Conflicts of Interest and Valuation

Information about Conflicts of Interest and Valuation

Published on August 10, 2014

Author: Miles.Peterson

Source: authorstream.com

Content

Conflicts of Interest & Valuation Institutionalizing Practices & Controls: Conflicts of Interest & Valuation Institutionalizing Practices & Controls 1 Senior Fellow from Practice: Gary Berger, CPA, Principal, Rothstein Kass Guest Lecturers: Vincent Calcagno, CPA, Principal, Rothstein Kass Noah Greenhill, JD, GC, JP Morgan John Roth, JD, LLM, GC & CCO, Venor Capital Conflict Areas Being Covered: Allocation Fees & expense Investment opportunities Valuation Liquidity Marketing Other considerations Conflict Areas Being Covered 2 Conflicts of Interest – Fees & Expense: What really is the conflict? Performance Profits How can the conflict be mitigated? Policy Training Testing How can the conflict be disclosed? Conflicts of Interest – Fees & Expense 3 Conflicts of Interest – Investment Opportunities: Personal vs. proprietary trading restrictions Allocations across accounts – mechanical vs. subjective Co-investment opportunities – disclosure, waterfalls, fees Disclosure on competing strategies of the manager or its affiliates Information barriers Conflicts of Interest – Investment Opportunities 4 Conflicts of Interest – Valuation: Why is the VALUATION conversation still so relevant? Institutional Investors Securities & Exchange Commission Conflicts of Interest – Valuation 5 Conflicts of Interest – Valuation (Institutions): Pre-2008 entry point multiples Value trapped in mature funds? 85% of Managers thought enough information was being provided to LP’s Only 43% of investors thought the same Conflicts of Interest – Valuation (Institutions) 6 Conflicts of Interest – Valuation (SEC): Doubling of enforcement cases the last 5 years Largest segment the past 2 years relate to valuation January 9, 2014 - SEC Exam Priorities for 2014 ‘Valuation is one of the five key areas of focus during Presence Exams’ February 2014 - WSJ Article ‘SEC Looking at How Alternative Funds Value Investments’ Conflicts of Interest – Valuation (SEC) 7 Conflicts of Interest – Valuation (Case Study): December 12, 2013 - Accounting & Enforcement Release $27.7 billion AUM Policies in Fund’s prospectus ‘Fund’s directors in c onsult with administrators’ Pricing and valuation policy ‘framework and methodology for determination, validation, approval, regular monitoring and review of pricing . . .’ ‘…each of the Fund’s directors delegated the responsibility … to the Independent Pricing Committee’ Conflicts of Interest – Valuation (Case Study) 8 Conflicts of Interest – Case Study Details: March 20, 2008 purchase 25% stake for $210 million IPO in the near term March 31, 2008 valuation $425 million Internal PM report using DCF & comparable comp’s Significant increase in commodity value & a quadrupling production forecast over next 4-5 years Conflicts of Interest – Case Study Details 9 Conflicts of Interest – Case Study Details: July 2008 transferred to related fund By November 2008 all of the prior key assumptions and inputs to valuation reversed January 2010 3 rd party report for $350 million September 2010 3 rd party report $221-284 million January 2011 effective December 1, 2010 Conflicts of Interest – Case Study Deta ils 10 Conflicts of Interest – Case Study WWW: Systematic, monthly practices to share relevant information not present Middle office & portfolio managers Middle office & IPC No mechanism to ensure sufficient review time nor challenges of marks No record of basis for monthly decisions although there was a ‘comprehensive documentation’ standard Undocumented procedures developed (semi-annual reviews) Conflicts of Interest – Case Study WWW 11 Conflicts of Interest – Valuation Best Practices: Valuation policies & procedures Valuation governance Standardization of models, supporting schedules & documents Establish & maintain controls Appropriate use of 3 rd party valuation firms Hire adequate talent Review Conflicts of Interest – Valuation Best Practices 12 Conflicts of Interest - Marketing: What really is the conflict? False or misleading statements Omission of facts Liquidity appearance Side letters How can the conflict be mitigated? Document review & approval process (evidence) Review process for communications Training How can the conflict be disclosed? Conflicts of Interest - Marketing 13 Conflicts of Interest – Liquidity: Asset & Liability mismatches Gates, suspensions, side pockets Parallel accounts with varying liquidity terms Zombie funds & run-off vehicles Conflicts of Interest – Liquidity 14 Conflicts of Interest – Other: Structural Substance over form Real vs. potential Culture of compliance Compliance vs. business decision Conflicts of Interest – Other 15

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