More than 550 professionals gathered at the CFOs and COOs Forum 2018 to discuss everything that matters to those running private funds. Here’s what we heard on the sidelines:
“Good luck to whoever tries to standardize performance calculations”
Ask four GPs to dig into the detail of how they calculate performance, and you will get four different methodologies. Do you include the GP commitment when calculating net IRR for the fund? How about recycled capital? How long do you leave your subscription credit line outstanding? And once you have come up with your methodology – with everything neatly and transparently footnoted – what data are you going to use to benchmark your performance? With the increasing prevalence of co-investment, performance calculation is diverging, not converging.
“PE in 401(k)? The law will have to change”
Offering private equity in defined contribution retirement plans, particularly 401(k)s, remains a challenge, with the Employee Retirement Income Security Act and fiduciary duty being the main obstacle, ahead of liquidity and daily valuations, according to an audience poll conducted during the forum. Delegates noted that laws and regulations related to the fiduciary duty will need to be reviewed and modified for this to be viable.
“Think about what you do at the end of the fund’s life”
When raising a new fund, GPs need to recognise and demonstrate their experience in dealing with their end-of-life funds. Do you work on a liquidity solution with a secondaries buyer or extend and negotiate with LPs about who pays what in fees and expenses? With one in five GPs expecting to restructure or recapitalise a fund this year, according to a delegate poll, and more than two-thirds looking to seek extensions, these questions are pressing.
“Our tax team is burning the midnight oil”
Tax reform is giving CFOs a series of challenges across their organisations and portfolios. One area of uncertainty relates to the three-year minimum holding period for investments to qualify for long-term capital gains treatment. Whether a bolt-on acquisition would reset the holding period for part of the investment is not yet clear. “There is still a lot of clarification needed,” said one CFO.
“We need to run ourselves like a portfolio company”
As the private equity industry develops – and firms grow their assets under management and into new strategies – GPs need to start running themselves just as they would expect a company they invest in to be run. That means shifting more of the focus onto firm management – and there’s nobody better placed to take the lead on this than the CFO.