Private equity funds face an ever-changing landscape of government regulations, social agendas and investor sentiment. Only one thing is certain — you can’t be certain of anything. To effectively manage in today’s environment while having an investment platform that can attract capital tomorrow, private equity fund general partners (GPs) and CFOs need an adaptable governance structure that delivers compliance and is responsive to new regulations and investor expectations. There are few simple, key areas to focus in on to enable flexibility in your organization.

What Are the Primary Factors Driving Change for Private Equity Funds?

Market Uncertainties

The second half of 2022 is shaping up to be one of the most intriguing and potentially disruptive in recent memory: 

• The U.S. economy continues to add jobs, which is usually great news for markets. However, September 2022 data shows jobs up 263,000 for the month, yet markets responded by falling 2-4% in anticipation of additional pain from the Fed further tightening the money supply.
• The 30-year fixed mortgage rate has risen above 7.1%, when they were below 3.3% in January 2022.
• University of Michigan’s consumer sentiment index was near historic lows during this past summer, as consumers grapple with higher prices.
• Labor shortages, supply chain disruptions, oil price fluctuations, “crypto winter” and more continue to weigh on businesses.

How these factors play out against each other is unknown, but the implications to private equity fund investments will be significant. The decision whether to pursue an investment or sell a current holding is heavily influenced by the culmination of these factors. To make the most of these decisions, crucial portfolio insights are more important than ever. Accelerating visibility into how these market conditions are impacting a portfolio and resulting valuation is the foundational layer of any corporate governance model.

Increased Government Regulation and Scrutiny

If market uncertainties aren’t enough, government regulators are layering on plenty more to consider. Driven by a wave of social agendas in 2018, corporate boardrooms faced new issues to tackle, many of which were considered long-run corporate interests. Coupled with increased scrutiny from political parties, now private equity fund leaders face a range of topics from environmental, social and governance (ESG) influences, to proposed SEC regulation increasing private fund reporting requirements, to groups like the Institutional Limited Partners Association who are aiming to define and standardize new reporting standards for investors to request as a condition of capital commitments. 

What sticks as a new compliance standard or fundraising prerequisite is yet to be known, but with political agendas continuing to push away from the center, we can be sure new administrations will look to usher in change.

Read about the SBIC's recently proposed regulations that would result in major expansions to its program, and significant reporting requirement changes for private funds.

How to Begin Creating a Flexible Governance Strategy

Given the lack of defined compliance standards and the changing markets, a build-it and leave-it strategy for private equity fund governance and reporting isn’t possible, or at least, isn’t sustainable. It can be easy to overcomplicate governance, but, first, think about whether or not your team is asking the right questions, such as: 

• Without clearly defined compliance standards, do you really know what you are required to report when it comes to governance and investor information? Are you compliant? Are you spending time and resources reporting unnecessary information?
• How will you adjust your governance framework and compliance reports when new standards are approved?
• How will you handle different governance reporting requirements that are driven by local statutory requirements, by portfolio company industry requirements, by fund strategy, by LP requirements?
• Is your team equipped with the technology and human capital resources to adapt to reporting and compliance changes quickly and effectively?

Next, focus on addressing these three foundational areas:

1.    Define and Document Your Governance Structure

• Why: How your governance supports the private fund strategy, market positioning and measures of governance quality
• Who: Governing roles, decision rights and independence expectations
• When: Calendar of governance meetings and high-level agenda topics

2.    Centralize Governance Reporting

• Use a cloud-based application to pull in various data sources required for trusted performance reporting
• Create an archive of financial, ESG and investor capital data to facilitate more efficient audits and compliance reporting

3.    Manage Governance Procedures

• Assign and segregate duties in reporting processes
• Establish control points and review steps in processes
• Control and maintain permission access rights to key reporting processes automating controls
   

While we work with many technologies, Workiva® offers a native connected reporting platform, which provides the full package of automated governance and reporting solutions. Using their technology, Cohen & Company has built the key elements private equity funds need into a pre-configured reporting platform — offering governance and reporting templates to accelerate the design and deployment of your own governance framework.

Learn more about our PE Reporting Solution

With the components above in place, you can begin to think about how you enable flexibility through responsive governance. For each of the areas below, your governance body should validate current reporting requirements, potential changes on the horizon and data required for different stakeholder groups:

• Financial Reports — Statements for fund and portfolio investments
• Investor Capital — Capital activity, cap tables and quarterly statements
• Fund Fees and Valuation Methods — Transparency to fund administration variables, levers impacting investor equity and disclosure compliance
• Management and Performance Reports — Connecting financial and non-financial data to create enhanced portfolio analysis, alongside commentary on historical and forward-looking performance
• ESG Reports — Metrics across portfolio entities, diversity across the entities, and other custom industry or geographic reporting standards

It’s clear that a comprehensive plan and integrated governance framework can provide a single view of fund governance objectives, data/reporting requirements and approved reporting deliverables. Making this a top priority for 2023 will help your private equity fund ensure proper compliance while setting the foundation for a more comprehensive and flexible governance model going forward.

Contact Jim Boland at jboland@cohenconsulting.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.