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The 2015 Preqin Global Private Equity & Venture Capital Report From Cottage Industry to Financial Leaders - Steve Judge, President and CEO, PEGCC - Bronwyn Bailey, Vice President of Research, PEGCC When private equity began to take hold in the 1980s as a new investment strategy, the industry was characterized by few firms and $100mn denominated funds. Flash forward 30 years and the once cottage industry now manages approximately $3.8tn of assets according to Preqin, fueled by investors’ need for exposure to this asset class. At the same time, private equity has come under stress due to external factors. The global financial crisis and greater regulatory scrutiny have transformed private equity firms’ internal processes and requirements. Consequently, firms increased their efforts by creating robust “back offices” to meet these demands. Changes include hiring new Chief Compliance Officers (CCOs), increasing the scope of the Investor Relations role, and elevating the Chief Financial Officer (CFO) position. The Private Equity Growth Capital Council (PEGCC) has responded to changes at our member firms by offering more resources and educational settings to assist the development of these roles. Chief Compliance Officers The passage of the Dodd-Frank Act brought one of the biggest shifts in the regulatory framework for the US private equity industry. Since 2012, private equity firms with over $150mn in assets under management are required to register with the Securities Exchange Commission (SEC) and are subject to additional regulatory oversight that comes with such registration. Firms must now document their compliance programs and undergo SEC exams. In preparation for “presence exams,” conducted by the SEC from October 2012 through October 2014, many private equity firms hired CCOs to oversee regulatory compliance and ensure readiness. The importance of the CCO to a wellfunctioning private equity firm is the main reason why the PEGCC created a CCO Working Group. Here, CCOs and legal experts meet regularly to exchange information about current regulatory developments and best practices. CCOs now have a forum for discussing key issues, such as SEC exam processes, valuation guidelines, ESG policies, the European Alternative Investment Fund Managers Directive (AIFMD), and compliance standards more generally. Investor Relations As the impact of the financial crisis dried up liquidity, the power dynamic between limited partner investors (LPs) and fund managers began to shift. Fund managers competed for scarce capital held by asset owners, and fundraising became more difficult. Although equity markets have since rebounded and LP demand for new funds has increased, other factors have continued to expand the purview of the Investor Relations (IR) role. IR professionals have quickly become well-informed on regulations impacting fundraising – such as AIFMD – knowledgeable about ESG policies, and experts on the latest metrics used in fund benchmarking. This role still requires careful navigation of demands by current and future investors as well as the changing regulatory landscape. By organizing IR Committee meetings to discuss these challenges and seminars to offer guidance on developing and implementing ESG policies, the PEGCC is supporting this evolving role at private equity firms. IR professionals appreciate opportunities for peer-to-peer discussions about fundraising best practices, trends in LP due diligence requests, and sources for PE market data. CFOs’ oversight of these additional areas motivated the PEGCC to create an annual CFO Day as a forum to share professional insights, supplementing the regular CFO Committee schedule. CFOs came to the first event looking for practical information that they could implement when they returned to their offices. One of the most popular topics during the first CFO Day was cybersecurity, an issue that continues to increase in importance and one on which the SEC has begun to focus. Conclusion Since the PEGCC opened its doors in 2007, the global financial crisis created seismic shifts in the economic dynamics of the industry, which were followed by stricter investor requirements and greater oversight by regulatory agencies. Private equity firms have modified their business practices due to these changes, and their trade association has adapted in serving the needs of its members and advocating on behalf of the industry. Chief Financial Officers Both greater requirements for transparency by LPs and increased regulatory hurdles place additional demands on Chief Financial Officers (CFOs). The growth of the industry has elevated the CFO role in many ways. In addition to fund administration and communications with LPs, CFOs may also be asked to lead the implementation of IT systems to ensure cybersecurity and to choose software to automate the transmission of fund financials to LPs. Increasingly, CFOs are also playing a role in compliance, particularly concerning company valuations. Private Equity Growth Capital Council (PEGCC) The Private Equity Growth Capital Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry and its contributions to the national and global economy. www.pegcc.org For more information about the report, please visit: www.preqin.com/gper alternative assets. intelligent data.