Debating Transparency and Valuation –’s Second Women on the Buy-Side Panel Discussion

By Melissa J. Anderson (New York City)

Yesterday, hosted its second Women on the Buy-Side networking breakfast and panel discussion. Nicki Gilmour, founder and CEO of, began the event by explaining that the purpose of the gathering was to draw together top women in the investment management industry to discuss the topic of risk and its implications on performance for 2010.

Gilmour later explained that by getting top women together, we can continue to create a critical mass of female leaders in the industry and “change the perception of what a leader looks like.” For the women themselves, this was an event where “they are not the only woman in the room.”

Holly H. Miller, founding partner of Stone House Consulting, LLC, moderated the panel on the “massively broad topic called transparency,” today’s new “buzz word.” Panelists included Michelle McCarthy, Chief Risk Officer at Russell Investments, Virginia Volpe, CFA, Director of Hedge Funds, Global Transaction Services at Citi, Diane Garnick, Investment Strategist at Invesco, and Mara Topping, Partner, Investment Funds Group, D.C. Office of White & Case.

Transparency’s Varying Definitions and Interested Parties

McCarthy began the discussion by explaining two different uses of transparency, (1) a means to avoid surprise, and (2) data for measurement systems: “two different moments that need different responses.” “The buzz word itself covers vast terrain,” she explained.

Volpe agreed that transparency has different meanings for different parties. From a regulatory perspective, she said, it has to do with fraud, investor level setting, protection, etc. From the investor side, it becomes a different kind of demand. How much transparency investors are asking for depends on a number of things, Volpe explained: the type of investor (institution, sovereign, or person), their size, how much money they’re dealing with, their location, and how 2009 affected them – as an opportunity or a hardship.

Going further, she explained, “many companies are looking at what comes down the pipe [regarding transparency] …as both a knee jerk reaction and as opportunity.”

Topping talked about “how you deal with levels of differential transparency.” Different parties are subject to different levels of transparency – which can result in a conflict of interest. Topping discussed, for example, “the issue regarding side letters,” in which there is “a sensitivity to differential access to information.” She explained however, that concerns regarding this issue are “more heightened in hedge funds than private equity.”

She continued, there is “debate about how much information you need to disclose with regard to how much you’re offering on those side letters.”

Volpe also commented on the growing demand for separate accounts in alternative investments. For example, if you look at the SMA space, she explained, the parties involved include funds of funds, single managers new to the field, new platform creators, and single managers already working within the space. How your asset management firm adequately addresses changes from a legal, risk, portfolio management, and operations perspective will be critical to your success.

Considering Regulatory and Client-based Changes

Garnick, speaking from an investor viewpoint, said “I don’t think there’s a single person in this room who thinks [that with more stringent regulations regarding transparency], we could have avoided systematic risk in the industry.” But given that the investment management industry is perceived as one made up of very smart and capable people, she continued, “people are asking ‘why are regulatory changes taking so long?’”

The answer: “logistical issues” and “second order effects.”

For example, Garnick explained, a first order effect of greater transparency at General Motors’ pension fund was that greater liability appeared on its balance sheet – leading its stock price to go down. The second order effect was the movement from pension plans at GM to 401K plans. “The entire retirement financial burden shifts from investors to factory workers,” she explained – for good or bad.

McCarthy talked about how many managers are looking in the wrong place to find out the amount of risk they are exposed to. She said, “the balance sheet tells you where the money has gone. The P&L tells you how much money you made.” She continued, “the balance sheet is the wrong tool for the game…” Managers need to know “what are you exposed to?” and “how much can you make from it?”

Furthermore, she said, “what’s missing now is aggregatability,” ensuring that managers are speaking the same language across the industry.

Citing legislation passed by the House of Representatives in December, as well as legislation currently in the Senate, Topping explained that she believed regulatory transparency is coming to managers in the US in the next year and a half. But she said, regardless of regulatory changes, “I’m getting a lot of clients in the process of registering” already. “There is cache to being a registered advisor now,” she explained.

“We are monitoring for the sort of best practices even unregistered advisors are going to be implementing, because clients are going to demand it.”

Valuation – Measurement and Collateral

Moving to a discussion about valuation, Garnick talked about setting global standards for collateral pools, asking “what kind of collateral are we going to accept across the board?”

McCarthy said, “It [is] not a miracle to uniformly collateralize. You [can], if you [have] good measurement systems. It [is] not unknowable.” For example, “over the counter derivatives are not uniformly bad, but not collateralizing them can be bad.”

Regarding valuation, she continued, “what [is] really required is to move away from a star manager being the only one who knows what something is worth.” Support groups need to be able to independently arrive at valuations, she explained.

Garnick closed the discussion by commenting on succession. Many people working in private equity today are the founders of the market, she said, and moving closer to retirement. According to research, salaries are generally higher during times when regulatory hurdles are low. When regulatory hurdles are higher, there is generally a fall in compensation levels. This may result in a succession issue, as private equity becomes more popular with investors in the coming years as well.