very top tier of international finance centres.
There is still uncertainty over issues such as corporate
taxation rates and the EU’s Alternative Investment Fund
Managers (AIFM) Directive. What I can say however is that
we are taking all steps possible to ensure that the island
continues to be a leading international funds centre. As such,
I am extremely confident that Guernsey will build on its
solid foundations to remain the European home of private
equity business.
The KKR effect
Guernsey has a strong heritage in providing clients from across
the globe with an extensive range of financial products and
services. For example, our funds industry stretches back half
a century. During the past two decades, the sector has seen a
gradual yet sustained shift where the balance of business has
moved from being largely retail, equity-traded/cash-based,
open-ended schemes to predominantly institutional, niche,
closed-ended funds. This included significant growth of esoteric
asset classes in particular through the middle of the last decade.
The experience means that the island has built a wealth of
expertise and first class infrastructure for the structuring,
management, administration and custody of not just traditional
funds but also alternatives and in particular private equity.
It could be argued though that the listing of the $5 billion
Guernsey limited partnership KKR Private Equity Investors LP
on the Amsterdam Euronext was so innovative that it has been
the largest single contributor to the island’s recent success in
the asset class. This highlighted that Guernsey was one of the
few jurisdictions from where funds wishing to list on Euronext
did not need to obtain a licence in the Netherlands because the
Dutch AFM had ruled that there was already adequate “home”
supervision. It also put Guernsey on the map internationally,
particularly in the US. The listing was a point from which the
island has never looked back, as it has become – in the words
of Bridget Barker, partner at law firm Macfarlanes in London –
“the jurisdiction of choice for private equity”.
Strength out of adversity
Today, Guernsey has an investment funds industry with total
business worth £184 billion. The island has not been immune
from the global financial crisis, but having said that, our funds
industry has continued to perform robustly. Although we have
seen overall business decline during the last calendar year, it
must be remembered that this comes in the wake of a severe
34 THE PEI Fund administration and technology compendium | june 2010

Guernsey Finance supporter section
In Guernsey we help funds flourish.
We combine a breadth and depth of
experience in management,
administration, custody and structural
innovation that is second to none,
with a wide non-executive director
resource, as well as a first class, well
regulated professional infrastructure.
Make Guernsey your first port of call.
Email: funds@guernseyfinance.com
Telephone: +44 (0) 1481 720071
www.guernseyfinance.com
global financial crisis. Our performance has outstripped some
of our closest competitors and the fact that we have had two
consecutive quarters of growth to the end of the year points
again to a slow climb out of the general trough of 2008/2009.
Certainly, Guernsey practitioners are reporting a greater level
of business than a year ago, with particular interest from
promoters and sponsors in harnessing our experience and
expertise in the alternative and niche asset classes using closedended
funds. This is reflected in the fact that the number and
value of private equity funds in Guernsey has continued to
grow, reaching nearly £45 billion within 316 funds at the end of
December 2009.
Centre of excellence
Leading private equity managers such as CVC and BC
Partners have the operation of their funds facilitated in
Guernsey. Our administrators do service non-Guernsey funds,
but a large proportion of their business relates to Guernsey
open- and closed-ended funds, which are now promoted and
sponsored by leading institutions in 45 countries. These can
be established through a range of flexible investment vehicles
such as unit trusts, the Guernsey-pioneered Protected Cell
Companies (PCCs), Incorporated Cell Companies (ICCs) and
limited partnerships. There are a wide range of administrators
on the island many of whom have specific expertise in
creating bespoke IT systems for servicing private equity funds.
These include dedicated private equity administrators such as
Ipes, Augentius and International Administration Guernsey
(IAG) as well as global brands such as HSBC, Northern Trust
and State Street who have capacity to act as administrators
and/or custodians.
Guernsey’s funds industry can draw on the services provided
by the banking, wealth management and risk management
sectors. In addition, it is supported by a comprehensive network
of investment, legal, tax, audit, accounting and actuarial
advisors, including multi-jurisdictional law firms and the “big
four” accountancy firms where there is specialist expertise
in private equity. Guernsey is home to the Channel Islands
Stock Exchange (CISX), which has more than 3,500 securities
listed and also provides access for listings on both London
and European exchanges. The Guernsey Financial Services
Commission (GFSC) has grown a reputation for its robust yet
pragmatic approach to regulation – for example, all Guernsey
schemes remain regulated but “fast track” routes have been
introduced which allow for the speedy launch of funds where
appropriate. In addition, Guernsey’s skilled workforce not
only has access to in-house training but also the Guernsey
A Private equity international publication
35

