B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity Moderator: Craig

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION

ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCEFund Administration and Private EquityModerator: Craig Bridgewater, KPMG30 September 2008

Jason BibbFounder and Managing Director

T: +1 441 279 [email protected]


ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCEFund Administration and Private Equity

How Is The Hedge Fund Market Serviced

Hedge Fund Hot Topics

The Bermuda Value Proposition

Is Perception The Reality?1

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3

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1 Is Perception The Reality?1 Is Perception The Reality?1 Is Perception The Reality?1



PERCEPTION VERSUS REALITY

“…Bermuda seems to be closed for business…”

“…Bermuda is too regulated…”

“…Bermuda takes too long to establish an hedge fund, other jurisdictions are easier…”

“…between all the third party service providers, Bermuda is too expensive…”

“…cannot find quality good people in Bermuda…”

“…I can do everything in Cayman, which is easier for my business…”

The ‘Bermuda’ Perception

Aggressive Offshore Jurisdictions seeking

business

US & Offshore Lawyers

Investment Managers seeking less

onerous regulatory environments

Global service providers adopting

the same mindset

How was the ‘Bermuda’ Perception Born?

The ‘Bermuda’ comparison

British Virgin Island

Tax Neutral environment

Politically and economically stable

Simple and flexible system of regulation and control

No regulatory restrictions on investment policy or fees

No requirement to appoint directors

Need to incorporate in BVI

Set up and maintenance costs are low

Fast track set up

Bermuda



Reputation for robust effective regulation


Flexibility over the appointment of directors, secretaries and resident

representatives

Need to incorporate and register in Bermuda


Fast track set up, if required

Robust AML policies

Cayman Islands



Reputation for lighter regulation


Requirement to appoint directors, but not local

Apart from an auditor there is no mandatory local service provision


Fast track set up



SERVICING THE HEDGE FUND MARKET

Incorporation & Formation

Services

Domestic & OffshoreFund, Portfolio and Partnership

Accounting Services

Investor & Treasury Services

Corporate Governance &

Company Secretarial

Services

What can your Hedge Fund Administrator offer

Risk & Compliance platform

Banking /CreditSolutions

Trading Solutions Custody Solutions

Extended services solutions (Large Administrators)

Fiduciary & Directorial Services

Fund, Portfolio and Partnership Accounting

Services

Investor ServicesCompany Secretarial

Services

A Fully Integrated Technology Platform

Fund Administrators

Banks, PBs & Custodians

Onshore & Offshore Lawyers

Auditors

The collaborative approach?

Aggressive Growth

Distressed Securities

IncomePrivate Equity

Macroeconomic

Market Neutral

Opportunistic

Special Situations

Emerging Markets

OTCMethodologi

es

Hedge Funds √ √ √ √ √ √ √ √ √ √

Fund of Funds √ √ √ √ √ √ √ √ √ √

Mutual Funds √ √ √ √ √ √ √ √ √ √

Pension Funds √ √ √ √ √ √ √ √ √ √

Servicing every type of Investment Mandate

Administration Challenges in Bermuda

Bermuda

Cost Containment

Managing internal

expansion

Offshoring

Staff Retention

Immigration

IT Systems

The Administration Challenges?



BERMUDA / INDUSTRY HOT TOPICS

Bermuda introduces new Investment Funds Act

The Companies Amendment Act 2006

Fair Value Measurement

Guidelines for the valuation of hedge fund investments

Hedge Fund ‘Hot’ Topics

• The Investment Funds Act 2006 came into effect on 7 March 2007

• Covers the regulation and supervision of mutual fund companies, unit trusts and limited partnerships established in Bermuda

• The new legislation represents risk-based regulation that is a key character of the Bermuda jurisdiction

• No person shall operate a fund in or from Bermuda unless the fund has been authorised under the Act or is exempt

• The Act also provides a new licensing regime for fund administrators

• It is now an offense to carry on administration in or from Bermuda without being licensed under the Act

