Guidelines

The investment manager should document and communicate the operational, management and oversight structures related to the vehicles it manages.

The operational, management and oversight structures related to investment vehicles are often complex and involve a wide range of parties performing specific tasks. The investment manager should document and communicate the structure of the vehicle framework to potential and existing investors. This should include the identification of specific roles performed by the investment advisor, management company, administrator, custodian, external auditor and valuer, amongst others. It should also identify the existence and roles of oversight and advisory bodies, such as investment committees, management boards, valuation and pricing committees, investor representative committees and audit committees, amongst others.
 

The investment manager should define an appropriate risk management framework.

This should include the definition of relevant risks and risk appetite. It should also define the roles, responsibilities and controls within the risk management function. The investment manager should ensure that the process and outcomes are aligned with the investment objectives of the vehicle, aligned with the identification of key and relevant risks and adapted to the specific needs of the vehicle. The resultant risk management framework should also be designed to operate in accordance with applicable regulations, e.g., AIFMD.

A risk management framework generally consists of implementing a policy that identifies relevant risks, establishes risk limits based on the investors’ risk appetites and expectations, gathers and analyses relevant information, and responds on a timely basis.

Risk management is a continuous process that should be monitored by the investment manager and the governing body of the vehicle. The results of this process should be reported to investors, taking account of applicable regulatory and financial reporting requirements.

See the inrev-guidelines">Reporting module for specific reporting guidelines. 
 

The investment manager, together with the governing body of the vehicle, should design and operate an effective system of internal controls.

An effective internal control framework is adapted to the specific risks, processes and organisational structure supporting an investment vehicle. It includes consideration of the operating environment of the investment manager and all relevant service providers to the vehicle. The design of an internal control environment starts with the definition of control objectives.

Based on this, effective internal controls can be designed, documented, and implemented. This should include the segregation of incompatible responsibilities and an appropriate transaction approval process that prevents an individual from acting alone or overriding internal controls. An internal control system should be tested on a recurring basis (e.g. by internal and external auditors) and the results reported to the governing body of the vehicle. Control remediation action plans to improve the environment can then be effectively directed.

The internal control framework should be aligned with legal and regulatory compliance functions and the overall risk management framework.
 

The investment manager, together with the governing body of the vehicle, should review the (vehicle) governance framework as part of any vehicle extension process.

Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.
 

The governing body of the vehicle should undertake a review of the continuing appointment or re-appointment of the external auditor, valuer, depositary and other key service providers on a regular basis.

This review should be undertaken at least every three years.

See also PV04 of the property-valuation#inrev-guidelines">Property Valuation module for guidelines on reviewing the performance of valuers.
 

The investment manager, together with the governing body of the vehicle, should evaluate the need for independent non-executive directors.

Given the wide range of investment vehicles and their features (open/closed end, number of investors, size, duration, risk profile, etc.), the need for independent non-executive directors varies across the industry.

For smaller vehicles, where investors may be closer to its day-to-day operation, the role and value of independent non-executive directors may be limited. For larger or more complex vehicles, it may be appropriate to appoint independent non-executive directors, which may form the majority of the governing body or occupy the chairperson role, to ensure decision-making always reflects the best interests of investors.

Where a vehicle appoints independent non-executive directors, the selection criteria should be clearly defined and focus on skills, qualifications, and relevant experience. Independent non-executive directors should at all times be independent of the investment manager and accountable to investors. The term of appointment of independent non-executive directors should be fixed, but for a period long enough for them to gain appropriate knowledge and to effectively execute their responsibility without losing their independence.
 

The investment manager, together with the governing body of the vehicle, should ensure that investor interests are adequately and appropriately represented.

This objective may be achieved through the constitution of various investor representative groups or committees, which generally have an advisory role in helping the investment manager and the governing body of the vehicle understand investor expectations.

Investor representative groups or committees should be able to convene meetings independently of the investment manager to enable them to exchange views or consider how to exercise their investor rights in relation to material matters.

In certain vehicles, depending on their legal structure, investors or their representative groups may need to be consulted and/or approve certain key decisions, e.g., vehicle liquidation or change of investment manager (see G30). Care should be exercised to ensure that the investors represented in these groups and committees do not gain an economic advantage over other investors.
 

Independent non-executive directors, where appointed, should act on behalf of all investors.

Independent non-executive directors, where appointed as members of the governing body of the vehicle, should represent the best interests of all investors, collectively. In this capacity, they play an important role in scrutinising and approving key matters that are subjective, complex, and material to the outcomes for investors (see also RG14 and RG15 of the inrev-guidelines">Reporting module).

For instance, particular areas of focus may include, but are not limited to:

• Ensuring communications and reporting to investors are clear, accurate, and transparent;
• Engaging with and reviewing reports from external auditors;
• Reviewing proposed changes to constitutional documents;
• Monitoring and approving any related- party transactions and conflicts of interest between investors and the investment manager;
• Ensuring a fair implementation of management and performance fee structures;
• Monitoring changes to pricing assumptions in open end vehicles;
• Overseeing the transition process when a manager’s mandate is terminated, either during or at the end of the vehicle lifecycle;
• Acting as a mediator between the investment manager and investors in certain circumstances, such as settling fee-related issues in the case of an investment manager termination;
• Monitoring the internal control framework of the vehicle (see G23) by, for example, receiving regular reports from, and having regular meetings with, the investment manager.

Read more at Reporting module.
 

The investment manager should define and communicate how certain material decisions, which include investors, are made, and how voting thresholds operate by reference to constitutional terms and local laws.

Certain material decisions (see G30), which may result in changes to the vehicle’s constitutional documents, generally require investor consent. Sufficient quantitative and qualitative information should be provided to investors to enable them to make an informed decision. Adequate time should be provided to consider this information and the proposal prior to any vote taking place.

The constitutional documents should therefore set out a practical voting process that enables the vehicle to effectively respond to circumstances.

A common approach is to require a qualified majority vote of investors. In determining which voting percentage is appropriate, consideration should be given to the individual voting power of the respective investors to establish a well- balanced voting ratio as well as any legal requirements.

The use of tacit approvals should be limited in scope and clearly described in the constitutional documents of the vehicle. If a proposed change is rejected by investors, there should be sufficient time before investors can be asked to reconsider a proposal that they have previously rejected.
 

The investment manager should identify and document any matters that require the specific involvement or consent of the investors.

The constitutional documents of the vehicle should clearly identify the process by which investors can exercise their rights, either through investor representative groups or committees, or by vote.

This enables investors to effectively propose and influence/control material changes related to the vehicle. Examples of such matters can include but are not limited to:

• Changes to the investment strategy, including allocation limits and use of leverage;
• Changes to valuation and financial reporting methodologies;
• Certain matters that relate to the resolution of conflicts of interest with related parties;
• Matters related to the appointment and operations of the investment manager, including key persons;
• Appointment of the members of the governing body of the vehicle and its external auditors;
• Liquidating or extending the life of the vehicle.
• Other material changes to the constitutional terms of the vehicle.