Alternative Assets

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Lisa Dodge

Investment Compliance SeriesPrivate Equity andAlternative Assets


Lisa Dodge, Compliance OfficerState of Wisconsin Investment Board (SWIB)


•Growth of Compliance•Independent of Investment Areas3


•Private Equity and why the investments areimportant?•What are some key definitions anddescriptions?•Where are the areas of risk?•What controls are in place?4


•Types•Players•Terms5


•Private Equity Limited Partnerships (LP) are along-term investment, 10-12 years•Private Equity LP are illiquid and difficult to exit.•Private Equity LP underlying assets can becomplex and have significant price volatility.•The very nature of a Private Equity LP iscomplex.6


•Portfolio and partnership guidelines•Initial investment due diligence•Bridge financing•Capital calls and management fees•Income and distributions•On-going monitoring of investments•Valuation methodology7


• Limited partnership agreements• Legal review• Initial due diligence• Appropriate approvals• Compliance Testing• Ongoing due diligence review• Quarterly and annual reports• Audited financial statements• LP's Annual Meetings• Annual Strategy review8


•Limits the investment risk•Examples:•Approvals•Diversification•Geographical Focus•Leverage•Public Securities9


•Investment restrictions outlined in thepartnership agreement•Examples:• Diversification• Geographical Focus• Leverage• Public Securities10


•Investment strategy and rationale•Face to face meetings with management team•Strengths and weaknesses•Strength of management team•Historic performance, financial modeling/risks•Key drivers of value•Fees•Differences of past funds & proposed fund•General Partner commitment and compensationlinked to performance11


•A bridge loan is interim financing untilpermanent or the next stage of financing can beobtained. Money from the new financing isgenerally used to "take out" (i.e. to pay back)the bridge loan, as well as other capitalizationneeds.•Example12


•Capital Calls:•The amount of money called by the Fund for aninvestment.•Income and Fee Distributions:•Fund expenses and management fees paid by theLimited Partners.13


•Fee paid to the General Partner to cover thecosts associated with running and administeringthe Limited Partnership.•Structure•Range•Mechanics/Nuances14


•Carried interest is the share of profits allocatedto the General Partner once the cost basis hasbeen returned to the Limited Partner.•Allocation of Profits•Preferred Return15


•Verify on-going communication with the LimitedPartnerships management team•Review of quarterly reports•Review annual audited financial statements•Verify attendance at annual investor meetings•Review capital calls, management fees,distributions, limited partnership restrictions16


•A clawback provision requires the GeneralPartner to return any excess carried interest(profit) to the Limited Partner generally at thefinal distribution or liquidation of a partnership.•General Partner’s Internal procedure17


•Most partnership agreements :•Have the ability to recall distributions for reinvestment.•Recall of capital but not profits.•During the investment period.18


•FASB 157 is effective for Fiscal Years beginningafterNovember 17, 2007.•Fair Value per FASB 157 –The price thatwould be received to sell an asset or paid totransfer a liability in an orderly transactionbetween market participants at themeasurement date.•Fair Value Methods:•Market Approach•Cost Approach•Equity Method (Income) Approach19


•Understand:• Nature of the underlying assets•Partnership’s strategy•Method and significant assumptions used by thepartnership to value the underlying investments•Confirm that:•Investments are valued in accordance with statedpartnership accounting policies•Valuation methodology is consistent across allinvestments within the partnership20


• All new investments are reviewed for adequate duediligence.• Approvals are verified for all new buys and sells.• Monthly compliance review of investments to investmentguidelines.• Investments are monitored quarterly for documentationsupporting on-going due diligence performed byinvestment staff.• Investments are randomly tested to ensure that capitalcalls, management fees, income and fee distributionswere reviewed to agree with partnership agreement.21

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