B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity Moderator: Craig Bridgewater, KPMG 30 September 2008

Jason Bibb Founder and Managing Director T: B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity

How Is The Hedge Fund Market Serviced Hedge Fund Hot Topics The Bermuda Value Proposition Is Perception The Reality?

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity 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 Tax Neutral environment Politically and economically stable Reputation for robust effective regulation No regulatory restrictions on investment policy or fees Flexibility over the appointment of directors, secretaries and resident representatives Need to incorporate and register in Bermuda Set up and maintenance costs are low Fast track set up, if required Robust AML policies Cayman Islands Tax Neutral environment Politically and economically stable Reputation for lighter regulation No regulatory restrictions on investment policy or fees Requirement to appoint directors, but not local Apart from an auditor there is no mandatory local service provision Set up and maintenance costs are low Fast track set up

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity SERVICING THE HEDGE FUND MARKET

Incorporation & Formation Services Domestic & Offshore Fund, Portfolio and Partnership Accounting Services Investor & Treasury Services Corporate Governance & Company Secretarial Services What can your Hedge Fund Administrator offer

Risk & Compliance platform Banking /Credit Solutions Trading Solutions Custody Solutions Extended services solutions (Large Administrators)

Fiduciary & Directorial Services Fund, Portfolio and Partnership Accounting Services Investor Services Company Secretarial Services A Fully Integrated Technology Platform

Fund Administrators Banks, PBs & Custodians Onshore & Offshore Lawyers Auditors The collaborative approach?

Aggressive Growth Distressed Securities Income Private Equity Macroeconomi c Market Neutral Opportunisti c Special Situations Emerging Markets OTC Methodologi 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?

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity 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 Techniques Reliability Level Input Level 1Quoted prices in active markets for identical assets or liabilities. Level 2Observable 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 3Unobservable 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.

B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity THE BERMUDA VALUE PROPOSITION

BERMUDA Tax Neutral Location, Ease of Travel Language & Infrastructure. Robust, effective regulation Ease of doing business with the right TPAs System of Law & Government People & Expertise Why Bermuda ?

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B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity Peter Hughes Group Managing Director T:

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 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 or see for more information

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B I B A BERMUDA INTERNATIONAL BUSINESS ASSOCIATION ANNUAL BERMUDA FINANCIAL SERVICES CONFERENCE Fund Administration and Private Equity Phillip Gee Vice President, Head of Sales & Marketing T: +1 (441)

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 C onflicts 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

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