October 14, 2007
Convergence of Risk Capital, Disclosures in the PE, Hedge Funds, M&A era !
Hola from Barcelona, Spain.
In preparation for a Risk mgmt and Excel bootcamp here in Barcelona, I was studying the European Risk mgmt practices related to transparency and risk controls specially in context of Private equity, Hedge funds and much publicized M&A deals. At a broad level, these are about more transparency for investors based on EU instituted guidelines for streamlining M&A regulations last year as well as related to Hedge Funds operations. These are expected to have wide ranging implications for the markets guidelines in the US and the rest of the world too.
I am discussing two developments - one in Germany, the other in UK.
Germany Modernization of the Conditions for Risk Capital - Germany’s Cabinet has issued a draft law to regulate the country's private equity industry. This proposed law has 2 goals in mind - 1. Protect domestic companies from corporate raiders 2 . Make M&A more transparent for investors. The govt. will vote on this new risk management law. This will require investors to publicize minority holdings owned through options, identify the actual owners of individual holdings and, when acquiring more than a 10% stake, announce their intentions.
The German securities regulator BaFin will have greater power and flexibility to decide if minority investors such as hedge funds "acted in concert" to influence the corporate strategy. If its proved that shareholders did join forces, the new law would compel them to bid for the company. The new law would require companies to announce their positions regardless of how they acquired or would acquire the stakes, while current legislation allows investors to hold off reporting an investment when it's held through options. Germany's new law would enable the country's securities regulator to prohibit a company from exercising voting rights tied to a stake if it decides the investor violated any new regulations.
Switzerland - Companies are now required to announce any stake of more than 3%, regardless of how it's held.
UK - Last week, a group of 14 of London’s biggest hedge funds under a Hedge Fund Working Group drew up a voluntary industry code of conduct. Under the plan the London group, which manages approx. $180 bn of assets or about 10 per cent of the global industry total, Hedge funds would have to “comply or explain”, agreeing to meet the standards or tell people why they were not meeting them.
The plan focuses on 3 main standards to protect investors.
1. Disclosure of holdings of complex hard-to-value securities, and the methods used to value them
2. Clear risk management plans, including plans to address liquidity risk
3. Clear policies on dealing with the conflicts between investors and managers
US - It will be interesting to see the resulting developments in our own market in the US. This growing push by foreign markets to improve global oversight and transparency of financial markets, including hedge funds and complex financial products is bound to influence U.S. oversight practices as well especially given the subprime-lending exposures.
The markets supervisors too are certainly nudging hedge-fund managers and investors to develop voluntary guidelines to help improve disclosure and mitigate the systemic risks.
In a related development the President's Working Group on Financial Markets is creating two advisory groups to develop "best practices" for investors of hedge funds and the managers who run the investment vehicles.
The first group comprising hedge-fund managers will develop guidelines such as valuation and enhanced disclosures to investors.
A second group, comprised of investors, will develop guidelines on the type of "due diligence" necessary for hedge funds investors, as well as the information investors should receive. The timeline for expected recommendations is by the end of the year.
In summary, in my humble opinion, self regulation and tighter Risk controls for Hedge funds, PE firms and M&A deals are pretty much on cards in the near horizon.
Posted by spachava at 04:21 AM
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