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Due Diligence – Legal & Operational

November 15, 2018Senior Practice Fellow:Scott Sherman, JD, GC, Tiger Management LLC

Guest Lecturers:Patrick McKeon, Managing Director, The Blackstone GroupMatthew Lux, JD, Managing Director & Deputy GC, EnTrustPermalMichael Holland, JD, CCO & Associate GC, Tilden Park Management LPJeremy Bohrer, JD, Managing Partner, Bohrer PLLC

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Table of Contents

Topic PageRCA Introduction 1 - 14

Due Diligence: Budgeting & Business Continuity 16 - 17

Outsourcing Traditional In-House Functions 18

Cybersecurity 19

Technology, Artificial Intelligence & Big Data 20

Social Media 21

Illiquid Vehicles | Addressing Potential Future Adverse Events 22

Co-Invests | Mitigating Potential Legal/Operational Challenges 23

Additional Topics for Consideration 24

Closing Thoughts 25

Faculty Biographies 26 - 30

Disclaimer 31

16

Due Diligence: Budgeting & Business Continuity

Balancing fee compression v. institutional quality infrastructure

Cutting in critical areas sends a bad signal

Good ODD process picks up red flags

• Influence on the motivation to learn

• Lower absenteeism and high school suspension rates

• Greater teacher commitment

• Employee turnover• Failure to replace key personnel• Stale / documents procedures• Reduction in frequency of key

reviews

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Due Diligence: Budgeting & Business Continuity

A focus on expense reduction (if undertaken correctly) can be healthy & bring about alignment with investor

interests

Continued focus on best practices

Management viewpoint

• Influence on the motivation to learn

• Regulatory & market-driven initiatives

• Infrastructure & best practices are dynamic

Continual reviews and peer benchmarking

• Predictive of better psychological well-being

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Outsourcing Traditional In-House Functions

Outsourcing hasn’t become as prominent as perhaps people thought it would be a few years ago, but time will tell how that evolves. Service providers still need to have adequate controls and oversight of the function.

Rationale behind outsourcing varies

Outsourcing not necessarily bad – must consider:* What is being outsourced* How is manager supervising

Important to maintain appropriate control environment

Routine vs. complex tasks – complex raises more questions.

Effect on funds vs. investment manager’s expenses?

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Cybersecurity

You have to assume your firm is going to be a target & eventually be

hacked, breached or otherwise compromised in some way.

Voya, Yahoo cases

Often part of standard investor ODD questionnaire

Has GDPR spurred additional actions?

Cybersecurity is another evolving practice & the size / complexity of the

firm must be considered when determining best practice. One size

does not fit all.

Systems (intrusion detection / protection / response, etc.) but also employee training (phishing, etc.)

20

Technology, Artificial Intelligence & Big Data

Mitigation techniques

MNPI concerns

Privacy concerns

App tracking

Web Scraping

Receipt & credit card data

Vendor due diligence

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Social Media

Management company policies re:

usage

Is it becoming a larger part of the

research process?- Policies & safeguards?

Utilized in prospective employee

screening?

Advertising & publicity concerns?@

22

Illiquid Vehicles | Addressing Potential Future Adverse Events

Seek ability to replace manager for “bad acts” or

at least have ability to force

wind-down.

Specific triggers & impact may

vary

Fund of one vehicle

helpful for customizing

terms

Learn from the past! New illiquid

vehicles are not co-mingled with other liquid investments, so you know what you’re buying into

ahead of time.

23

Co-Invests | Mitigating Potential Legal/Operational Challenges

Engage relevant teams at investor & manager early (legal, accounting/tax, operations)

Communicate key items for structuring early (ERISA/FIRPTA/ECI/UBTI/HSR)• ERISA incentive fee issues can impact fee structures for co-investments

Know required timing for each deliverable ( sometimes helpful to have sub docs done first); Consider vehicles that can accommodate future investments (series/segregate vehicles)

Understanding the investment pipeline is key for diligence. Diligence, legal structuring & operations all have to be closely aligned & working together in order to meet the time frame.

MNPI concerns heightened?

Activist approaches? Challenges of a Board seat?

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Additional Topics for Consideration

How does this change managers policies & implementation?

SEC’s Use of Advanced Analytics?

Is this a fad or is it here to stay?

Are certain investors more likely to follow these principles?

How to validate managers assertions?

