Governance set to become a specialist discipline Funds are finding that only independent specialists can deliver the necessary oversight of complex SPV structures
Changing regulations and tax legislation are giving Chief Financial Officers and General Counsels a virtually impossible task. The private equity (PE) and real estate (RE) funds they oversee typically have large numbers of underlying special purpose vehicles (SPVs). Keeping track of shifting rules and laws is in danger of overwhelming the resources of some in-house teams.
According to Citco analysis, each of our RE investment fund clients has an average of 25 SPVs, organised in eight or more jurisdictions. The biggest RE funds may have more than 100. PE funds typically have fewer SPVs than RE funds but face similar challenges.
Over time, the larger PE and RE funds have grown extensive webs of SPVs as their international portfolios have grown. Managing the different entities, including corporate secretarial activities, has become a significant burden. Now multi-country reporting for tax purposes is increasing, as are other regulatory requirements. Just keeping abreast of changing requirements across many different jurisdictions is extremely challenging.
As if this were not enough, institutional investors and regulatory authorities are shining a light on corporate governance. They want transparency in governance, often down to SPV level. Ideally, this is delivered by an independent specialist firm that has governance skills and can administer the SPVs.
Such is the difficulty of maintaining faultless governance that it’s likely to become a specialist discipline in its own right. Indeed, having a single firm administer a fund and its underlying holding companies and SPVs should serve to give investors and regulators alike comfort.
"Having a single firm administer a fund, its underlying holding companies and SPVs should give Investors and regulators comfort."
Reconciling accounting formats
In most cases, a fund selects a single global accounting standard, such as US, Luxembourg or Irish GAAP, or IFRS, for reporting to its management, investors and other stakeholders. It commits to this standard in its offering documents. For local statutory filing purposes, however, such reports may need to be translated to a local accounting standard that is applicable in an SPV’s jurisdiction. This may require complex conversion processes.
Besides the challenges associated with different reporting formats for management/investors and statutory accounts, intercompany accounts (IC accounts) and consolidations create additional complexities. Intercompany relationships are created both between funds and their lower-tier SPVs, as well as between lower-tier SPVs directly. As these SPVs are domiciled in many different countries, reconciliation of these intercompany accounts through communication between different offices is inefficient.
Centralising SPV administration
In order to give investors and regulators the transparency they require, while also simplifying the challenges of SPV accounting, there is much to be gained from appointing a single independent service provider.
The Citco group of companies has SPV servicing centres in Lithuania and the Philippines, where more than 300 staff members are fluent in 20 different local accounting standards in addition to US GAAP and IFRS. Teams of qualified accounting staff convert management accounts into formats that can be used for local statutory filing purposes. They also process consolidations and intercompany account reconciliations in real time. This is all done on a single system, which supports administration of all PE or RE entities.
Additionally, Citco’s Global Subsidiary Governance Services (GSGS) works closely with PE, RE and multinational companies. A team of lawyers makes sure that all client entities are in good legal standing in their relevant jurisdictions.
Such is the pressure on RE and PE managers to ensure solid fund governance that we believe services such as these will become increasingly sought after.
8th February 2016