LPs have compliance headaches too

Private equity managers aren’t the only ones grappling with risk management and compliance pressures. Investors face many of the same challenges, writes Jenna Gottlieb.

While private equity CFOs and COOs work tirelessly to comply with new rules and regulations, it’s important to remember that you’re not alone. LPs share many of the same headaches.

The $235 billion California Public Employees’ Retirement System is a perfect example of an LP facing additional layers of compliance. The investment and administrative staffs of CalPERS have been under the gun for much of the past two years following fallout from a wide-ranging placement agent investigation. Legal activity and the subsequent ethics probe have brought about a number of new, and time consuming, compliance policies and procedures, including creating an online PPM system that in theory was meant to alleviate the need for placement agents.

Here’s what CalPERS did: The programme, created last summer, works by managers submitting proposals directly to the pension. PPMs are reviewed by CalPERS investment staff covering private placement memoranda from managers of private equity, real estate, and infrastructure funds.


CalPERS, which receives as many as 700 PPMs a year, has to review history, track record, strategy, deal sourcing and geographic and industry focus. After the investment office reviews the proposal, it may be declined, accepted for additional due diligence or referred to one of the pension’s external partners for further review.

In short, CalPERS created a lot more work for pension staff as pension employees will be tasked with reviewing each PPM submitted. There will no longer be placement agents pitching a select number of funds.

But, help is on the way.

CalPERS, like many public pension funds, is seeking to hire individuals to develop and implement compliance monitoring and operating risk mitigation programmes.

The four positions are:

•  Senior manager and team leader, who will report to CalPERS’ chief operating investment officer, will be responsible for implementing and monitoring investment management compliance and operational risk programmes and policies;

•  Investment compliance manager, who will ensure compliance with investment policies, monitor investment guidelines, monitor trading practices and to mitigate conflicts of interest;

•  Operational compliance officer, who will manage and monitor internal investment compliance processes including staff training and awareness, travel and gift policy compliance and information barriers;

•  And an operational risk officer, who will identify and mitigate operational risk in investment processes through tools such as operating event escalation and reporting, root cause analysis and risk assessment/identification.

The new positions should ease some of the pressure and increased work load, but will it be enough?

While state and federal laws are making it clear that despite the misplaced motivation for some of these regulatory developments, LPs still will need to comply.

While many of the compliance requirements are in effect for different reasons, LPs and GPs continue to spend more time and resources on compliance. You can be sure there is a shared source of empathy between GPs and their investors.