Fund administration: the silver lining post GFC

One fund management professional likened it to a mega-stress test, marking the end of the first real regional private equity cycle.
One consequence has been a new edge on issues already simmering for some time. Within these, the question of domicile looms large.

"Domicile is obviously key," Nicholas Plowman, a partner with international law firm and offshore specialist Ogier, told AVCJ, "But it is driven, among other things, by how taxation offshore and onshore tie in. From an Asian perspective, the Cayman Islands are the number one PE-focused jurisdiction where people are looking to establish themselves."

A new comfort zone

The choice has been further complicated of late by onshore pressures from different governments on offshore jurisdictions, notably the new European Union draft legislation on alternative funds. "I think this has made people think even more of Cayman as the jurisdiction of choice," Plowman says.

"With the European directive now nearing finalization, it looks likely to retain its premium standing and to move from strength to strength, particularly in the PE and hedge fund world. Cayman has covered all the [new] compliance requirements, including items like Tax Information Exchange Agreements [TIEAs], anti-money laundering [AML], and Financial Action Task Force on Money Laundering [FATF]."

They're not alone in this, of course. But now, following the settling-out of new GFC-driven regulations, another comfort zone is beginning to emerge. And that will have a knock-on effect in Asia, particularly for those aiming to raise money in Europe.

On the same subject, Brian McDaniel, partner with Goodwin Procter, lists the key factors in deciding domicile. One is taxation by the domicile of formation – Cayman, Mauritius, Singapore and Hong Kong will not impose an additional tax on capital gains from the fund.

Another is availability of tax benefits in the investee country. A third is whether, under new anti-avoidance rules, the fund itself – as opposed to only its SPVs – should be in a tax treaty jurisdiction. Singapore and Hong Kong have good treaties with China, while Mauritius and Singapore have good treaties with India.

Other considerations include regulatory and licensing issues in the domicile country, McDaniel says. The benefits of being domiciled in China as a foreign-invested RMB fund have to be factored in.

Javed Rahman, MD with administration services provider Alter Domus, believes that these decisions also depend on who the LPs are, where the GP wants to raise money, and how much they want to spend on structuring, among other issues.

Importance of manageable structures

Another aspect, Rahman adds, is that when forming funds, PE houses should make sure the structure is "manageable" from an operational perspective. "GPs should make sure the fund documents allow for flexibility, without rigidly defining rules," he asserts. Yet another key issue that needs to be considered is deciding whether to manage the accounting and quarterly report preparation in-house, or to outsource these.

Ray Haarstick, founder and CEO of Relevant Equity Systems, states the case for technology. "The chief benefit of a system is control over costs, while ensuring timely high-quality reporting. A well-designed application provides your team with tools to get more work done with less effort."

"Private equity houses are currently in an extremely difficult fundraising environment – even for those with good track records," notes Rob Hutchinson, Executive Director of Audit at KPMG in Guernsey. "Having good accounting and reporting systems is a prerequisite."

Rahman agrees in principle, but notes a developing trend he's seen of late. "PE funds typically have complex distribution and capital call structures," he explains. "Thus, it's very important that there are [appropriate] processes in place, and that qualified accountants are handling the calculations."

"Previously, many PE funds administered their funds in-house. But lately there's been a departure from that practice. Fund operations are increasingly being outsourced."

Relevant's Haarstick disagrees. He sees the desire for more firms to take control of their back office, especially when GPs now have to personally sign off. "You get the best ‘bang for your buck' by far from equipping your financial team with a back-office system that can manage investors, administer your fund, manage and value your fund's assets and generate quarterly reports. Cautious LPs often want to see your system in action during due diligence visits. They want assurance that your firm is on top of its deal flow, making rational investment decisions, and proactively monitoring value creation in your portfolio."

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