Download From Cottage Industry to Financial Leaders

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
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