Expert commentary: Guernsey Finance
Training Agency (GTA) University Centre, which works with
the Institute of Directors (IoD) to ensure that the island has a
pool of experienced and well qualified non-executive directors
maintaining high standards of corporate governance.
Our pedigree is reflected in the fact that Jon Moulton,
founder of Alchemy Partners and now Better Capital – and
who has a property on the island – has said that Guernsey is
“a terrific place in which to do business”. In addition, private
equity managers EQT and Permira have established their own
bases on the island. Importantly, having a physical operation
in Guernsey provides additional substance to management
arrangements. Terra Firma has not only established in
Guernsey, but chairman Guy Hands has decided to buy a
property and live on the island. This reflects the fact that not
only is the island an ideal location for conducting business or
locating management companies but it is also attractive as a
residence for the managers themselves. This is no doubt helped
by the fact that Guernsey has a zero rate of corporate tax as
standard, there is still no withholding tax on dividends paid,
no capital gains tax, no inheritance tax and no value added or
general sales tax, and personal income tax remains levied at
a maximum of 20 percent, with a variety of capping options
available depending on individual circumstances.
Top tier
Guernsey has during its 50 years as a finance centre and
particularly during the last decade or so, faced scrutiny from
the likes of the UK government, the EU, the IMF, FATF
and the OECD/G20. The island has always cooperated in these
processes and on each occasion been placed within the premier
division of international finance centres.
This has continued to be the case during the past
eighteen months:
• Guernsey features alongside the UK and US on the OECD
“white list” that was published at the conclusion of the
London G20 summit in April 2009;
• The review of British Crown Dependencies and Offshore
Territories by Michael Foot on behalf of HM Treasury placed
Guernsey in the top division of international finance centres;
• Guernsey was ranked 22nd in the latest Global Financial
Centres Index (GFC 7, March 2010) – within the very top
echelon of the so-called “offshore” centres.
There is also every reason to believe that Guernsey has
performed well under assessment by the IMF during the first
half of this year. However, the island never rests on its laurels
but is always looking to the future.
We are currently facing challenges in a variety of guises,
not least in terms of our corporate tax rates. It is reassuring that
Guernsey’s chief minister, Lyndon Trott, has said: “The fund
management industry’s exempt company status is not under
threat and indeed its scope could well be extended.” Guernsey
has also been extremely proactive voicing its position in both
London and Brussels regarding AIFM and we are confident that
the island will continue to have access to European markets.
It is so that we can tackle such challenges most effectively that
the island is stepping up its representation within the corridors
of power in both the UK and the EU.
Guernsey is determined to do all it can to ensure that it
continues to be a leading international funds centre. As such,
I am extremely confident that the island will build on its
illustrious heritage to remain the premier European centre for
private equity business well into the future. •
Guernsey – in brief
• Situated in Europe between the UK and France
• A British Crown Dependency; outside the EU
• English speaking
• Currency: British pound Sterling (GBP)
• Same time zone as the UK
• Links to both London and Europe
Why Guernsey for private equity?
• Range of administrators
• Experience and expertise
• Favoured by leading managers
• “Fast track” capability
• Exchange listings
• Respected international finance centre
36 THE PEI Fund administration and technology compendium | june 2010

SPONSORS
Sponsors
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www.ogier.com
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Contacts:
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Contacts:
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Contact:
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