ESG Investing

New NY laws

Increased focus on zero tolerance

Sexual Harassment

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Closing Thoughts

• Diligence expectations for compliance professionals have been raised significantly; expect these professionals to fully understand the investment process

• Be prepared; Constantly evaluate and benchmark policies and procedures

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Scott Sherman, JD, GC, Tiger Management LLC

Scott Sherman is Chief Legal Officer and Chief Compliance Officer of Tiger Management L.L.C. and is on the firm’s management committee. Previously, Mr. Sherman was a Managing Director at The Blackstone Group, where he focused on the legal structuring of the group’s multi-manager portfolios as well as the review, analysis and negotiation of underlying hedge fund manager investments.

Before joining Blackstone in 2003, Mr. Sherman worked in the Corporate Department of Willkie Farr & Gallagher, a New York based international law firm, where he was involved with numerous legal issues, including the structuring and regulatory compliance of hedge funds and managed futures funds.

Mr. Sherman received a JD from Columbia Law School, an MBA from Columbia Business School and a BA from Duke University. Mr. Sherman is a senior fellow of the Regulatory Compliance Association, serves on the New York City Bar Association’s Private Funds Committee and is a member of the board of directors of the Purchase Community House and Feeding Westchester.

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Patrick McKeon, Managing Director, The Blackstone Group

Patrick McKeon is a Managing Director of the Hedge Fund Solutions Group.

Mr. McKeon is involved in performing operational due diligence and monitoring procedures on the Hedge Fund Solutions Group's underlying hedge fund managers from a business/financial perspective.

Prior to joining Blackstone in 2002, Mr. McKeon worked in the financial services division of Arthur Andersen and also in the Investment Management Funds group of KPMG.

Mr. McKeon received his BA in Economics and Accounting from the College of the Holy Cross and is a Certified Public Accountant.

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Matthew Lux, JD, Managing Director & Deputy GC, EnTrustPermal

Matthew Lux is Managing Director and Deputy General Counsel at EnTrustPermal, a global alternative asset manager with over $20 billion in assets. His responsibilities include all legal and transactional matters for the firm's direct lending and investing strategies, as well as the negotiation and structuring of co-investments with fund managers across a number of strategies and asset classes. He is a member of the Compliance & Conflicts Committee at EnTrustPermal.

Mr. Lux was previously the General Counsel and Head of Compliance at RockbayCapital Management, LP, an event-driven hedge fund manager, where he was responsible for all legal and compliance affairs. Prior to joining Rockbay, he was an associate in the Corporate and Financial Services Group at Willkie Farr & Gallagher LLP in New York, where his practice included a variety of transactional, capital markets and investment fund matters.

Mr. Lux received his Bachelor's degree from Union College and his law degree from the University of Pennsylvania Law School.

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Michael Holland, JD, CCO & Associate GC, Tilden Park Management LP

Michael Holland, Chief Compliance Officer and Associate General Counsel – Prior to joining Tilden Park, Michael served as Senior Counsel in the Market Abuse Unit of the SEC’s Division of Enforcement, where he focused primarily on investigations and litigation involving insider trading, market manipulation, and market structure violations. During his tenure with the SEC, Michael also served for one year as a Special Assistant United States Attorney assigned to the Securities and Commodities Fraud Task Force at the United States Attorney’s Office for the Southern District of New York.

Before joining the SEC, Michael was an Associate within the Government Enforcement and White Collar Crime Group of Skadden, Arps, Slate, Meagher & FlomLLP and an Associate in the Litigation Department at Clifford Chance US LLP.

Michael holds a J.D. from Georgetown University Law Center and a B.A. in History from Williams College.

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Jeremy Bohrer, JD, Managing Partner, Bohrer PLLC

Jeremy I. Bohrer resolves complex issues at the nexus of business and law as the managing partner of Bohrer PLLC. By leveraging his own unique experience as the former Chief Operating Officer and General Counsel of a multi-billion dollar hedge fund, JB brings his firsthand knowledge of crisis, enterprise, and legal risk management to every client he counsels. Within his alternative asset management practice, Jeremy has developed extensive expertise in fund and partnership structures, regulatory and enforcement trends, and an insider’s approach to deal making and capital deployment. His firm presently represents high-profile executives, hedge and private equity funds, general partnerships, family offices, capital allocators, and other investors.

Prior to founding Bohrer PLLC, Jeremy held senior roles at a Fortune 25 financial institution and global law firms.

He received a B.A. cum laude from Tufts University and J.D. from Washington University School of Law.

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