Cash Flow Projections Get Personal in Alternative Investments

Alternative investments remuneration disclosure scrutinized under AIFMD

Read this article and learn about:

  • What needs to be done to adhere to remuneration reporting
  • How firms can establish business processes and adopt technology to adhere to the AIFMD regulations
  • Possible solutions to house the data, produce reports and provide an audit trail for these new regulatory burdens
Consolidated Asset Platform Déjà Vu: The Key to Competitiveness for Alternative Investments? 
Carol Penhale, CEO, Bedford Park Associates

The Alternative Investment Fund Managers Directive (AIFMD) is striving for many goals with its oversight of alternative investments.   One area under an increased spotlight is transparency between compensation structures for portfolio and risk managers and the underlying funds/deals they construct and manage.  Applying payout scrutiny to individuals stewarding investment structures and looking for staggered, multi-year compensation deals from conception through the life-cycle of the structure is rising. 

Having historically produced cash flow projections to support the business case deals and monitoring reports, architects of these funds and holdings have a new – and very personal – challenge to consider when they structure, monitor and report on investments.

As the early days of this era are upon us, the undertakings for collective investment in transferable securities (UCITS) policies are the focus for interpretation of the principles governing remuneration policies.  Firms size, deal/fund size, how they are managed, their internal structures, leveraged/ unleveraged and the nature, scope and complexity of activities are all factors that determine reporting thresholds.

The criteria of what needs to be done to adhere to remuneration reporting will likely affect how deals are structured going forward.  Some firms will amend investments/funds to fall off the radar threshold for reporting under AIFMD.

There has been a lot of coverage on interpretation of AIFMD remuneration rules from a legal and accounting perspective, but very little on how firms establish business processes and adopt technology to adhere to these regulations” Carol Penhale, CEO, Bedford Park Associates


The scope of what is under scrutiny is expansive and covers private equity, real estate, infrastructure and other alternative assets, as well as vehicles such as hedge funds.  It also covers not only funds based in Europe but any instrument or fund marketed in Europe, so operations with global reach will need to be mindful of their current footprint and future plans for expansion and AIFMD impact.

Migrating AIFMD discussion from interpretation to solution

There has been a lot of coverage on interpretation of AIFMD remuneration rules from a legal and accounting perspective, but very little on how firms establish business processes and adopt technology to adhere to these regulations.  Changes to operations and processes to comply affect a multitude of asset classes and fund types.  Roles such as portfolio management and analytics in the front office, compliance and risk are shouldering the most impact as ‘identified staff’ under AIFMD.

Some firms have considered establishing remuneration committees, others are examining policies leave the monitoring to compliance to ensure rules are built/maintained and a paper trail for audits and reporting going forward and, of course, the  impact to portfolio managers and dealmakers cannot be overlooked.

Many firms are still reliant on Excel in the front office for cash flow projections and monitoring for alternative investments.  The increasing need for an audit trail to monitor for AIFMD needs is only the latest of business and operational pressures for alternatives-focused operations to encourage adoption of technology to support front office, ‘what if’ analytics functions and monitoring for alternative investments.

Beyond the front office needs, many firms struggle with comprehensive compliance solutions that cross all asset types, especially where both listed and private securities are managed and multi-asset class scenarios co-mingle these traditionally separate styles.  Consolidated exposure for compliance is a growing challenge and the addition of monitoring AIFMD needs for remuneration at a granular level for both anticipated results and back-dated adherence based on investment performance has many firms struggling with eloquent corporately supported solutions to house the data, produce reports and provide an audit trail for these new regulatory burdens.

The need to comply with AIFMD remuneration policies provides a trigger for asset managers to seek out feature-rich data handling and analytics solutions. The best motivation for change has to lie in what technology delivers for the business moving forwards beyond regulatory reporting to competitive edge in terms of faster reporting cycles, more granular data and the development of clearer, cleaner scenarios, informing and enabling decision-makers and investors alike.

Commensurate compensation in the spotlight

The remuneration details and investment framework to be captured are quite specific under AIFMD and are on a multi-year basis.  To get a sense of the challenges involved from an execution standpoint, highlights can be bucketed into five categories for this discussion:

  • A multi-year evaluation framework is to be adopted where both quantitative and qualitative performance criteria are examined for remuneration consideration;
  • At least 40-60% of variable remuneration should be deferred over at least a 3-year period;
  • At least 50% of variable remuneration should be awarded in instruments with a post-vesting retention period;
  • ‘Performance fees’ are under focus and fall under remuneration policies; and
  • Variable remuneration is subject to malus and claw back provisions as examined under the performance of previous business cycles.
Many firms are struggling with eloquent corporately supported solutions to house the data, produce reports and provide an audit trail for these new regulatory burdens Carol Penhale, CEO, Bedford Park Associates

These sophisticated calculations need to be taken into account during planning for new investments to ensure the investment, the fund and underlying entities have sufficient cash flow and equity to support the pay-out structure.  For many firms, a place to capture the data sets and the functionality to execute these calculations are not available for any asset classes or funds.  Maintaining these frameworks in Excel will prove unwieldy very quickly as performance history builds.

In particular, the ability to do claw backs or back date transactions based on projected vs. actual investment performance requires tools more complex than Excel to record the amendments in the cash flow records and it will also necessitate the need for a paper trail and audit process down the road, for which Excel is a precarious platform.  Firms will increasingly seek better tools to manage business, operational and cash flow risk as well as remuneration payout obligations.

