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

2. Overview of Funds SA’s unlisted asset exposures2

3. 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:
No. annual transactions processed (2007): 413
No. annual transactions processed (2015): 1,735 ( 286%) 3

4. 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. 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. 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. 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. 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

9. 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

10. Thank you 10

11. 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