Unlisted Assets - Operational Challenges - Funds SA Case Study 5 May 2016

Overview of Funds SA’s unlisted asset exposures   2

3 Overview of Funds SA’s unlisted asset exposures Funds SA Total FUM (31 March 2016): $27 bn Unlisted assets FUM: $2.1 bn (private equity, infrastructure, real estate private equity) Uncalled commitments: $1.2 bn No. of manager relationships : 53 No. of fund investments: 203 No. annual transactions processed (2007): 413 No. annual transactions processed (2015): 1,735 ( 286%)   3

4 Funds SA operates a pooled investment approach Investor 1 Investor 2 CLIENTS: Investor 1 Investor 2 ….. Investor 9   MULTI-SECTOR STRATEGIES Moderate Balanced Growth High Growth Client Specific ASSET CLASSES Asset Class 1 Asset Class 2 Diversified Strategies Growth Private Equity Infrastructure Real Estate Private Equity   4

5 The Challenges associated with Unlisted Investments 1. Governance Oversight by the Board and Audit Committee Highly complex legal structures Increasing client focus – particularly fees Reputational risks (eg. use of Cayman vehicles) 2. Investment Strategy Maintaining allocation to unlisted assets at target weight Liquidity and stress testing Pooling issues 3. Valuations and transfer pricing Infrequent and lagged investment valuations Investor equity issues in a common asset pool   5

6 The Challenges associated with Unlisted Investments 4. Regulatory and assurance Fee measurement and disclosure (incl. performance fees) – RG97 Financial reporting and audit issues – lagged valuations Tax complexity APRA and ASIC requirements 5. Operational Insource vs outsourced administration Funds SA insources – uses Private I Settlement risks Bespoke arrangements with General Partners -> almost impossible to standardise approach Performance measurement and fee measurement Key person risk … but … better oversight of what’s going on / better feel for the numbers   6

7 How Operations can help Keep on top of what’s going on in the industry ILPA, ASFA, AIST Speak to your peers, asset consultants, custodian Engage closely with your Investment Team / advisors Encourage minimum operational standards as part of new fund due diligence Work with existing fund managers to improve reporting Provide relevant analysis and reporting Scenario and sensitivity analysis Liquidity and SAA stress testing Flexible valuation approach Valuation policy for times of “significant financial market stress”. Involve your Board, Audit Committee and auditors early in the process   7

8 How Operations can help Investor equity measures Operational Use of buy/sell spreads for transacting investors Lock-up / lock-out periods ASIC/APRA Guide to good unit pricing practice Operational If administration insourced – don’t skimp and ensure robust assurance framework in place Fraud risk is heightened in an internal administration environment If outsourced – (1) really understand the outsourced model, and (2) maintain very close oversight Keep your stakeholders informed … a lot Develop clear policies and communicate them effectively (eg. valuations, unit pricing, buy/sell spreads, investor lock-up periods) Fee shock   8

Next steps for Funds SA Whole-of-organisation tax governance review (in progress) Target Operating Model review Review our private markets administration arrangements ie. continue to insource or decide to outsource? Review approach to Operational Due Diligence Ensure a continuous review / enhancement process over key policies and processes ie. avoid the “set-and-forget”   9

Thank you   10

Funds SA 11 Copyright 2016 Funds SA funds.sa.gov.au The information within this document has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information. Copyright 2016 Funds SA funds.sa.gov.au   11