Private funds investors are formalizing their approach to compliance, with some managers noting that the pandemic led to an “explosion of more ODD work from LPs that touched on compliance in a way that wasn’t formal before.”
Managers are fielding questions on everything from SOC reports, vendor selection and monitoring, and even whether their firms have an internal audit function, attendees at the Private Funds CFO Network’s European Forum said earlier this month. Reporters attending the event were not allowed to name speakers and other attendees.
Of course, regulators – particularly in the US – are also demanding more than ever. Custody has become a key focus of the SEC during its inspections, and chief compliance officers must demonstrate to the regulator that their annual and quarterly reports are on time, and that all information is being disclosed to investors.
The SEC introduced a major package of private funds regulation this summer and in Europe the European Supervisory Authorities are considering changes to the Sustainable Finance Disclosures Regulation, which could lead to the reclassification of Article 8 and Article 9 funds – different regulatory classes of ESG-focused investment funds – and amendments to the disclosure framework.
Managers are thus coping with increased engagement with regulators and LPs alike. As investors become more educated, fund operations teams have to be sure that they understand their obligations and clearly communicate that they are complying.
The CCO of a London-based secondaries and co-investments specialist said that, “in some instances, ODD meetings with existing investors are now 10 times longer than pre-covid.”
The CFO of a US healthcare-focused VC firm said: “We put together a day one presentation for ODD when we were fundraising a couple of years ago; normally we would have done that only for the SEC. The questions weren’t the same from all LPs but the presentation was a lot more formal.”
Do what you say
But managing partners can still be reluctant to apportion the necessary investment into their compliance departments, said one CFO attending the event. “[Budget] continues to be the biggest point of friction,” the person said.
That can be counterproductive, the CFO of the VC fund explained. “There’s still a culture of ‘say as little as possible’ and explain later if you have to. I think that’s counterproductive,” the person said.
And with the risk tolerance among institutional LPs, such as heavily regulated insurance companies, changing, firms need to be ever more careful. Noncompliance may not just lead to enforcement by a regulator, it can destroy investor relations. “LPs don’t want to see you receiving a deficiency letter,” said one compliance expert.
One approach that some CCOs are taking is to “force themselves into the gaps”, as one expert put it, having weekly catch-ups between the investment team, CFO/CCO and head of fund operations.
“Communication is the only way to deal with that, making people aware that we are doing what we say we are doing in our compliance policy with regards to conflicts,” said one CCO.