A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

PERSPECTIVES FOR THE INDUSTRY

CACEIS’ s opinion in L uxembourg In the context of the recent financial turmoil, an uncertain economic outlook for 2010 and regu- latory developments at both a European and national level, what can be seen as the major challenges faced by private equity firms going forward? Clearly, it may be too early to draw any definite conclusions in this respect. However, as a leading provider of custodial and fund administration services to the private equity industry in particular and the funds industry in general, CACEIS is well positioned to give an opinion, taking into account the likely effects of the European Commission text published on 30 th April 2009. (1) Changes to the role of the custodian The depositary’s monitoring duties, “knowing at all the times how the assets of the UCI/SIF/ SICAR are invested and where and how they are available” may no longer be understood as a “lighter” supervisory regime on the part of the custodian. Recent financial turbulence has highlighted some of the control functions of the depositary bank, including confirmation of holdings by the private equity vehicles, reconciliations and monitoring of settlements of the portfolio and overdrafts. Robust controls on any fund’s out- sourced services (not only sub-custodians and prime brokers) and a counterparty to fund’s transactions in order to ensure settlement in a timely manner are of the utmost importance. Current discussions at the EU Commission on the reform of the current architecture of the fi- nancial system are aimed specifically at reviewing the definition and interpretation of the de- positary’s duties and liabilities. Furthermore, the AIFM’s proposed directive permits exempts the custodian from liability for losses, if it can demonstrate that a loss was unavoidable (rein- forced “obligation de moyen”, with the burden of proof remaining on the depositary). Both the above underline the growing importance of depositaries’ supervisory role. As a consequence, it is in the interests of private equity firms to entrust the assets of their fund to depositary banks which focus on maintaining or setting up, as the case maybe, high standards of quality-control to ensure compliance with Luxembourg laws and regulations and prevailing EU regulation regarding the supervisory role. (2) On the valuation process Over the past years, administrators of private equity fund vehicles have been increasingly so- licited to contribute to the valuation process. However, in practice administrators tend not to see themselves as valuation agents and leave the valuation of certain private equity assets to expert pricing agents or the governing bodies of the fund in question. This practice is in line with the recommendations of the IOSCO and AIMA. It will be certainly challenging for fund managers to comply with the requirements of the draft AIFM directive, which requires AIF funds to appoint a valuation agent which is independent from the fund manager, to ensure the fair valuation of the assets under management as well as the valuation of their shares or units. In the future, the ability to provide such a service is likely to become a key factor for both admin- istrators and valuation agents. Fund managers will have to see how to optimise their contribu- tion to the process of different service providers without making them endorse uncontrolled responsibilities. Valuation agents and AIFMstill need to agree whether the ultimate responsibil- ity for the valuation remains with the fund’s governing body.

page 80 | A thorough understanding of PE