PERE CFO Forum 2013


I spent most of yesterday in New York at PERE’s CFO Forum. I came to speak about the evolution and revolution of regulation in the private equity real estate industry. I thought I would share a few items.

The opening panel focused on the changing role of the Chief Financial Officer. A big change is the avalanche of regulations and business requirements. Compliance is expensive when you add together the direct costs, the indirect costs, and the lost opportunity costs. It’s a cost of doing business.

Fund managers are fiduciaries. Exceed your investors expectations.

There is the rise of the new “F” words: FATCA, FIRPTA, FBAR, and FCPA.

The second panel focused on valuations. They put forth three items to focus on during valuations: consistency, transparency, and independence. You should have a consistency in the process, regardless of product type or geography.

Transparency allows someone to see good work product to get to the final fair value. As with third grade math, it’s not just about getting the right answer, it’s also about showing your work.

Independence is important to show that the decision makers are not influenced by other factors in trying to reach fair value. A person compensated based on an increase in fair value should not sit on the valuation committee.

As markets recovered from the 2008 financial panic we entered an era of price discovery. Nobody was quite sure where pricing would be post-crisis. With rising interest rates, we may be entering a new phase of price discovery.

The third panel was on tax reform and tax policy developments. There is a general sense in Washington that there could be a major tax code reform. As a result some changes are being held up based on the possibility of becoming part of a larger piece of legislation.

  • Carried interest remains under attack. The latest is the Cut Loopholes Act S. 268.
  • Rate equalization would likely reduce the disparate treatment between capital gains and ordinary income.
  • Business interest expense could be reduced to avoid the tax incentive in favor of leverage over equity.
  • FIRPTA is being found to discourage inbound investments in real estate. One proposed reform is the Real Estate Jobs and Investment Act S. 1181 that would repeal IRS Notice 2007-55.
  • Entity choice and pass through legislation would impose corporate taxation on “large” pass through entities.
  • Like-kind exchanges could be tightened to limit the deferral to direct swaps and application of a stricter standard of “like.”

My panel was on regulation: evolution or revolution for real estate.

According to some informal polls, most of the audience had registered last year as a result of Dodd-Frank. A few had been registered prior and a few were not registered.

As much as we are dealing with dramatic changes in the regulatory environment, the Securities and Exchange Commission is dealing with a dramatic change in their oversight of investment advisers. Dodd-Frank moved thousands of small retail investment advisers from the SEC to state registration. In exchange, the SEC got lots more hedge fund, private equity  funds, and real estate funds. The SEC has as much to learn about private fund operations as we do to learn about SEC oversight.