Prepare now for more private equity and hedge fund regulation
Amid increased calls for transparency, hedge fund and private equity firms are bracing for enhanced regulation. By taking a top-down approach to governance and risk that encompasses the entire organization, executives can help prepare their firms for heightened disclosure requirements while maximizing internal efficiencies. Below, we answer some pressing questions.
Q: Why must firms build an effective governance strategy that begins at the top?
A: Creating an effective governance and risk management framework can be time consuming, costly and difficult – and inefficient if undertaken in silos. Management and the board of directors must set the tone for the organization, and help it build a true culture of governance and risk management. An effective governance framework consists of three levels of defense. Using this basic framework, each organization can tailor its efforts to meet its own unique needs and budgetary limitations.
Q: How should alternative asset management firms position themselves to meet the demands of a market calling for more transparency, disclosure and regulation?
A: To be successful, firms should do three things:
- Establish a more formal governance and risk framework with the appropriate sponsorship and involvement from senior management and the board.
- Embrace more sophisticated oversight that reduces both risk and surprises, in the form of dedicated risk management and compliance functions.
- Establish or improve the internal audit function.
Firms should approach all of these efforts holistically and consider their impact on all stakeholders within the organization.
Q: How has risk management become a potential differentiator for private equity and hedge funds?
A: To reduce risk, investors are asking for more rigorous oversight from asset managers, and demanding information on processes firms once considered proprietary competitive advantages. In response, asset management firms are:
- Addressing regulatory compliance risk.
- Investing in the infrastructure to support the management of operational, technology, market and counterparty risks.
- Implementing more robust treasury and cash management practices that maximize returns, while lowering the risks associated with liquidity and forecasting.
Funds can go a long way toward meeting the appeals of existing and potential clients by making the right investments in a governance and risk management framework. They can lessen risk across the organization by addressing it holistically, and by being as forthright and transparent as possible about these processes, without disclosing proprietary information.
Q: How can alternative asset management firms benefit from a formal internal audit?
A: An internal audit can help firms assess business strategies and models with increasingly complex risk profiles. Internal audits also can help firms quantify and assess the scope of challenges associated with public offerings and the launch of funds, among other objectives.
For additional information about increased private equity and hedge fund regulation, Meeting new questions head on
