Heard from GAIM Ops West - Day 1

Castle Hall is pleased to attend this year's GAIM Ops West conference in Palm Springs, California. Today's session focused on the perspectives of investors, with a separate track addressing private equity due diligence.

• Private Equity ODD is rapidly becoming universal - and is universally troublesome. Investors have rapidly moved to extend their ODD procedures to include their new (and existing) allocations to private equity managers. However, varying levels of disclosure and transparency is a problem for many. Some large PE managers, knowing they are oversubscribed, are universally judged to jump on the opportunity to dial back on transparency. So, the more successful you get, the less institutional you behave?
• Accounting and ops must track - and reconcile - the fees that they pay to their managers, including PE. Investors may hold positions in several hundred funds, and discussion focused on the need for standardized templates, digital data exchange initiatives - and transparency. Implicit was the view that completion of an audit does not mean that the fees (and especially calculation of the carry) are necessarily correct.
• Here in California, a new law - AB2833 - requires state investors to disclose the fees paid to their asset managers. Other US states (and various international jurisdictions) are also forcing fee transparency. These initiatives aim to increase accountability, so that the end owners of pension plan and foundation assets can determine how much of their capital has been paid in fees to the asset management industry.
• Diligence monitoring is increasing, but with considerable variation in process. Investors will typically ask for updated information from their managers at least once per year, but intra year procedures remain varied. The scope of questions and type of required reporting also varies by allocator. Questions included the cost / benefit of completing refresh background checks - at Castle Hall, we certainly believe the sub $5k cost is justified each year once an allocation exceeds, say, $25 million.
• ESG is on the radar, but less so in the US as compared to Europe. Aside from discussions around ESG and the potential to enhance investment returns within a strategy, panellists also discussed #metoo and diversity at the management company level. In New York, the State now requires every employer, irrespective of size and industry, to adopt a sexual harassment policy (the model documents provided by the State are a helpful read for both managers and investors, noted one panellist).

The ESG discussion ended in a final question. While investors are interested in topics, and certainly require more disclosure (ideally in a more standardized form), how many investors are prepared NOT to allocate if a manager does not meet their ESG criteria? Equally, how many investors will allocate to a "hot" PE manager - even if the level of disclosure and transparency falls short of the investor's policy and requirements imposed on other allocations?

Rome was not built in a day, and it is important to work incrementally to improve procedures, in a sense of partnership between investors and the asset managers in their investment "supply chain".

Equally, at one point in time, AML rules were such that it was fine to not ask for a copy of the passport of someone you knew really well, or someone who would be really offended if you demanded the utility bill. AML is certainly one area where diligence workflow has become standardized, and over time loopholes in asset management diligence will also close.

Looking forward to Day 2!