Raju Hussain is well placed to give advice on how to deal with financial authorities. A former regulator himself – he cut his teeth at what is now Financial Conduct Authority in the UK – he has in the last two years guided Europe’s largest private equity firm, CVC Capital Partners, through three regulatory exam processes as the firm’s global head of compliance. Two of these were with the US Securities and Exchange Commission.
CVC operates from 24 offices and is regulated in the US, Jersey, the UK, Hong Kong, Singapore and Luxembourg. Despite being a Europe-headquartered firm, Hussain considers the SEC to be CVC’s “lead regulator.” This is because the firm has numerous US investors – think of any US public pension plan with an appetite for private equity and they are likely to be in the firm’s latest €16 billion flagship fund – and there is cross-border application of the SEC rules. Over the past five years – in particular, since the tenure of previous SEC chairwoman Mary Jo White – the commission has worked closely with PE firms and got to know the asset class well.
The examination processes Hussain has led the firm through – lasting on average for eight or nine months, he says – are “intense,” but they have not tarnished his view of the SEC. On the contrary, “I think our regulators are fantastic,” he tells pfm, when we meet in early November at the firm’s London headquarters overlooking the Thames. “The SEC is not looking to catch you out, although a lot of firms look at it like that. It’s a partnership.”
Hussain’s view is no doubt influenced by the outcome of the examinations, the most recent of which was part of a thematic industry-wide “sweep” in which the commission was looking at compliance with rules around political campaign contributions – topical as we meet in the run up to US mid-terms. Under the Investment Advisers Act Rule 206(4)-5, employees of investment firms who make donations to political campaigns are then barred from providing advisory services to any government entity for two years. For private equity firms who manage public pension money (which is most of them) this is a very real issue. CVC was not among a handful of firms that settled with the SEC over campaign donations this summer.
Much of Hussain’s day job will look familiar to many who wear the compliance hat. He is involved in (but careful to stress not solely responsible for) everything from GDPR compliance to personal trading, know your customer to pay-to-play.
One of the challenges Hussain’s team faces is implementing policies across a diverse group of countries. “Since I first joined, our network has grown, the complexity within our business has multiplied and legislation has changed,” he says. “When we look at regulation today, when we adopt policies, we try to do it on a global level, supported by local policies, but it is pretty difficult. For example, data privacy rights in the 24 jurisdictions in which we operate today are very different. How do we implement email surveillance adequately without impacting people’s privacy?”
The approach, Hussain continues, is to: “take the highest common denominator and apply it on a commercial basis, trying to be pragmatic, commercial and risk-based.”
Hussain reports to the chief operating officer and managing partner Fred Watt as well as to the firm’s local and global boards. The compliance team numbers five plus him: three in London, one in Singapore and one in New York. He is looking to add another to his staff in New York before the year is out.
Where Hussain believes CVC’s compliance team “is different compared to most firms” is the collaboration with the deal team. “We work in partnership with our deal teams, so that with the investments we are making, we are covering general regulatory risk, the risk of bribery and corruption, money laundering risk, sanction risk, audit and independence issues,” he says.
“For example, if we are doing a FIG [financial institutions group] deal today, what are areas that we want the deal team and external counsel to focus on as part of the due diligence?”
Compliance deficiencies in a target company do not necessarily break a deal.
“There could be areas we want to remediate immediately on closing or within six months of closing. It is quite a fluid process of looking at and mapping risk, and then addressing those risks that have a potential impact on our business or funds.”
Hussain comes across as a serious individual. But he cracks up when asked how he would explain his job to a small child. “My [five-year-old] son thinks my job is to fly around the world,” he says, referencing that fact that the week after we meet he is due in Singapore to deliver training to the deal team alongside various outside advisors, as well as meet the internal auditors, the firm’s regulator, and spend a day onsite with a portfolio company.
A large part of the compliance chief’s job involves telling people what they can no longer do: rarely a popular exercise. Is Hussain left sitting by himself in the CVC canteen?
“It was historically the role of compliance to be unpopular,” he says. “It is a control function and it is there to say fundamentally ‘no’ – you are not going to make people happy. It is important to have integrity and to ensure you treat everyone the same. That is super-important.”
Importantly, Hussain continues, the “tone for compliance is set right from the top. Our role is to advise, to challenge. Our senior management team have really empowered us to do the right things.” What is front of mind for Hussain’s team now? Brexit: specifically, what it means to CVC and its portfolio companies. CVC’s initial reaction to the UK vote to leave the EU in June 2016 was work through the portfolio to “understand the risks from a currency, financing and EBITDA perspective.”
“From this summer we have been looking more in-depth at Brexit because of the growing likeliness of a no-deal scenario,” he says. “We have had legal and compliance working closely and leading our deal and business support teams in the UK and Europe. We employ a number of EU nationals in our London office, what does it mean for them? What will the impact on equity and debt capital markets be?”
As compliance chief for one of the world’s largest private equity firms, does Hussain see any dark corners of private markets that regulators will shine their light onto next? If he does, then he is perhaps understandably not saying so. “Private equity is now in a pretty good place in terms of transparency,” he says. “The area of capital call facilities, for example, is now highly disclosed to investors.”
He notes the sophistication of investors and their representative body, the Institutional Limited Partners Association, as playing a part in this. He adds, however, that with funds that are a minimum of 10 years, but almost always longer, one cannot tell what regulatory changes will happen or what terms will change.
What advice does Hussain, who prior to his appointment by CVC in 2012 was a consultant with a broad range of asset management clients, have for firms going through an SEC examination?
One: go through a mock exam process. “Complete a mock audit using consultants or lawyers who have done them with other firms in your sector,” he tells pfm. These can either be a routine mock audit or targeted to a specific area of interest to the regulator.
Two: engage outside consultants to conduct thorough annual reviews.
Three: when the exam, which can last around eight or nine months, is in progress “it is about having a good relationship with the examiners and managing the process well.”
In other words, create an internal team to respond to the initial request list, ensure everyone knows what is required of them and they are able to respond within the timeline – “which in any SEC exam is quite short” – says Hussain. Documents need to be verified internally, which is typically the role of the CCO; data needs to be scrubbed and translated into a format that addresses the question being asked.
“Build the relationship early on,” says Hussain. “if you can’t make the timeline, reach out early for an extension. Have regular catch-ups with the examiners.”