Apart from reporting for AIFMD, many organizations increasingly have a similar need to understand transparency on executive compensation for alternative investment incentive compensation more broadly in firms. Some of the larger, more complex entities have introduced or are contemplating an executive compensation committee.  These needs are also well serviced with the introduction of technology for transparent reporting.

While firms want to move towards better tools and away from Excel, few want to jeopardize the modus operandi of their deal makers to work their magic as part of the transition.  Configurable views and reports in a corporately supported platform are sought after by firms looking to adapt technology and move away from Excel.  Easily configurable environments help ease the migration challenges of portfolio managers and analysts and their abilities to create ‘the art of the deal’ in a new technology environment and away from Excel. 

For those who invest in technology, data and process changes to support the business, additional payoffs are more consistency and faster turnaround for operational, cash flow, investment risk views and easier adoption of new asset classes.  Technology that can support the enriched transaction data set associated with various alternative asset classes in one platform will greatly help firms consolidate and bring consistency to their holdings and exposure on a consolidated basis for AIFMD and more effective running of the book of business.

While firms want to move towards better tools and away from Excel, few want to jeopardize the modus operandi of their deal makers to work their magic as part of the transitionCarol Penhale, CEO, Bedford Park Associates

Technology that helps firms with configured templates for deal set-up and pre-populate data for ‘what if’ analytics not only around expenses and cash flows but also stringently adhering to the compensation payout requirements and reporting transparency that are necessary for AIFMD is the goal for affected firms going forward.

Fee disclosure a growing global trend

Audit trails for AIFMD management are also vital in delivering proof with regard to the wide range of stipulations within AIFMD relating to reporting and disclosure.  As part of the directive, an alternative investment fund manager (AIFM) impacted by AIFMD has to make extensive disclosures to its regulator, and prospective investors before they invest, relating to a range of criteria. Specifically, fund managers need to do so in relation to the fund’s investment policy; the legal implications of the contractual relationship entered into and how the AIFM ensures fair treatment of investors (including details of any preferential treatment of particular investors).

It also needs to carry out the same processes with reference to fees, charges and expenses; valuation procedures and information on the remuneration policy.  This transparency on fees and remuneration to underlying investors is a trend across the industry, not just Europe, with initiatives such as DOL in the U.S. and CRM2 in Canada.  This fee disclosure movement has many firms nervous and they are sharpening pencils, looking to fiercely manage costs that flow through to investor and regulatory scrutiny to ensure they remain competitive going forward.

The ability to support an accelerated turnaround on fee/expense reporting and cash flow projections/actuals are key elements of managing the business more effectively and being able to turnaround decisions on potential investments/dispositions fully informed of the longer-term effects on cash flow, remuneration and fee disclosure options to both regulatory and potential investors. By meeting AIFMD stipulations, firms can also achieve a much broader range of business benefits.

More complex investments challenged by accelerated reporting cycle needs

By making processes more efficient and cost-effective for AIFMD reporting, firms’ investment in smart technology also promotes more effective operational workflows for the business outside of its regulatory obligations. And this is especially pertinent in the current climate where reporting cycles are reducing from annually, to quarterly, to monthly.  Firms need to work out how to do the reporting and get data to support reporting within these tighter turnaround times.

The audit trail, date and time stamps and user IDs afforded by a corporately supported system are key to improving reporting and effective work flows to manage the business.  While cost and rollout of Excel are inexpensive, fast and attractive at the outset of managing cash flow projections for private investments, the downstream complexity of managing data/processes in Excel becomes more unwieldly and prone to errors on an exponential basis.

In addition, firms with corporate-supported technology would then be able to carry out gap analysis of potential deals with all the deals they had done previously.  Reviewing any in-house gap analysis for remuneration comparisons with other key deal criteria as well will likely become part of the normal-course workflow for alternative asset due diligence in an AIFMC world.

The ‘do nothing’ scenario of not investing in better tools and data erodes the competitiveness of the firm in addition to its ability to remain industry compliant. If firms invest in platforms that capture the relevant data and transaction history away from Excel, it reduces the source of much business risk and operational costs for firms.

Firms ultimately need to maintain a fully transparent record of their entire history investment/fund history in case of an audit.  This history takes on even more significance when faced with the complexities of remuneration reporting on both a go-forward and back-dated actual basis.  When these payout considerations affect staff compensation, investor and regulatory scrutiny and the firm’s ability to run the business cost effectively, the audit trail moves very quickly from ‘want’ to ‘need’ on the requirements ledger.

Investment in this groundwork for technology improvements to support AIFMD also positions these organizations well to carry out the due diligence they need to do to turn deals around quickly. Having granular data at their fingertips is helpful to firms not just from the standpoint of AIFMD but also for improving the business opportunities for new deals - either to sell properties in the alternative investment space, for example, or to rapidly carry out due diligence on investments they want to buy and win new business in a highly competitive environment.

While the changes under AIFMD can be daunting there is an opportunity for firms investing in technology and improved processes to adhere to regulatory challenges by simultaneously improving the operations and effectiveness of the business to remain competitive.



Carol founded boutique consulting firm, Bedford Park Associates in 2010, which assists financial services firms with transformational strategy, technology and process flows. Prior to founding BPA, Carol was a Partner at Boston-based Cutter Associates for a decade and helped establish the asset management research think tank The Technology Council. Carol has worked with many multi-national/global asset management and software vendor firms resolving public, private, data/EDM and regulatory initiatives on both sides of the Atlantic for over 20 years. Prior to entering the consulting world, Carol worked in both business and IT roles at several financial, vendor and professional services firms including Mackenzie Investments, DST and several boutique merchant banks, private equity/real estate firms.