Study: Internal controls essential for managers

It’s no secret that limited partners like transparency. In today’s private equity market, establishing internal mechanisms for transparency is essential to attracting investors, according to a recent report from PricewaterhouseCoopers. 

While many LPs are expected to increase their overall allocations to alternative assets in the next few years, investment managers will need to adopt in-house functions if they want to retain commitments from LPs, the report said. This includes establishing valuation policies and methodologies with investors, which gives limited partners a greater sense of trust and security in their partnership with a manager. 

Firms can build trust in a number of ways, including bringing in third-party administrators and other service providers to eliminate any potential or perceived conflicts of interest, according to the report. 

“Internal controls are important for understanding how folks understand how firms operate now and in the future,” PwC managing director Sam Gallo told Private Equity Manager. “They’re not giving away their secret sauce … I don’t see it as a negative. I see it as a positive where, they’ve built these very strong internal controls, and they need to communicate that these internal controls work.”

Among other LP concerns the report lists, PwC recommended alternative investment managers communicate with their investors on market and strategy risks and provide documentation of firms’ critical business processes that manage those risks. Establishing those business practices is more important now considering recent regulatory efforts that have targeted the industry, Gallo said. 

“In the midst of a new regulatory requirements coming down the pike, private equity [firms] are going to have to operate in a space where they might not feel as comfortable as their hedge fund partners counterparts,” Gallo said. “It’s about both finding that balance of running that investment portfolio and running a business successfully.”