Hedge Fund ‘Hot’ Topics - Investment Funds Act-

• Changes in minimum share capital– There is no longer a minimum share capital requirement– Bermuda companies can now hold Treasury shares

• Unrestricted corporate objectives– The Act allows a company to have unrestricted objects and powers within its Memorandum

of Association

• Change in requirements for execution of documents– The ‘unanimous’ requirement of written resolutions has now been cancelled and an

effective resolution can now be passed by the same majority of voting shareholders as would be required had a physical meeting been held

• Executing deeds and documents under witnessed corporate seal is now optional as opposed to mandatory

• E-friendly initiatives – The Act has ‘e-enabled’ certain filing, notice and voting requirements helping to improve the

speed and effectiveness of corporate compliance– The voting process has been modernized whereby the Act allows for a show of hands to be

supplemented by the communication and counting of votes received

Hedge Fund ‘Hot’ Topics – The Companies Amendment Act-

• Effective for fiscal years beginning after November 15, 2007• FAS 157 establishes a single authoritative definition of fair value, sets out a framework for

measuring fair value and requires additional disclosures about fair value measurements

Hedge Fund ‘Hot’ Topics – Fair Value Measurement-

Hierarchy of Inputs to Valuation TechniquesReliability Level Input

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable prices in active markets for similar assets or liabilities. Prices for identical or similar assets or liabilities in markets that are not active.

Directly observable market inputs for substantially the full term of the asset or liability, e.g. interest rates and yield curves are commonly quoted intervals, volatilities, prepayment spreads, default rates and credit spreads.

Market inputs that are not directly observable but are derived from or corroborated by observable market data.

Level 3 Unobservable inputs based on the reporting entity's own assumptions

A chief concern for investment managers of hedge funds and those charged with the governance is the process for valuation of complex, illiquid financial instruments such as distressed securities, OTC structured noted and private equity investments.

The valuation policies and practices of hedge funds should be documented and approved by the board of Directors.

The Valuation Policy should include a hierarchy of pricing sources that are to be used.

The Valuation Policy should be regularly reviewed and updated, as required, taking account of different scenarios.

The Board of Directors should appoint an independent Valuation Service Provider to mitigate any conflicts of interest and to segregate the responsibility of the valuation process with the investment process.

Where the investment manager is involved in the valuation process controls should be established to address conflicts of interest and the managers involvement should be disclosed to shareholders.

The valuation of the fund’s portfolio should be based on multiple pricing sources and, where broker quotations are used, such quotations should be sourced by the independent Valuation Service Provider

Hedge Fund ‘Hot’ Topics – Valuation of investments-

Hedge Fund ‘Hot’ Topics – Convergence-

Gating restrictions, strategy diversification, institutionalization, side pockets, blurring of the lines between hedge funds, private equity and long only funds are just a subset of the issues arising from this transformation.



THE BERMUDA VALUE PROPOSITION

Why Bermuda ?

Thank you



Peter HughesGroup Managing Director

T: +1 441 292 [email protected]

Fund Structures

• Classic Master-Feeder Structure

• Usually a Master Fund based offshore or as a Delaware LP

• Advantage of one portfolio managed by the Investment Manager

• A Bermuda (or other offshore domicile) fund and a Delaware LP feeder

• Set up costs range from $40-100k depending on fund complexity and lawyers used

• Administration fees are usually charged on the feeders and not the master

• Audit fees range from $50k-100k (incl. tax work) depending on fund complexity and auditors

• Mini Master-Feeder Structure

• Usually a Delaware LP as a Master Fund with a Bermuda (or other offshore domicile) feeder

• Advantage of one portfolio managed by the Investment Manager

• US Investors invest directly into the LP and the offshore feeder will be a partner in the master

• Set up costs lower than Classic structure as one less fund to set up so saving $10-20k

• Administration fees will be similar to the Classic structure but there are annual cost savings

