July is here – the weather is hot, and so is corporate governance. The July issue of Private Equity Manager is filled with reasons why this is so.
As money, securities and people increasingly cross borders, the burden of making sure that all of this activity takes place in an orderly and legal fashion is getting heavier. At private equity firms, that burden falls largely to the chief financial officer, the chief compliance officer and the general counsel (three roles which sometimes are played by a single person).
Take, for example, Judy Kuan's article about the optimum structure of an India-focused private equity fund (see p. 20). In seeking tax efficiency, as well as a structure with which limited partners will be comfortable, GPs must establish and monitor entities in several jurisdictions. Some of the tasks required as part of this structure are simultaneously mundane and exotic. For example, a New York-based CFO managing an India investment program will monitor, probably for the first time, Mauritian board members. Such is the regulatory complexity of today's global private equity market.
While standard practices have emerged in many aspects of the private equity business, there remains corporate governance noman's land. This month we also profile an ongoing (and very behind-the-scenes) battle between private equity firms and their auditors with regard to fair value (see p. 30). Especially in the US, standards of valuation have been put forward but not universally adopted. At the same time, auditors are coming under increased pressure to demand more aggressive and proactive efforts toward fair value on the parts of GP clients. How long can an industry with accounting based entirely on ?manager discretion? outrun the flood of corporate governance scrutiny?
Finally, corporate governance matters because investors say it does. A recent global survey from Institutional Shareholder Services includes a quote from an unnamed money manager: ?A company that is well run will probably address problems that arise more quickly. A company that focuses on its accountability to shareholders is more likely to act in their interests, and a company with good governance is probably less at risk from malfeasance.?
In a low-return environment, simply working hard to not lose money through malfeasance can warm LP hearts.
Enjoy the issue,