A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FISCAL AND OPERATIONAL ISSUES

3.2

Operational issues

3.2.1

Preamble

As already mentioned in section 1.1.4., the operational model of private equity funds has little in common with regular funds. Listed investments are few in number if there are any at all, NAV calculation is infrequent, there are usually no subscriptions or redemptions and reporting is very specialised. If not outsourced to a trusted provider, all the above must be delivered by the private equity firm. In order to reduce operational issues, it is therefore a best practice to establish an operating memorandum for each private equity fund, which gathers roles and responsibilities of the nu- merous intervening parties and precisely describes the processes, including timing and report- ing considerations. As regards outsourced back-office functions, depositary and fund administration services must often be provided by a specialised team, since reporting is hard to automate and services must be customisable and tailored to the fund’s needs to ensure high quality of service.

Robust risk management is also essential due to the higher levels of risk inherent in this type of investment and the fact that the promoter does not always have a solid financial base.

Furthermore, although stellar performance will undoubtedly remain the most significant inves- tor selection criteria, qualitative factors are increasingly seen as a way to differentiate a private equity fund from its competitors. Qualitative factors include:

• The quality, quantity and transparency of reporting to investors, often the only source of infor- mation on the non-quoted companies;

• Effective methods of investment valuation, taking into account unrealised profit, which often forms a significant part of the actual yield. It is worth noting that there is a trend towards com- pliance with European trade association recommendations on portfolio valuation; • And, finally, the GP is scrutinised by increasingly thorough due diligence procedures, so the need to comply with regulations relating to prevention of money-laundering and accounting principals is paramount. All these operational issues are detailed in the following sub-sections. For a better compre- hension before addressing the different operational aspects (subscriptions, capital calls, investments, NAV/IRR, reporting, distribution waterfall), figure 37 displays the typical fund lifecycle from the GP’s and from the depositary/central administrator’s points of view.

3.2

A thorough understanding of PE | page 59