• Audit fees will be lower as there will be audit and tax savings of $15-30k from one less fund

Fund Structures - continued

• Side by Side Structure

• Usually a Delaware LP for US Investors

• A Bermuda (or other offshore domicile) fund for offshore investors

• The funds have separate portfolios

• The funds will often have different returns which can be difficult to explain to investors

• Set up costs range from $40-100k depending on fund complexity and lawyers used (both funds)

• Administration fees would be similar to a Classic Master-Feeder or Mini Master structure

• Audit fees range from $40k-80k (incl. tax work) depending on fund complexity and auditors

• Segregated Account Companies (SAC)

• Sometimes referred to as segregated cell companies

• Assets are legally separated from the assets in other segregated accounts (cells) – ring-fenced

• Segregated accounts used as different strategies creating sub-funds under one umbrella

• Segregated accounts used to tailor portfolios for larger clients

• Bermuda segregated accounts can invest in each other – Cayman cells cannot

• Flexible and cost effective solution for growing an asset management business

• Administration fees vary depending on whether each account is a strategy or tailored portfolio

• Audit fees vary depending on whether each account is a strategy or tailored portfolio

Private Equity Funds in Bermuda

• Private Equity is becoming more mainstream – hedge funds are holding more PE positions usually in side-pockets.

• With a poor 2008 and a possible recession in the US and Europe where will Western institutional investors and pension funds find the returns they need to satisfy their investors or pay out their pension plans?

• The emerging markets still represent high growth opportunities at better value from their highs at the end of 2007. Western investors will be looking at accessing these opportunities and some will be in the form of Emerging Markets PE funds.

• Private Equity funds are usually closed ended funds or partnerships. Guernsey is the domicile that is currently being used. Guernsey is close to capacity and a Bermuda set up would be several times cheaper and more efficient given its locality to US managers.

• With more institutions and pensions investing in PE funds there is a move away from the traditional in-house accounting and valuation process. The use of specialist independent administrators is becoming more common. Independent valuations and administration are required for investors in hedge funds and this will become a requirement for PE funds too.

• Institutional investors are reluctant to invest in PE funds due to the long lock in periods. A new market in London has opened similar to AIM called the Specialist Funds Market which can give daily liquidity to investors in the PE funds listed there which may make these funds more marketable to institutional investors.

Contact Peter Hughes ([email protected]) or see www.apexfundservices.com for more information

Thank you



Phillip GeeVice President, Head of Sales &

MarketingT: +1 (441) 295-8617

[email protected]

FAS 157 – Fair Value

Aims to increase consistency and transparency

Exit price not entry price

• Exit price – what you would get if sold today• Entry price – replacement cost• Discount for restricted securities• No blockage factors for Level 1• Additional reporting disclosures

Establishes 3-tier classification for valuing instruments

• Level 1 – Quoted prices in active markets. Mark to market.• Level 2 –observable information. Mark to model.

• Level 3 – Unobservable inputs. Make it up!

Valuation

Pricing methodologies

• Straight forward for Level 1 & 2• Structured and transparent valuation methodologies and tools• Milestone points used to trigger change in valuation policy• Agreement between valuation parties (including auditors)• Valuation committee

Potential issues with implementation and ongoing compliance

• Conflicts with offering documents - NAV divergence• Existing practices and standards• Side pockets and segregation• Illiquid positions - value now or value to maturity• No International Accounting Standard equivalent (yet)

Centre of Main Interests

Do you know where your funds centre of main interests are?

• Country of incorporation may not be the country of liquidation.

Consideration for offshore funds

• US Bankruptcy code: Chapter 15 verses Chapter 7 or 11• Recent case study: Bear Stearns offshore funds• “Foreign main proceedings”

“Linking criteria” - Where are the following located:

• Directors (& Employees) • Investment Manager• Books and records• Administrator• Liquid assets• Investor registry• Creditors

Thank you

Documents

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity Moderator: Craig