Private Equity Managers Need To Up Governance Game if They Are To Thrive in a Volatile World

Recent years have given rise to a number of significant headwinds; geopolitical uncertainty, disrupted energy supplies, conflicts in Europe and the Middle East, sizeable rises in inflation and an increase in the cost of capital have all collided to create a challenging backdrop while heightening the perceived risks of operating in such an environment.

Meanwhile, advances in the digital sector – particularly in relation to artificial intelligence (AI) – and question marks over the evidencing of ethical considerations and benchmarks have prompted greater focus on corporate governance standards.

Naturally at times of great uncertainty, stability is something that resonates in particular among investors – and demonstrating rigour through governance frameworks and processes, board composition and jurisdictional robustness is becoming increasingly important in achieving that stability, and in turn imbibing investors and managers with the requisite confidence.

The right people at the table

At its essence, the primary impetus of fund governance is to ensure all operations are in line with the stated objectives held in the offer documents and to safeguard the interests of investors.

The Financial Reporting Council’s (FRC) Corporate Governance Guidance sets out a number of considerations when establishing a governance framework; strong leadership, effective decision making, engagement, division of responsibilities, audit, risk management and internal controls are all cited as imperative to creating a robust governance culture.

But diversity of board composition – ensuring the right breadth of knowledge, skill, experience and perspective are at the table – is also highlighted as crucial to the objective of discharging governance duties.

It is a point that was affirmed by research from the Institute of Directors, which indicated that it is in fact the board composition, over any other aspect in the governance framework, that dictates future success.

As such, meeting stakeholder and ever-changing regulatory demands has put the role of the non-executive director front and centre where their expertise and integrity have become vital to protecting investor interests, mitigating risks and shaping strategic direction.

It is a position that should not be underestimated; not only can non-executive directors provide independent oversight, greater transparency and accountability, but they can be drivers of value creation where their presence boosts investor confidence which in turn increases the capital raising ability of the manager.

Finding symbiosis

International finance centres (IFCs) undoubtedly also play a distinct role in upholding high standards of governance, both by offering a finely honed regulatory ecosystem that provides a clear platform for governance and substance, but also by having deep pools of experienced non-executive directors to hand.

Central to the success of such IFCs, however, is a reputation for robust corporate governance practices, which subsequently drive trust and attracts investment. These jurisdictions have a vested interest in supporting such symbiosis, which is crucial to their own growth as quality financial centres.

Such centres understand the need to keep pace with the regulatory playing field with threats, such as grey listing, posing significant risks to their viability especially where financial sanctions, market access restrictions and – ultimately – a loss in investor confidence are at play.

But, while international regulatory bodies such as the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development (OECD), keep a close eye regarding their adherence to global standards on anti-money laundering, combating the financing of terrorism, tax transparency, and regulatory compliance, such centres are acutely aware that their future lies in a cooperative stance.

For instance, towards the end of last year, changes in the Jersey landscape with the amends to Schedule 2 of the Proceeds of Crime (Jersey) Law 1999, brought a large number of individuals who act as directors, into scope of Jersey’s anti-money laundering, countering the financing of terrorism and counter proliferation financing regimes.

Meanwhile further afield in the Caribbean, developments in Cayman around corporate governance and internal controls are requiring boards to address five key components to fulfil their fiduciary duties: control environments, risk identification and assessments, control activities and segregation of duties, and information and communication, as well as monitoring activities.

Striking the right balance

Of course, quality jurisdictions will be mindful of not creating too onerous a regulatory environment that hinders non-executive director decisions and dissuades new entrants. IFCs that can find the sweet spot between proportionate regulation, investor protection, and ease of use underpinned by a solid corporate governance backbone will stand out in challenging macro times.

The pace of change shows no signs of slowing down. With the global landscape set to continue to challenge managers with complexity – from market uncertainty and geopolitical fragmentation to digital disruption and evolution in sustainable finance – private equity managers will increasingly need to ensure they are able to adapt quickly and appropriately if they are to retain the trust and confidence of their investors.

Thinking long term, beyond tomorrow, and implementing robust governance will be critical in achieving that.

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Simon Page is Head of Fund Services at Hawksford

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group