5 THINGS YOU MISSED: ACG’s NY Luncheon ‘Family Office Update’ event

1 Separating the Private Equity Firm and Family Office: It is very important thatthe private equity firm and the family office are separated to have better autonomy for each. A separate management team for family office can make decisions without having any conflict of interest with either the private equity firm or any of the investors. The separation also makes sure that the deal which the private equity firm is looking into is not passed on to the family offices and vice versa, thus giving each fund the independence to look into deals, make their decisions, and not be influenced by the other. If the manager of the family office is also part of the management team of the private equity fund, then it becomes difficult for such managers to make the right decision for the fund or the family office. Hence, it is better to have to separate entities in place where there is more professionalism, making it easier for anyone to give answers when asked about any conflict of interest
2 SEC Involvement in Family Offices: If there are any co-investments with an unregistered or exempt firm, then it is better to have procedures in place and make sure that the investments criteria stated by the SEC are followed. Otherwise, this can be a challenge if the SEC conducts an audit. Primarily, the SEC looks into possible conflict of interest cases in deals which involve family offices. They also look into club deals which have broken deal expenses. “It was all fees; they were focused on fees, co-invest fees. Since we are a small fund, we do a lot of co-investment,” said Andy Unanue of AUA Private Equity Partner. The SEC further would want the family office to disclose any payments made to any adviser to the family business and private equity fund. Separately, it is observed that the auditors are not as knowledgeable/aware as they should have been about the family office space.
3 Professionalizing Family Offices: It is better to register the family office before the SEC makes it compulsory for family offices to be registered and professionalized. “What we are starting to see now is a little bit more institutionalized and professionalized concept: having these family offices operate as a business and bring in good quality, professional people to manage the assets of the family,” said Jay Levy of Cohn Reznick. Currently, there is a trend for a family office to move away from investing in hedge funds and getting more involved in private equity funds; these have more procedures and complicity involved. Hence it is better for the family offices to be professionalized.
4 Cyber Security: When there is a club deal, the family offices are exposed to other co-investors regarding personal information. There is a risk of possible cyber-attacks in such deals and the information of one or more family offices’ data can become compromised. “SEC expectations are for registered investment advisors, which we see both registered and non-registered family office adopting. The SEC wants to see a risk assessment that’s being performed, initially and on-ongoing as the business changes.” said Christopher Ray of ACA Compliance Group. Headded that SEC wants to see supervisory procedures and measures in place for data loss prevention like procedures/measure relating to mobile devices and access to mobile storage; portable storage and phishing testing; and mock phishing testing done with employees. Recently, cybersecurity has become a hot topic and the regulators and investors have started paying more attention. There is regulatory compliance published by the SEC and also a best practices page published by ACG, with emphasis on cybersecurity.
5 Procedures and Documentation: Having internal control processes within the family offices which are documented and followed are of utmost importance. Procedures should be in place about the authorization, approval, and reconciliation of the transactions, thus making sure that there is accountability for the same at the end of it. “If there is one thing I would definitely pass on, it is ‘documenting.’ One of my favorite sayings is that if it is not documented, that means that it doesn’t exist or didn’t happen. I can’t overstate the importance of writing down your procedures because if a regulator or examiner comes in, it won’t do you any good until it’s written down,” said Scott Gluck of Duane Morris.

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