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Technical briefing - 14 August 2018

Importance of fund board composition and adding value to the investment process

Following the financial crisis, the role of the fund board has come under greater scrutiny following a number of high profile legal cases. A fund board has the critical role of ensuring leadership of the fund while protecting investor interests. This article will consider the role and mix of a fund board and how the board can add value throughout the investment process.

Author of article:

Bobby Stirling

Global Head of Client Accounting

What makes a successful fund board?

Firstly, it is important to understand what the asset manager and investors are looking for in their boards. As referred to above, the key role is that of leadership. In addition to the core fiduciary duties, a board is required to independently balance the interest of all the fund’s stakeholders. They must ensure the fund operates within its mandate and in compliance with the local regulatory environment. They need to oversee the interactions with all the funds service providers such as asset managers, administrators, auditors, tax advisors and lawyers.    

A varied skill set on a board is critical. If, for example, a board has an appropriate mix of lawyers, accountants, administrators, industry specialists and non-executive directors, to name just a few, then the fund is better placed to mitigate the many risks faced during its life cycle. However, if a board composition is concentrated within one or two skills sets then certain risks may be mitigated while others not sufficiently addressed. For example, there has been a move to appoint chartered surveyors to real estate boards to provide a level of asset class expertise.

The long-term popularity of the Channel Islands as a jurisdiction has resulted in a growing number of non-executive directors with previous experience servicing the funds industry. This can only benefit investors, as board members will have often gained experience in a variety of areas within the funds industry and, with the correct mix, can develop an appropriate governance framework.

Adding value to the investment process

One of the biggest, if not most critical aspects when adding value and generating positive investor returns, is balancing the board’s knowledge of the asset classes and markets with asset managers. How does a board member obtain comfort over the transaction price for an early stage illiquid asset? The deal teams invest significant amounts of time in understanding the target asset and micro economic environment before entering negotiations with the vendors. The fund board is presented an overview of the process and requested to approve the investment.

It is imperative that the board provides sufficient challenge to the process prior to approving investment related transactions. A number of the key questions that a board member should ask include:

  • Is the target company in line with the investment policy as detailed in the information memorandum or prospectus of the fund (i.e. a technology fund would not normally invest in property or a buy-out fund in crypto-currency)?
  • Does the asset manager have the expertise in the relevant asset class?
  • Has there been sufficient time to review the proposal i.e. were board papers circulated in advance of the meeting?
  • Was sufficient due diligence performed?
  • Has tax advice been received regarding the structuring and potential exit strategies?
  • Is there evidence of the likelihood of a positive return of investment – i.e. is it the intention of real estate assets to obtain returns through rental yield and/or capital return?
  • How will performance be monitored throughout the asset holding period?
  • Has there been a robust negotiating process where the asset manager developed a deal in the fund’s best interests?

Increased allocations by institutional investors, sovereign wealth funds and family offices to alternatives has resulted in greater diversity in asset classes. PwC’s 2017 “Asset and Wealth Management Revolution Report” anticipates global alternatives AuM will increase from USD10.1 trillion in 2016 to USD21.1 trillion in 2025.

While there has been growth in established alternative asset classes such as private equity, real estate and infrastructure, there has also been increased allocations to less traditional assets such as renewables and crypto-currency. Such diverse asset types highlight the need for boards to understand the fund’s mandate and provide appropriate challenge to the investment process.

What does the future hold?

The Channel Islands is well placed to further its position as a centre of excellence for funds investing in alternative asset classes due to the collaboration between government, regulators and industry. The total net asset value of funds under administration in Jersey at the end of 2017 was more than £291bn, representing a 15% year-on-year increase.

Continued innovation in products, such as the Jersey Private Fund (JPF) or Guernsey’s Private Investment Fund (PIF), provide cost effective solutions for fund structuring, allowing a greater allocation of the board’s time to the investment process and value-add opportunities.

As alternative funds look to diversify asset classes, the Channel Islands is well placed to continue its strong tradition as a world-leading centre for fund domiciliation.

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